Qualifying as a bona fide prospective

purchaser ("BFPP") of a property

contaminated by hazardous substances

will not necessarily insulate a purchaser

from responsibility for cleanup costs. The

United States Environmental Protection

Agency (the "EPA") has come up with

another way to recover its cleanup costs,

and the BFPP is its target. In January

2002, Section 107(r) was added to the Comprehensive

Environmental Response, Compensation, and Liability Act,

42 U.S.C. Section 9600 et seq. ("CERCLA"). Section 107(r)

created a statutory property lien known as a "windfall lien"

for the increase in fair market value of property attributable

to the EPA's remediation costs. In July 2003, the EPA issued

a policy guidance on the windfall lien (the "EPA Windfall Lien

Guidance"), bringing this little known lien into the spotlight.

WHAT IS A BFPP?

CERCLA authorizes the EPA to clean up property that contains

hazardous substances and hold the property owner or

operator liable for the costs of remediation. The reach of

CERCLA liability extends not only to current property owners

or operators, but to any person who owned or operated the

property at the time of disposal of any hazardous substances

and any person who arranged for disposal, treatment or the

transport of the hazardous substances for disposal or

treatment. Notwithstanding CERCLA's broad reach, the

statute provides a defense to BFPPs that applies to brownfield

sites as well as sites listed on the federal government's

National Priorities List. Under the BFPP defense, a landowner

who acquires contaminated property after January 11, 2002

can avoid CERCLA liability if the purchaser establishes by a

preponderance of the evidence that:

• All disposal of hazardous substances at the propertyoccurred before the purchaser acquired the property;

• The purchaser made all "appropriate inquiries" intoprevious ownership and uses;

(Windfall continued on page 5)

FALL 2003 a n e w s l e t t e r f o r t h e r e a l e s t a t e i n d u s t r y

by Norman F.Carlin

• The purchaser provided all legally required notices regarding thehazardous substances at the property;

• The purchaser exercised appropriate care regarding thehazardous substances by taking reasonable steps to stop anycontinuing release, prevent any threatened future release andprevent or limit exposure of the previously released hazardoussubstances to humans or the environment;

• The purchaser fully cooperated with, assisted and providedaccess to authorized personnel conducting the response actionat the property;

• The purchaser complied with any land use restrictions imposedas part of the response action and did not impede theeffectiveness or integrity of any institutional control (such as adeed restriction against residential use) used at the property;

• The purchaser complied with any EPA request for information oradministrative subpoena issued under CERCLA; and

• The purchaser is not a Potentially Responsible Party (as definedin CERCLA) or affiliated with one through family or business.

The BFPP defense is also available to qualifying tenants who lease

contaminated property after January 11, 2002. While potential

purchasers and tenants of contaminated property often look to the BFPP

defense for protection from liability under CERCLA, Congress was

concerned that an owner or purchaser could profit at taxpayers' expense

from an increased property value attributable to clean up paid for by the

EPA and not reimbursed by a liable party. Consequently, Congress

created the windfall lien concept.

WHAT IS A WINDFALL LIEN?

A windfall lien is a statutory lien in favor of the EPA against property

owned by a BFPP for the increase in the fair market value of the proper-

ty attributable to the EPA's unrecovered response costs. A windfall lien

ALSO

IN

THIS ISSUEPutting the “In”Before Feasible Alternatives page 2

CALIFORNIA ENVIRONMENTAL QUALITY ACT (CEQA)

Mezzanine Financing page 3POWER AND PROTECTION OF MEZZANINE FINANCING

Shedding Light on Green Buildings page 4BENEFITS AND COSTS OF GREEN ALTERNATIVES

EPA WINDFALL LIENSI N N O C E N TP U R C H A S E R SB E W A R E

by Wendy T.Coleman

Page 2

(Feasible Alternatives continued on page 7)

www.pillsburywinthrop.com

legal, social, technological or other considerations

make the alternative or mitigation measure infeasi-

ble. Documentation of infeasibility can provide the

public agency with a basis for declining to impose the

suggested mitigation measures and for approving the

project as submitted. But in many cases, owners and

developers do not address the feasibility issue until

late in the process, often after the EIR is completed.

ANTICIPATING FEASIBILITY ISSUES

What does "infeasible" mean? When should a project

applicant present infeasibility evidence--in the EIR or

in a report to the public agency? Can the applicant

compile the evidence at the last minute without the

project approval being delayed? The answers to

these questions are found through a careful survey of

CEQA and its guidelines, court cases and real-life

experiences in cases like the vineyard project. CEQA

itself does not present any bright line standard for

determining when a mitigation measure or alternative

is infeasible, but court cases have shed some light on

key concepts such as "economic infeasibility," which

To the new owners, it seemed like a

dream project. They would turn a

dilapidated old California farmhouse

and barn, vacant for two decades,

into an expanded vineyard, with a

new tasting room and restaurant.

