1. The Visual Artists Rights Act of 1990 Jacob W. Reby Lewis, Rice & Fingersh, L.C. St. Louis, Missouri 63101

13. Tina R. Makoulian Ballard Spahr LLP makoulian@ballardspahr.com DRILLING AND FRACKING: A VIOLATION OF “ENVIRONMENTAL RIGHTS?” An Analysis of Robinson Township, et al. v. Commonwealth

14. 14 What is the Issue?

15. 15 Act 13 Industry sought consistency across Commonwealth Act 13 -Compelled municipalities to enact ordinance providing for oil and gas development in nearly all zoning classifications. -Imposed uniform rules for hydrofracturing. -Established limited time periods for local review of applications. -Provided minimum setback requirements, but required waiver.

16. 16 Challenge to Act 13 Petitioners: -Robinson Township and six other municipalities -Delaware Riverkeeper Network -Individuals Respondents: -Commonwealth of Pennsylvania -Public Utility Commission -Robert Powelson, Chair, PUC -Linda Kelly, Attorney General -Michael Kramer, Secretary, DEP Twelve separate constitutional challenges

17. 17 Commonwealth Court Holding: Act 13 Unconstitutional Violates substantive due process -allows incompatible uses in zoning districts -does not protect the interests of neighboring property owners from harm -alters the character of the neighborhood -makes irrational classifications Violates nondelegation doctrine because it “gives no guidance to DEP that guide and constrain its discretion to decide to waive the distance requirements from water body and wetland setbacks.”

18. 18 Role of Article I, Section 27 in Commonwealth Court Decision Article I, § 27 states: “The people have a right to clean air, pure water, and to the preservation of the natural, scenic, historic and esthetic values of the environment. Pennsylvania’s public natural resources are the common property of all the people, including generations yet to come. As trustee of these resources, the Commonwealth shall conserve and maintain them for the benefit of all the people.” Commonwealth Court held that Act 13 relieved municipalities “of their responsibilities to strike a balance between oil and gas development and environmental concerns” under Article I, § 27. Therefore, no cause of action under Article 1, §27.

19. 19 Supreme Court Decision Plurality Opinion —Article I, Section 27 State’s position: -the amendment “recognizes or confers no rights upon citizens and no right or inherent obligation upon municipalities.” -“the amendment exists only to guide the General Assembly, which alone determines what is best for public natural resources, and the environment generally, in Pennsylvania.” Commonwealth Court’s decision is consistent with state’s position Plurality opinion (three justices) turned this interpretation on its head

20. 20 Plurality Opinion – Analysis of Article 1, Section 27 Amendment establishes two rights in the people: -A right to clean air, pure water, and to the preservation of the natural, scenic, historic and esthetic values of the environment -A limitation on the state’s power to act contrary to this right These rights: -Bind state and local governments -Are equal in status and enforceability to any other rights included in Article I, including property rights

21. 21 Plurality Opinion – Analysis of Article 1, Section 27 Amendment also creates a public trust, with the Commonwealth as trustee of Pennsylvania’s public natural resources. The Commonwealth’s duties as trustee are: -“to refrain from permitting or encouraging the degradation, diminution, or depletion of public natural resources” -“to act affirmatively to protect the environment, via legislative action”

22. 22 Plurality Opinion – Application of Article 1, Section 27 to Act 13 Local governments are trustees with constitutional responsibilities. Preemption of local regulation violates Article I, Section 27 “because the General Assembly has no authority to remove a political subdivision’s implicitly necessary authority to carry into effect its constitutional duties.” Requirement that DEP waive setbacks from streams and other water bodies also violates Article I, Section 27.

23. 23 Implications of Robinson on Oil and Gas Industry Developers subject to different local regulations in every municipality Municipalities emboldened to further restrict oil and gas development Private citizens emboldened to challenge oil and gas development as a violation of environmental rights Other regulations under Act 13 subject to challenge Oil and gas development will take longer and be more expensive

24. 24 Broader Implications of Robinson Expansion of litigation Alteration of relationship between Commonwealth and its municipalities Longer and more expensive entitlements process for many projects

25. Financing Delaware Statutory Trusts Barry A. Hines Frost Brown Todd Louisville, Kentucky

26. TIC investors invested approximately $11.5 Billion in syndicated TIC transactions from 2004 to 2007.

27. Loan volume secured by TIC-owned properties originated from 2004 to 2007 is approximately $38 Billion.

28. Most of these loans will mature from 2014 to 2017. CMBS Lenders will not refinance syndicated TIC transactions.

29. Options for TIC investors at loan maturity. 1)Sell the TIC property prior to loan maturity. 2)Roll the TIC into a limited liability company (TIC investors lose their ability to defer taxes through a Section 1031 exchange upon a future sale of the property). 3)Convert the TIC to a Delaware Statutory Trust.

30. What is a DST? 1)It’s an entity under Delaware law. 2)If properly structured, the beneficial ownership interest in a DST is treated as real property for purposes of Section 1031. See Revenue Ruling 2004-86.

31. Advantages of a DST 1031 Treatment 1)Beneficial owners receive favorable Section 1031 treatment. 2)A lender is making one loan to one borrower. 3)Beneficial owners have no vote over the management or operation of the property. 4)Transfers by beneficial owners do not require loan assumption and extensive underwriting. 5)Beneficial owners of a DST do not have a right to partition.

32. Disadvantages of a DST 1)The activities of a DST must be limited to collection and distribution of income. 2)The DST may not accept additional equity contributions from the beneficial owners. 3)The DST may not renegotiate the terms of a loan. 4)The DST may not renegotiate leases or enter into new leases with tenants. 5)The DST may only make minor non-structural modifications to the improvements on the property.

33. A DST is a “brain dead” entity.

34. A DST is a workable solution for single tenant properties where the lease termination date extends beyond the loan maturity and the tenant has all the obligations and responsibilities with respect to everything related to the property.

35. With a properly structured master lease between the DST and the DST sponsor, DSTs can also be utilized for multi-tenant properties.

36. Special consideration for Lenders financing DSTs 1)The loan documents will contain a provision providing for conversion by the DST to a limited liability company upon the occurrence of any of the following events. (a) an event of default (b) an imminent risk of default, or (c) ninety (90) days prior to the loan maturity date. The conversion is necessary since the DST as structured does not have the ability to renegotiate the loan or to enter into a new loan transaction to refinance the existing loan.

37. 2)Additional events of default. 3)Additional non-recourse carve-outs. 4)Because future equity contributions are prohibited, lenders will escrow for everything.