Benefits of Environmental Liability Transfers

By Collin Ackerman and Chad Farrell of Encore Redevelopment, August 2009

In light of recent developments in environmental laws, accounting standards, and public awareness, more corporations are choosing to take action with their contaminated properties, many of which had been mothballed for decades. The concept of environmental liability transfer has been rapidly gaining momentum in the corporate community as the mechanism of choice for removing contaminated sites from a corporation’s balance sheet. In many cases, a liability transfer deal can be the first step in returning a site to productive reuse.

The Financial Accounting Standards Board is currently in the process of finalizing revisions to the rule governing the reporting of environmental contingencies. The release of this finalized document will undoubtedly spur even more companies to take action, many utilizing environmental liability transfer deals as a mechanism to eliminate the negative impact of contaminated property on the corporation’s balance sheet.

              Companies can structure a liability transfer in any number of different ways.  Sellers/owners can obtain indemnity from environmental liabilities through direct sale to a bona fide prospective purchaser (BFPP), participation in a third party liability transfer deal, or execution of a sale/leaseback agreement with a BFPP.  Under any of these deal structures, the seller and buyer can be absolved of future liability if all conditions are met.  An environmental liability transfer can often be the most effective strategy to:

• Dispose of risk (known and unknown)

• Eliminate carrying costs including insurance, tax liabilities, and security

• Obtain tax savings through deduction of project costs

• Eliminate environmental reserves from balance sheets- Changes in financial accounting standards (FAS 5) set to take effect at the end of this year will require more detailed reporting of environmental liabilities as well as lowering the threshold requirements for reporting those liabilities.