But just two weeks before the

planning commission hearing, they

learned that historic preservationists

had convinced the commission that

it had no choice but to approve a

"reduced project" -- one that allowed

only a modest increase in acreage,

preserved the old farmhouse and

barn by relocating the tasting room, and eliminated

the restaurant. The owners and their consultants had

not really worried about this alternative, even though

it had been discussed in the project's environmental

assessment, since it had seemed so unlikely and

unfair. They felt side-swiped by the process and were

unprepared to show how this alternative was truly

infeasible. When the project was denied, they

wondered how such a beneficial development could

be derailed in this way.

This hypothetical scenario underscores the problems

that may arise from the California Environmental

Quality Act ("CEQA") mandate that public agencies

impose all "feasible" mitigation measures whenever a

project has a significant environmental impact.

Developers understand that CEQA requires public

agencies to analyze and disclose potentially signifi-

cant environmental impacts resulting from both pub-

lic and private projects, usually in an environmental

impact report ("EIR"). But they do not always appreci-

ate that a public agency cannot approve a project

with significant impacts if any feasible alternative or

mitigation measure can lessen or reduce those

impacts.

Although the vineyard project is fictional, similar sce-

narios happen frequently in California. It is critical

that project developers carefully document the rea-

sons for rejecting a suggested alternative or mitiga-

tion measure by showing that specific economic,

inPUTTING THE “IN” BEFORE

FEASIBLE ALTERNATIVESpreserving a project under CEQA

by Ronald E.Van Buskirk

by Elizabeth L.Strahlstrom

can involve considerations such as delay costs,

capital expenditures or lost project revenues. The

cases make clear that it is one thing for a project

applicant to say that an alternative or mitigation

measure is economically infeasible, but another thing

to produce specific, credible evidence of infeasibility

on which a planning commission or city council can

rely in approving a project.

For example, in one court case involving development

of a resort hotel in Santa Barbara, the developer

failed to show that a reduced-sized project was

economically infeasible. The developer's claim that a

reduction in size would require a complete redesign

and revision of the project and would result in higher

per room costs did not render the alternative

economically infeasible, without specific evidence

that the additional costs or lost profitability were

sufficiently severe as to render it impractical to

proceed with the project. To establish infeasibility,

the developer needed to introduce evidence of the

comparative costs, comparative profit or losses or

comparative economic benefit to the public agency,

nearby communities or the public at large. The court

found that a showing that an alternative may be more

expensive or less profitable is not sufficient to

establish that the alternative is financially infeasible.

EVIDENCE OF INFEASIBILITY

Assuming that a project applicant can provide the

required evidence to support a finding of infeasibility,

should this evidence go in the EIR? This is an

important strategic question. In one case involving

new construction on a site containing an historic

building, the EIR itself contained evidence that a

project alternative requiring the reuse of the historical

building would more than double the cost of new

construction, supporting a finding of economic

infeasibility. In another case, the evidence of

economic infeasibility was found outside of the EIR,

but was made available to the public for review before

the public agency approved the project. While the

applicants took different approaches, both projects

were approved.

www.pillsburywinthrop.com Page 3

It has been said that per-ception is reality. This iscertainly true in real estate.The way that real estatepractitioners - buyers, sell-ers, lenders, insurers andgovernmental agencies -perceive their markets,their competition and their

environment dictates their strategies andproduct lines.

Examples are as varied as they are numer-ous, and several can be found in the pagesof this fifth edition of Pillsbury Winthrop LLPOn Real Estate. The creation of the so-called"windfall lien" by the EnvironmentalProtection Agency illustrates a governmen-tal agency's actions to close a perceivedremediation loophole. Green buildings areonce again a hot topic in reaction to per-ceived problems underscored by the recentEast Coast blackout. California's environ-mental legislation, known as CEQA, high-lights the need for developers to be pre-pared to hurdle perceived environmentalroadblocks. In each article, members of ourGlobal Real Estate Practice Section discussthese perceptions and reactions to them.

But the attorneys in our firm are not alone indiscussing these concepts. Ted Sprink, aSenior Vice President of Fidelity NationalTitle, a Pillsbury Winthrop client, contributesan article on mezzanine financing, whichdescribes, among other things, the creationof a new product for a perceived void in per-fecting security interests.

