Generally, our firm’s experience and policy regarding such opinions, as well as the views generally expressed by listserv respondents, both last Spring and in my recent inquiry in early September, 2018, are consistent with the views of the drafting committee in the Local Counsel Report. Our firm rarely issues zoning and permitting opinions, and we are very reluctant to do so. In point of fact, giving an opinion that a particular real estate project, whether existing or to-be-built, would require a level of investigation of law and fact that is both extremely time-consuming and also application of technical information that is well beyond the professional expertise (or even incidental knowledge) of even experienced real estate counsel. Such opinions would necessarily require review and analysis of a project’s physical characteristics and the application of the language of local ordinances (which language, in some instances at least, may be subject to interpretation by official bodies) to those characteristics. In many respects, such opinions could only be supportable by relying heavily and without critical examination on conclusions provided by professionals such as architects and surveyors. If such opinions were given on the basis of a significant independent investigation and fact/law analysis by the law firm, an adequate level of diligence could be cost-prohibitive. And if the opinions were given (as some respondents on the listserv noted occasionally happen) based solely on opinions or certificates from architects, surveyors, or others, then they would constitute mere “conduit” opinions, i.e., simply passing on someone else’s point of view, a practice that is suspect among best practices opinion commentators (although the value of conduit opinions may be questioned, they are not infrequently given and accepted by lender’s counsel).
Even in the past when lender requests for zoning or other governmental permitting or approval opinions were more common, our firm was generally unwilling to give the opinions. For zoning opinions, this unwillingness related especially to full-blown compliance opinions dealing with dimensional aspects of zoning, parking requirements, sign regulations, and similar matters. We did find it easier to give a limited opinion focusing strictly on permitted uses. For example, we occasionally gave carefully tailored opinions based on review of the zoning map and zoning ordinance where we either could assume or felt comfortable opining that a real estate development was in a certain zoning district and then give an opinion based on an assumption that the ordinance we reviewed was fully up to date, that such and such zoning district included our client’s property’s use as an office building, multi-family residential building, shopping center, light industrial facility, or otherwise, as a use permitted of right, or as a conditional use. Even more narrowly, we could simply opine that a given zoning ordinance permitted a specified list of uses as of right or conditional uses in a particular district (while assuming rather than opining that the subject property was in that district). Even those opinions became more complicated if the property were in a district subject to complex zoning, including special overlays and the like. And, we have never opined that a given real estate project was “properly zoned as such and such” because this implies a judgment about the zoning action taken by the municipal authority.
Permitting opinions other than those related to zoning have some of the same features, but the opinion requests are often phrased in ways that are so broad as to deter even some practitioners who are otherwise willing to do the legwork needed to give an opinion that a given permit or approval has been issued to a real estate project, and whose client is willing to pay for it. These are opinions (which could also sweep in zoning and land use and even environmental compliance) that a certain real estate project “has all necessary permits and approvals.” This type of opinion, requiring canvassing of the entire universe after determining what is within the boundaries of that universe, should simply be avoided. I do not recall an instance where our firm ever gave such an opinion, and we refuse to give them today. However, unlike zoning opinions, requests for which requests currently seem rare (although, based on some listserv responses, they are not extinct), “all permits and approvals” opinion requests do pop up more than we would like. Of course, such opinions can be given on a conduit type of basis (normally referring solely to a client certificate or representations in the loan documents), but that raises the same issues previously noted.
In any event, based on both our firm’s experience and MANY listserv comments, it appears reasonable to conclude that lender requests for zoning and permitting approvals have fallen off considerably in recent years. Some of this may be attributed to general recognition by lenders that they cannot impose those kinds of transaction costs on their borrowers and remain competitive in the marketplace. But, again, based on our experience and the observations of colleagues set forth in the listserv, the primary reason for the change in practice has likely emerged because of lenders’ willingness to rely on alternative sources of assurance such as municipal compliance letters (not always easy to get in satisfactory form or at all) and title insurance zoning endorsements (which, themselves, may require back up including municipal letters and counsel opinions, circling back to where we started!), as well as PZR Reports™.
