Fall, 1990 (v3n1)
Editor's Note:
The following article by
Karen Klonsky, farm management specialist, and Kim
Norris, research manager, both of the Department of Agricultural
Economics, UC Davis, is based on information presented at a toxics liability
symposium July 26, 1990 in Fresno sponsored by UC Cooperative Extension
and the UC Agricultural Issues Center.
Farm operations, like any
businesses using hazardous or toxic materials, run the risk of incurring
liability for clean-up of their own or neighboring properties contaminated
by the storage, use, or disposal of those materials. The owner of property
that has been contaminated by a tenant or previous owner can be liable
for clean-up. This includes banks that have taken ownership of property
in foreclosure. Any person or business entity that can be shown to have
influence over the management of the business can be liable, again implicating
agricultural lenders.
These new risks - a result
of federal Superfund legislation - mean that most lenders now want to
assess the environmental condition of the property being farmed before
making a production or real estate loan. In turn, farmers applying for
production or real estate loans should be prepared to answer detailed
questions about the history of the farm. For example, borrowers may be
asked if the property ever contained any surface or underground storage
tanks, or if there are any records of chemical or waste spills.
This is new territory for ag lenders and borrowers alike. It is only in the past few years that farm property environmental questionnaires and site assessments have joined balance sheets and income statements as part of farm loan requirements. Many growers want to know how it will affect their access to credit.
Superfund Link
The main impetus for change
has been the enforcement of federal Superfund legislation. Superfund
is the term commonly used to refer to the Comprehensive Response,
Compensation, and Liability Act of 1980 (CERCLA) and its 1986 extension,
the Superfund Amendments and Reauthorization Act (SARA). While a number
of federal and state environmental laws affect agriculture (FIFRA, RCRA,
Proposition 65), Superfund has had the greatest impact on farm lending
practices.
Under Superfund, there are
four categories of "potentially responsible parties" who may
be held accountable for the clean-up of contaminated property. To date,
four court cases have upheld lender liability in two of these categories.
First, if a bank takes ownership of contaminated property through foreclosure,
the bank as owner is liable for clean-up, even if it did not hold the
property at the time the contamination occurred. Second, even where land
is not held as collateral, a lender may be held liable for clean-up costs
if it was involved in the daily operations of the business. A very recent
district court decision held that a lender is liable for clean-up costs
if it has the "potential to influence" production decisions
that led to the contamination. Often, a bank making a production loan
will make periodic site visits and be aware of the production plans of
the farm operation. This can be construed as having "potential to
influence" business decisions.
In this environment the lender faces three kinds of risk, known as the three C's: credit, collateral and clean-up. Credit risk is the risk that the borrower may become financially unable to service its debt if hazardous waste clean-up is required. Collateral risk is the risk that the value of property securing the loan will be impaired if environmental contamination is discovered on that property or adjoining property. Clean-up risk is the risk that the lender will be held liable for part or all of the cost of cleaning-up a contaminated property, whether or not that lender was responsible for the mess. It is also possible that the cost of a hazardous waste clean-up may exceed the value of the property. To protect themselves from these risks and liabilities, lenders increasingly are using farm property environmental questionnaires and environmental site assessments to determine the likelihood of environmental hazards.
Assessing Risk
Banks generally use two methods
to assess environmental risk. The first is an environmental questionnaire.
These questionnaires are used to collect information about past uses of
the property, the presence of underground storage tanks, sumps, holding
ponds, storage facilities for toxic substances, and cleanup and disposal
practices. Answers to the questions may flag the need for an environmental
site assessment (ESA).
An environmental site assessment
is a study of the nature and extent of toxic conditions conducted by a
qualified third party. An ESA consists of three phases. The first phase
usually includes site inspection, public agency file review, review of
site history, regulatory compliance investigation, and aerial photo review.
The public agencies that may be asked for information are the environmental
health division of the county health services agency, the appropriate
regional office of the California Department of Health Services, Toxic
Substances Control Division and the appropriate Regional Water Quality
Control Board. Other sources of information include the county agricultural
commissioner's office, local planning and building departments, and the
county assessor's office and records office. The results of the Phase
1 inspection will determine whether or not Phase 2 is necessary.
A Phase 2 ESA includes 1) checking for PCB in transformers and asbestos in buildings; 2) sub-surface testing for toxic substances; 3) testing of surface water, runoff and sub-surface water; and 4) a plan for clean-up if necessary. The final phase is the clean-up itself. Usually the environmental consultant who conducted the ESA will also carry out the cleanup. Clean-up may entail the disposal of empty containers or the removal of contaminated soil. These activities can only be carried out by licensed businesses, and brought to licensed waste disposal sites.
Borrower Implications
Bankers do not use a standard set of guidelines in deciding whether or not to require an environmental questionnaire or site assessment. Each bank has to develop its own environmental risk policy. These additional requirements for a loan add to the cost of doing business. While there are no industry-wide numbers to report, numerous agricultural lenders have assumed
responsibility for hazardous
waste clean-up on foreclosed properties. For example, Farmers Home Administration
in California has spent $13 million since December 1987 to clean up 17
contaminated properties.
It is not clear to what extent these costs are being passed on to borrowers in today's competitive loan market. It is clear that banks do not want the requirements for questionnaires or ESAs to be a competitive tool. However, large and small farm lenders are using farm property environmental questionnaires and site assessments to reduce the risk of potential liability. In so doing, they are in the position of policing agriculture and influencing on-farm toxic management systems.
Scrutinize Real Estate
Anyone involved in a real
estate transaction or long-term agricultural lease should determine the
environmental condition of the property involved. If you are selling land
you will want a clean bill of health going into any sales negotiations
so that environmental condition of the property does not become a sticky
bargaining point. Also, if there is a contamination problem on the property
in the future, you will want to be able to prove that the property was
clean when you sold it. If you are buying property, you should find out
about any potential problems before you take ownership. If there is a
problem, clean-up costs can be built into the sales agreement. The same
logic applies to entry into a long-term agricultural lease.
For more information on how
to investigate the background of a particular piece of property request
Sources of Information for Farm Property Environmental Reports by
Karen Klonsky and Kim Norris, available from the authors at the Department
of Agricultural Economics, University of California, Davis, CA, (916)752-4424.
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