While it may be true that perception is reali-ty, it is indisputable that reality is what youmake of it. We at Pillsbury Winthrop hope tocontinue making our clients' realities filledwith success.

FROM

THE

CHAIR

In a bold move to position itself as a market leader,

a well-known and respected real estate develop-

ment company planned to acquire its leading com-

petitor and combine the companies' respective

product lines. Both companies had operated for

over fifteen years by their existing ownership and

management. Each had solid balance sheets and

positive cash flows. The price was right, and the

newly-formed company would eliminate duplicative

functions for considerable savings. The developer

considered the merger a slam-dunk.

Rejecting the idea of raising capital by issuing new

stock through a private placement, the developer

requested a loan of $75 million from a bank to fund

the acquisition and provide working capital.

Despite adequate cash flow to service the proposed

new debt, the developer was dismayed to learn that

the bank would approve a loan of only $60 million.

The bank's reason for the $15 million shortfall in

required funding? Insufficient collateral.

CLOSING THE FUNDING GAP

So where can a qualified borrower with a proven

track record, strong management, a solid business

plan and healthy cash flow go when a "credit

crunch" becomes a factor?

A growing number of middle-market businesses

have discovered mezzanine financing as an effective

way to secure additional capital. Mezzanine

financing provides access to equity or capital that

the borrower can utilize for various purposes, not

the least of which is to "re-invest" in an acquisition,

project or development. This new capital frequently

enhances the project for the benefit of both lender

and borrower.

A powerful resource for funding growth, mezzanine

financing is often used for working capital, acquisi-

tions, expansions, leveraged buy-outs and re-capi-

talizations. Loans for these financial structures are

attractive to mezzanine lenders and investors due to

the high yields generally offered.

THE MECHANICS OF MEZZANINE FINANCING

Essentially, mezzanine funding provides subordinat-

ed debt financing with greater returns than tradi-

tional bank debt. Mezzanine capital is a form of jun-

ior debt that bridges the gap between private equity

investment and the traditional bank loan. Senior to

the original equity but junior to the bank, the mez-

zanine debt is considered "in the middle" and is

sometimes referred to as a "bridge."

The mezzanine component generally represents well

below fifty percent of a transaction's capital

structure. The loan-to-value (“LTV”) ratio of first

mortgage financing is commonly limited to 75%. A

mezzanine component can contribute to an

aggregate LTV of up to 95%. The 20% differential in

this example represents the equity that the borrower

or its principals can use to gain access to additional

capital through the mezzanine loan.

Mezzanine financing is often extended to the

partners or equity holders of a borrowing entity,

frequently a limited liability company (an “LLC”). As

security, the lender takes a pledge of the party's

equity interest. The pledge of the equity interest in

the LLC can be defined as either "investment

property" or "general intangible" (personal property)

under Article 9 of the Uniform Commercial Code

(“UCC”), and can be insured for attachment,

perfection and priority.

PERFECTING THE SECURITY INTEREST

The mezzanine market segment is commonly linked

to income-producing commercial real estate, such

as a shopping center, hotel, office building or apart-

ment complex. As a result, mezzanine lenders often

have concerns about declining real estate values,

aggressive low interest rate lenders, buyers who

may have overpaid for a property and general eco-

THE power AND protection OF

Mezzanine Financing

nomic factors that can impact rentals and future rev-

enue streams. Naturally, any new debt can represent a

potential strain on property, as can increased vacan-

cies and declining rents. Highly leveraged assets may

be difficult to refinance or sell.

UCC "title" insurance covering the membership interest

in a partnership or LLC is a major development to

provide additional protection to mezzanine lenders in

insuring their security interest. Perfection of a security

interest can be accomplished by:

• Filing the appropriate UCC-1 financing statement inthe appropriate jurisdiction;

• Taking possession of the "collateral" if the securityinterest is certificated or subject to a controlagreement (such as a deposit account); or

• Controlling the collateral if the security interest isdeemed investment property.

Contributing Author | Theodore H. Sprink

“Mezzanine financing offers aninnovative solution to fund the growthand expansion of commercial projects.”

-- Theodore H. SprinkSenior Vice President,Fidelity National Title

by Mary B.Cranston

(Mezzanine Financing continued on page 6)

CRISIS PUTS FOCUS ON ENVIRONMENTALLY-SENSITIVE BUILDINGS

www.pillsburywinthrop.comPage 4

initial cost of implementing green strategies. This

question is complicated by the relatively new, and

sometimes untested, nature of certain green

strategies, making the valuation of any ongoing

savings a matter of some conjecture. While few

would doubt that green strategies can produce

savings, whether these savings are beneficial to

developers is not altogether clear.

Two other economic issues factor in the green debate.