Recently, a cottage industry has grown up around zoning and permitting compliance reports (so-called “PZR Reports,” named after the Planning & Zoning Resource Company). These are separate reports commissioned by either the borrower or lender and paid for by the borrower usually as a loan checklist requirement—and on which both the lender and the borrower may rely for their own purposes either in lieu of zoning and permitting opinions, zoning endorsements (which typically require costly premium surcharges), and municipal compliance letters or to enable title insurance companies to issue zoning endorsements to their policies. As long as reliance on PZR Reports becomes a conventionally accepted practice on which lenders can rely as sufficient lending diligence, then, in effect, a standard of care has been established that has the salutary effect of eliminating the requirement for zoning and permitting opinions. The replacement by such a standard of earlier practices that may have led lenders to request attorneys’ opinions on zoning and permitting compliance likely accounts for the strong general impression that the need for such opinions has faded from general practice.
Environmental Opinions
Environmental opinions have an interesting history. Our recent listserv correspondence did not comment on environmental compliance opinions as such. However, as a general matter, an “all permits necessary” type of opinion would likely be understood as extending to special environmental permits (especially relevant for real estate improvements used for manufacturing, processing, or energy production purposes). (One of the difficulties of such opinions is trying to figure out how wide a net such opinions are casting.) And, it is likely that opinions relating to zoning compliance, including as to status of remediation, might be requested in cases of known environmentally-compromised property, although it is likely that such concerns would be dealt with not in formal legal opinions but in specialized memoranda, and of course, the attorneys would like to punt such topics to environmental engineering firms.
Several decades ago, many lenders’ standard opinion forms for real estate finance transactions asked for opinions beyond those related to specific types of environmental compliance permits required for the activities conducted at the real estate in question. At that time, lenders were hyper-focused on environmental liabilities that could arise from contaminated property. If that property constituted loan collateral, initially there was an issue of exposure to potential remediation costs that could weaken the borrower’s financial capability, or even to potential diminution of the value of the collateral due to toxic conditions. Further, there was also the potential risk that the lender might have third-party exposure to environmental claims if the lender held a recorded mortgage, not to mention if it became involved in hands-on management of a troubled property. Hence, our firm was asked to render opinions on the potential liability in the environmental area. For example, we were requested to identify all possible “environmental requirements, including environmental liens.” Of course, such requests constituted a variant of the “all permits” type of global opinion, but we found that these could not easily be avoided. So, with the substantial involvement of our environmental attorneys, we produced opinions that could involve a broad catalog of potential environmental regulations and an indication of which of those could result in liens. This task included determining what laws and regulations to include or exclude. For example, were occupational health and safety laws and regulations “environmental”? How about protected species laws? Predictably, our environmental partners erred on the side of inclusivity. All of this led to drafting delays and, ultimately, to enormous bills (double, triple or more than the basic financing opinion letter itself), and, unfortunately at times, battles with clients over fees.
We do not see opinion requests of that sort anymore. As with the multiple changes in the market that diminished lender requests for zoning and permitting opinions discussed above, there were significant developments affecting lender practices that likely explain the changes. First, we began to object to such opinions on economic grounds—that they produced client costs vastly in excess of client expectations or practice cost-benefit values. Second, there was increasing willingness to rely on a combination of required Phase I and, if indicated, Phase II site assessments on which lenders could rely. Third, statutory frameworks evolved that insulated lenders from liabilities for environmental claims or remediation requirements. And, finally, the use of environmental indemnity agreements in the nature of a guaranty evolved and became fairly standard, including in CMBS financing.
In sum, legal opinions addressed to lenders that deal with project zoning, permitting, other governmental approvals, and compliance with regulations affecting real estate such as environmental matters have become relatively rare in recent years. This trend stems from a variety of causes including opinion issuer (and borrower client) resistance, cost issues and market pressures generally, and replacement of attorneys’ opinions in such areas by other types of assurances, as, for example, PZR Reports, which seem to constitute in many cases a standard of due diligence acceptable to lenders and others in the lending community such as ratings agencies. Although such opinions are rare, they are not completely eliminated. In the next issue of Opinions Matters, I will discuss examples of these opinion requests in certain types of financing transactions and will explain how our firm responded to those requests.