New Jersey Department of Environmental Protection Changes Policy Regarding Letters of Non-Applicability

The New Jersey Department of Environmental Protection (“NJDEP”) recently implemented a significant change to its ISRA policy that broadly impacts business transactions involving real property in New Jersey. Since its enactment in 1983, “ISRA,” otherwise known as the Industrial Site Recovery Act, N.J.S.A. 13:1K-6 et’seq., has changed the way business is conducted in New Jersey. ISRA significantly curtails the rights of real property owners to transfer interests in or close the operations at “industrial establishments” by requiring an environmental cleanup prior to the transfer, or as a result of the cessation of operations. As a result of ISRA, owners of “industrial establishments” can be required to spend significant time and money on environmental cleanups at the very moment the decision to sell or close operations is made.

Confusion as to whether a property is an “industrial establishment” or whether a specific transaction “triggered” ISRA led NJDEP to implement a program whereby an owner could describe the property or the transaction to NJDEP and NJDEP would then issue a letter with its determination of whether ISRA was applicable. These “Letters of Nonapplicability” (“LNAs”) provide a great deal of comfort to owners and purchasers of real property, as well as to lenders providing any financing to such parties. As a result, LNAs became extremely popular resulting in over 5,000 requests for LNAs each year. The popularity of the LNA has now led NJDEP to change its policy. As of this month, NJDEP will no longer process requests for ISRA Letters of Non-Applicability in connection with the following transactions:

1. 1. The refinance of a loan or obtaining a construction loan;

1. The sale, purchase, or corporate transaction involving the following types of properties:
   • • residences including apartment buildings and nursing homes;
   • • agricultural land;
   • • restaurant/bars;
   • • medical offices;
   • • retail gasoline stations;
   • • automobile repair shops, body shops or dealerships;
   • • dry cleaning operations;
   • • undeveloped land not located adjacent to an industrial establishment;
   • • garden centers/home improvement centers/lumber yards/hardware stores;
   • • hair or beauty salons;
   • • motels, hotels or rooming houses;
   • retail stores, excluding print shops.

Attached is a copy of the form letter that the NJDEP is supplying when it receives a request for an LNA in connection with any of the above.

As lenders’ counsel we are presently involved in several transactions involving the above types of transactions. In this capacity we have had recent discussions with NJDEP concerning the impact of their new policy. The NJDEP has afforded us the opportunity to prepare a comment letter as to what our clients would like changed (if possible) about NJDEP’s new policy. NJDEP would like to eliminate issuing LNAs for property where ISRA is clearly not applicable. However, even where a property is not subject to ISRA, issues relating to the property’s history, the operations of certain tenants, the possible securitization or sales of loans, or the complexity of the deal, may warrant the issuance of an LNA to provide comfort to lenders that ISRA is not applicable.

Although not all lenders require an LNA for every transaction, some still do and will be impacted by this new policy. If you would like to suggest comments for our letter to NJDEP, or if you would like to discuss alternative methods of addressing this issue, please contact Michael J. Lubben, Esq. of our Corporate and Finance Practice or Arthur J. Clarke, Esq. of our Environmental Law Practice. We plan to send out our comment letter on Friday, April 30, 2004. If you would like us to email you a copy of our letter, after it is sent to NJDEP, please let us know.