First, capital sources for real estate are inherently

conservative in their underwriting, creating an

impediment to the implementation of untested green

strategies. Second, while the upfront costs of

implementing green strategies are invariably borne

by the owner/developer, the benefits are passed on

to the tenants and users of buildings. To make a

green strategy work, the owner must develop a

method to recover some of the upfront costs, either

through increased rents or escalations which allow

the owner to recover green expenditures -- with the

increased costs to the tenant presumably offset by

the tenant’s ongoing operating savings. While the

owner may believe that the cost-benefit analysis

justifies higher rents or specific pass-through

charges, if the tenant (whom the developer/owner

would expect to bear the enhanced cost) does not

subscribe to the owner's analysis of the offsetting

savings, the project's success is at risk. As green

strategies become more commonplace, and a track

record for green buildings is established, these

disconnects will steadily decrease.

On August 14, 2003, the northeast-

ern United States and parts of

Ontario were paralyzed by a sudden

blackout that stopped 50 million

people in their tracks. From New

York City to Toronto to Detroit, com-

puters crashed, air conditioners

shut off and thousands of homes

and businesses were plunged into

darkness by the largest power out-

age in North American history.

Millions of workers were ordered to

evacuate their offices, descending

long flights of stairs because the

elevators had stopped working. Others, less fortu-

nate, were trapped in elevators and on subways for

hours. Many restaurants, theaters and shops closed.

The economic cost to governments, private industries

and individuals ran into the tens of billions of dollars.

While capacity, or the lack of it, was evidently not the

culprit in causing the blackout, the outage - like the

California power crisis in 2000 and 2001 - has

intensified discussions within the real estate industry

about energy strategies. Conservation has once again

taken on increased importance. This, in turn, has

illuminated concepts and strategies associated with

so-called "green buildings."

WHAT ARE GREEN BUILDINGS?

Green buildings are structures that incorporate envi-

ronmentally-sensitive building practices involving

less energy consumption, less pollution and better

indoor air quality. They are designed to promote

resource conservation, including energy efficiency,

water conservation and waste minimization. By way

of example, a green building might reduce electric

consumption through the incorporation of energy-effi-

cient appliances and fixtures, high-performance win-

dows and the liberal use of insulation. Faucet aera-

tors, water-conserving toilets and low-maintenance

landscaping are strategies commonly implemented to

conserve the use of water.

In their initial construction, green buildings often

contain a large amount of recycled materials. Lumber

and other products, like windows, doors, cabinets

and appliances, may be salvaged from demolished or

rehabilitated buildings. Drywall, flooring, furniture

and other items may be composed of recycled

content. Construction waste may be re-used as

landfill, diverting large portions of refuse from waste

disposal sites. Similarly, green buildings may

incorporate rapidly renewable materials like bamboo

in the place of wood from slower-growing trees.

Thoughtful design can play a large role in green

buildings as well. A building that is properly situated

geographically can reduce energy requirements by

relying on the sun to satisfy at least some of the

heating requirements during colder months, on

shading during summer months to help keep the

building cool and on natural light to reduce the need

for artificial light. Green buildings may also contain

features that permit limited operation of certain

building systems in the case of a power outage or an

emergency.

THE ECONOMIC DEBATE OVER BUILDING GREEN

The debate over green buildings within the real estate

industry has, to date, mostly involved economics,

centered on the question of whether the savings

generated from a reduction in operating costs,

utilities and other ongoing expenses outweighs the (Green Buildings continued on page 6)

Shedding Light onGREEN BUILDINGS

by MaxFriedman

by Matthew E.Cudrin

www.pillsburywinthrop.com Page 5

(Windfall continued from cover page)

will arise only if (i) the EPA has performed a response action, (ii) the EPA has not

been able to recover its costs for the response action from a liable party and (iii)

the response action increased the fair market value of the property above the fair

market value of the property that existed prior to the response action. The wind-

fall lien arises at the time the EPA incurs its costs and continues until the lien is

satisfied, by sale or otherwise, or the EPA recovers all of its costs incurred at the

property. If all these conditions are met, the EPA will consider whether perfecting

a windfall lien on a particular property is appropriate.

PERFECTING A WINDFALL LIEN

Despite the existence of the new tool to recoup costs, according to the EPA

Windfall Lien Guidance, the

EPA is not likely to perfect a

windfall lien every time it

bears unrecovered costs.

Instead, the evaluation of

whether the EPA will perfect a

windfall lien will be made on a

case-by-case basis, consider-

ing a number of factors. More specifically, the EPA Windfall Lien Guidance sug-

gests that the following factors should exist before the EPA will perfect a windfall

lien: the EPA has substantial unreimbursed cleanup costs that the EPA is unlikely

to recover from liable parties, a BFPP will likely obtain a significant windfall as a

direct result of the EPA's expenditure of response costs at the property and/or a

real estate transaction or series of transactions is structured so as to permit (i) a

BFPP to retain an increase in fair market value resulting from the EPA's cleanup

costs or (ii) a liable owner to sell property to avoid CERCLA liability. Other factors

may also be considered.

The EPA Windfall Lien Guidance indicates that the EPA generally will not seek to

perfect a windfall lien if: (i) a BFPP acquires the property at fair market value after

cleanup (which includes the completion of all EPA response activities, including

operation and maintenance), (ii) the EPA has resolved liability of an owner

pursuant to a settlement or successful recovery of response costs that took into

account the full value of the property as if the cleanup were complete, including

any potential windfall from the EPA's cleanup activity, (iii) the EPA's only

expenditure is a brownfield grant or loan, (iv) the EPA's only costs are preliminary

site assessment or site investigation costs and the EPA does not anticipate

undertaking removal or remediation actions at the site, (v) the site will be used for

residential purposes, for the creation or preservation of a park or another public

purpose, (vi) there is a substantial likelihood that the EPA will recover all of its

cleanup costs from liable parties or (vii) other EPA policies mandate against

pursuing current landowners for CERCLA cleanup or cost recovery (e.g., if the

property falls within the EPA’s 1995 policy on property containing contaminated

aquifers or is subject to a "No Current Superfund Interest" comfort/status letter).

Because the EPA's evaluation will be conducted case-by-case, the EPA could

decide to perfect a windfall lien in a situation where the EPA Windfall Lien

Guidance might otherwise indicate a lien is inappropriate. Thus, the windfall lien

provision introduces considerable uncertainty for purchasers.

VALUING A WINDFALL LIEN

A further source of uncertainty is the value of the windfall lien. If the EPA perfects

a windfall lien against a property, the value of the lien will be equal to the

unrecovered cleanup or removal costs, not exceeding the increase in the fair

market value of the property attributable to the EPA's cleanup costs at the time of

a sale or other disposition of the property. The EPA Windfall Lien Guidance

provides several examples to illustrate how the EPA generally will value a windfall

lien, such as the following:

•The EPA spends $2,000,000 to clean up property, increasing its value from$1,000,000 to $2,000,000. A BFPP then purchases the property at the fairmarket value of $2,000,000. After the BFPP purchases the property, theEPA spends an additional $1,000,000 cleaning up the property, whichresults in an additional $500,000 increase in the fair market value of theproperty. The EPA, through a 107(r) lien, will generally only seek to recoverthe $500,000 increase attributable to its cleanup after the BFPP acquiredthe property.

• Prior to any EPA cleanup,BFPP #1 buys a contami-nated property for its fairmarket value of $750,000.The EPA subsequentlyspends $500,000 onclean-up which increasesthe fair market value of

the property to $1,000,000, and files a 107(r) lien on the property. BFPP #2buys the property at a reduced price of $750,000, reflecting the windfalllien's encumbrance. The EPA generally will seek the $250,000 that issecured by the lien on the property.

•The EPA spends $3,000,000 on property, increasing its value from$1,000,000 to $2,000,000. A BFPP buys the property for $500,000 and theEPA subsequently spends another $1,000,000 cleaning up the property,resulting in a $500,000 increase in the property's fair market value andraising the property's fair market value to $2,500,000. The EPA willgenerally seek $1,500,000 because the BFPP is reaping the benefit of theEPA's cleanup both before and after the BFPP purchased the property.

The EPA has indicated that where the remedial action continues or takes place

after the property has been acquired by a BFPP, the EPA will calculate the increase

in the property's fair market value as if the remediation were complete when the

property was acquired. While the EPA's examples provide a general framework for

valuing windfall liens, the precise method and process of valuation remain

unaddressed and unclear. (Windfall continued on page 7)

“The windfall lien conceptintroduces considerable

uncertainty for purchasers.”

“The windfall lien conceptintroduces considerable

uncertainty for purchasers.”

www.pillsburywinthrop.com

(Green Buildings continued from page 4)

Page 6

(Mezzanine Financing continued from page 3)

Other revenue-side advantages of green buildings are

even more difficult to quantify. A pleasant, environ-

mentally-sensitive atmosphere - and the cache of a vis-

ibly modern, technologically advanced building - may

be attractive to tenants, resulting in higher rents and

enhanced tenant retention. But the attractiveness of

these features may be supported only by anecdotal evi-

dence. The Leadership in Energy and Environmental

Design ("LEED") system, currently being implemented

by the United States Green Building Council ("USGBC"),

is a creative effort to make some of these intangible

benefits more concrete. LEED creates a "points" sys-

tem to evaluate the environmental quality of a particu-

lar building - awarding ratings of "certified," "gold" and

"platinum" to qualifying buildings. The USGBC hopes

LEED will become a recognized way to confer prestige

on environmentally-sensitive buildings, with attendant

market advantages.

Because of these uncertainties, the market for green

buildings has been limited largely to owner/users

and others with a particular commitment, corporate

or otherwise, to the concept of green buildings.

INDUCEMENTS FOR GREEN BUILDINGS

Recognizing that the market may not, by itself, sup-

port environmentally-sensitive strategies, legislation

has been passed in many jurisdictions to stimulate

development of green buildings. One such induce-

ment is the availability of tax credits. In May 2000,

New York became the first state to enact green build-

ing tax incentive legislation, providing owners and

tenants with income and franchise tax credits for the

incremental cost of making a new or existing structure

a green building. An eligible taxpayer may claim a tax

credit of up to $3.75 per square foot for interior work

and up to $7.50 per square foot for exterior work if a

structure meets certain requirements for air quality,

building materials, energy and water use and dispos-

al of waste. In addition, certain percentages of the

cost of installing solar panels and similar equipment

may be claimed as tax credits. The states of Arizona,

Hawaii, Idaho, Maryland, Massachusetts, New Jersey

and Oregon have implemented comparable packages.

Advocates of tax credits and other incentives predict not

only direct results, but a longer-term "chain reaction" as

well. Under this theory, offering financial and other

incentives for the development of green buildings can

be expected to increase the number of green buildings

constructed. Then, as owners and developers become

more familiar with the technology and methods

involved, and the benefits of the incentives and lower

operating costs become better known within the build-

ing industry, the number may grow further. This expan-

sion in market participation may lead to economies of

Control is generally considered the strongest of these

three methods. However, in certain cases, a

mezzanine lender may improve its position by the

treatment of its security interest in the pledged

collateral. At the request of the mezzanine lender, a

partnership or LLC can "opt-in" to Article 8 of the

Uniform Commercial Code and elect to have its

interest treated as securities.

THE PROTECTION OF UCC INSURANCE

In a manner similar to traditional title insurance for

real estate secured loans, UCC insurance is available

to insure the mezzanine lender's security interest in

non-real estate collateral. The equity pledge securing

the mezzanine loan falls into this category, and

through UCC insurance, the lender gains protection

complementing existing real estate title insurance

and outside counsel's traditional legal opinion.

Many lenders prefer insuring the validity, attachment,

perfection and priority of their security interests,

rather than relying on third party searches and costly,

cumbersome and heavily "excepted" legal opinions.

The relatively modest cost of UCC insurance is an

investment in finding, avoiding and/or correcting col-

lateral-related problems prior to funding. The re-

sponsibility for searching the proper public record for

the correct entity, the correct collateral and in the cor-

rect jurisdiction shifts risk to an insurance company,

in a manner far exceeding the minimal "indemnity"

available from UCC search vendors relying on propri-

etary indices. UCC insurance can prevent third par-

ties from intervening in the relationship between bor-

rower and lender, while also serving to prevent

claims of negligence or malpractice against outside

counsel for failure to perfect a security interest. As

such, insuring a security interest against defects in

the search, documentation and filing process can

benefit the lender, borrower and outside counsel rep-

resenting both parties.

UCCPlus Insurance Protection, introduced by the

Fidelity National Financial family of companies in late

2001, insures mezzanine and asset-based loans

secured by non-real estate assets for attachment,

perfection and priority. Coverage extends to validity,

enforceability, fraud and forgery, and provides for the

cost of defense in the event of a dispute or claim.

UCCPlus Insurance Protection policies are underwrit-

ten by Alamo Title, Chicago Title, Fidelity National

Title, Security Union Title and Ticor Title insurance

companies.

Mezzanine financing offers an innovative solution to

fund the growth and expansion of commercial

projects. With knowledgeable legal counsel and

proper title insurance coverage, borrowers and

lenders can secure the advice and protection they

need for their ultimate success.

Ted Sprink is a Senior Vice President for the UCC InsuranceDivision of the Fidelity National Financial Family of

Companies. He can be reached at (619) 544-6220 ortsprink@fnf.com. Additional details about UCCPlus can be

found at www.uccplus.com.

Stephen M. Wright, an Associate in Pillsbury Winthrop LLP’sSan Francisco office, also contributed to this article. He

can be contacted at (415) 983-1765 orswright@pillsburywinthrop.com.

scale and result in a reduction in the higher up-front

costs currently involved in green buildings.

THE FUTURE OF GREEN BUILDINGS

As green building strategies mature, it is likely that the

debate will become more nuanced. When the

economic costs and benefits of particular green

building strategies are more clearly identified, the

green building discussion is likely to focus more on

specific, targeted considerations. For example, in light

of the 2003 blackout and the California energy crisis,

tenants may become more willing to pay a premium for

green building systems and features (such as solar

powered lighting) that will allow for limited operation

of particular building systems during emergencies. To

keep pace, lease documents may be recast to allow

the landlord to recover the cost of specific green

systems and features that enhance reliability and

redundancy of building operations -- ensuring building

performance and safety in the event of blackouts or

other utility interruption. Limited application of

green technologies may, in the near term, be more

realistic than broader strategies.

Clearly, the events of the last several years have

demonstrated the need for a comprehensive review

and consideration of the country's energy strategies.

It may also presage practical consideration of green

buildings to deal, more immediately, with some of

the same issues.

Matthew E. Cudrin | AssociateNew York

mcudrin@pillsburywinthrop.com(212) 858-1537

Max Friedman | PartnerNew York

mfriedman@pillsburywinthrop.com(212) 858-1555

www.pillsburywinthrop.com Page 7

The vineyard example illustrates that the need to

document infeasibility often is not recognized until a

particular mitigation measure or project alternative is

suggested, which can happen at any time during

CEQA's mandatory public review process. While the

hypothetical vineyard owner likely could have

produced evidence bearing on feasibility at the last

minute before the planning commission hearing, the

question of how to ensure the public has a chance to

review the information so that CEQA's informational

purpose is served can be troublesome. For example,

inserting the new information into the final EIR may

require that the EIR be re-circulated for a new round

of public comment, possibly delaying a project by

several months. Providing the evidence to the public

agency after the EIR is completed can lead to a claim

that the EIR is a legally inadequate document. On

the other hand, putting the information in the draft

EIR exposes it to early public comment and review.

There is no "one size fits all" answer to these

questions. But to avoid this dilemma, it is critical to

evaluate likely impacts at the outset of each project

and to consider the forms of mitigation or project

alternatives that the EIR consultants, the agency

and/or members of the public may suggest as

feasible ways to reduce those impacts.

Unquestionably, the CEQA review process has

become the battleground of choice for opponents to

development and infrastructure projects in

California. Business competitors, neighborhood

groups, historic preservationists, environmental

activists and organized labor have discovered that

they can delay or even terminate a project by

opposing it under CEQA at the public agency level or

in court. It is essential that CEQA planning be geared

from the outset to withstand agency scrutiny and a

court challenge. Preparing for "feasibility" issues as

part of the strategic CEQA compliance plan will

greatly improve a public or private project's

opportunities for success.

(Feasible Alternatives continued from page 2) (Windfall continued from page 5)

Elizabeth L. Strahlstrom | Senior AssociateSan Francisco

lstrahlstrom@pillsburywinthrop.com(415) 983-1240

Ronald E. Van Buskirk | Firm General CounselSan Francisco

rvanbuskirk@pillsburywinthrop.com(415) 983-1496

RESOLVING A WINDFALL LIEN

A BFPP has a number of options with respect to resolving a potential windfall lien. According to the EPA Windfall

Lien Guidance, a BFPP may attempt to resolve a potential windfall lien on the property through a windfall

resolution agreement or a comfort/status letter, both of which may be done at or around the time the BFPP

acquires the property, and can result in removal of the cloud on the property's title and provide for free

alienability of the property in the future. A comfort/status letter is generally issued in those situations where

the EPA does not anticipate taking further response action and/or where it will most likely not seek to perfect a

windfall lien. The EPA Windfall Lien Guidance suggests that use of such letters will be limited to situations where

a project in the public interest (e.g., an economic redevelopment project) is hindered by the potential liability

and there is no other mechanism available to adequately address the BFPP's concerns. On the other hand, in

those situations where the EPA is likely to perfect a windfall lien and a BFPP wants to satisfy any such lien prior

to or concurrently with acquisition of the property, the EPA has the authority to resolve windfall lien liability by

private agreement. To that end, the EPA and the BFPP may use a windfall lien resolution agreement pursuant to

which the parties negotiate and agree on an amount the BFPP will pay the EPA. The EPA provides samples of

the comfort/status letter and windfall lien resolution agreement as attachments to the EPA Windfall Lien

Guidance.

UNANSWERED QUESTIONS

The EPA Windfall Lien Guidance leaves many questions unanswered. On the most fundamental level, the EPA

Windfall Lien Guidance does not explain how a 107(r) lien will be created and how it will affect the encumbered

property. Is the EPA obligated to provide the BFPP with written notice of the lien and, if so, when will such notice

be given? If not, will it be a BFPP's responsibility to determine the lien's existence? What, if any, are the BFPP's

pre-litigation rights to dispute the existence of the lien and what is the process?

Another significant question that remains unanswered is how the EPA will value the increase in fair market value

and how a BFPP may dispute the value attributed by the EPA. According to the EPA, there is no formula for such

valuation and, in fact, valuation will be done on a case-by-case basis with careful consideration given to the

appraisal provided to the EPA by the BFPP, as well as to comparable values to determine the cause of property

value increases. The EPA has stated that there will be no judicial determination of value and that any dispute

will be settled through the EPA's own settlement devices. Currently, no pre-litigation dispute process exists,

although the EPA has indicated that it is considering how such a process would work. The EPA has suggested

that such a settlement would occur by private appraisal provided by the seller or BFPP, which would be reviewed

by the EPA and its own expert appraiser.

Other questions that remain to be resolved relate to the implications of a windfall lien on insurance. Will title

insurance companies insure over a windfall lien? Will title insurance companies require a Phase I report or a

certificate from a buyer or seller that there is no EPA cleanup in progress? What customs will arise in the

property sales arena to deal with windfall lien issues? Will buyers insist on indemnities from sellers? Will

environmental insurance insure against these liens?

With these and other questions unanswered, it remains to be seen exactly how windfall liens will affect the

disposition and acquisition of brownfield properties. However, it is clear that there will be an impact.

Due to the uncertainty and complexity of the EPA's windfall lien power, sellers and prospective purchasers of

property contaminated with hazardous substances would be well advised to carefully investigate whether the

potential for a windfall lien exists.

Wendy Theophilos Coleman | AssociateSan Francisco

wcoleman@pillsburywinthrop.com(415) 983-1650

Norman F. Carlin | PartnerSan Francisco

ncarlin@pillsburywinthrop.com(415) 983-1133

“A further source of uncertainty is the valueof the windfall lien.”

Century City Office RELOCATES TO

MGM Tower

MGM Tower10250 Constellation Boulevard, 21st FloorLos Angeles, California 90067-6221

Return Service Requested

Editor-in-Chief: Robert M. Haight, Jr.

Editors: James Rishwain, Stacey R. Preston and Barry Langman

Production: Nancy Newman and Ian FarringtonFor further information on Pillsbury Winthrop LLP's global real estate practice, please contact:

Max Friedman (212) 858-1555 Laura Hannusch (713) 425-7321 James Rishwain (310) 203-1111 mfriedman@pillsburywinthrop.com lhannusch@pillsburywinthrop.com jrishwain@pillsburywinthrop.com

One Battery Park Plaza 909 Fannin Street, 22nd Floor 10250 Constellation Boulevard, 21st FloorNew York, NY 10004-1490 Houston, TX 77010-1043 Los Angeles, CA 90067-6221

www.pillsburywinthrop.com

Century City • Houston • London • Los Angeles • New York • Northern Virginia • Orange County • Sacramento • San Diego

San Diego - North County • San Francisco • Silicon Valley • Singapore • Stamford • Sydney • Tokyo • Washington DC

This publication and the articles contained in it present only general reviews of therespective subjects covered and do not constitute opinions or legal advice.

© 2003 Pillsbury Winthrop LLP. All Rights Reserved.

The Century City office of Pillsbury Winthrop LLP has

moved to the new 35-story MGM Tower building,

located in the heart of the Westside’s business and

entertainment district at Constellation Boulevard

and Century Park West in Los Angeles.

At its new site, Pillsbury Winthrop will occupy the

entire 21st floor in an area which encompasses

21,669 square feet, with an option to expand. The

space will accommodate 36 attorneys who focus on

real estate, financing, entertainment, business liti-

gation and intellectual property matters.

The MGM Tower is the first major high-rise to be

built in Los Angeles in a decade. Los Angeles archi-

tects Johnson Fain designed the $150 million glass

tower, which opened its doors in April 2003.

Johnson Fain also designed Fox Plaza in Century

City and SunAmerica Center, both located in the

immediate vicinity of the MGM Tower. The architect

for Pillsbury Winthrop’s new interior space was

Caliber Award winner, Felderman Keating +

Associates, whose portfolio includes MTV

Networks’ West Coast headquarters.

MG

MT

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