Printer Friendly

Opportunities in Brownfields.

EPA is putting a priority on revitalizing urban areas spoiled by environmental waste. New policy has made the agency more approachable for lenders and developers seeking to restore this blighted real estate.

The term "brownfields" is turning up increasingly in discussions about environmental cleanup. The typical brownfield site is an abandoned former industrial area. To the surrounding communities, brownfields represent lost economic activity, lost employment opportunities, reduced tax bases and physical blight. Often, such sites are located in inner cities and contribute to urban decay. Redevelopment of brownfield sites thus can have tremendous positive economic and social benefits.

Redevelopment of brown fields also appeals to environmental interests because it reduces the incentive to locate new facilities in "greenfields" locations, and thus reduces the problems of urban sprawl and competition for land.

One important barrier to redevelopment of brownfield sites is the federal Superfund program. Old industrial sites are usually contaminated, and new owners risk assuming liability for potentially costly cleanups. Liability under Superfund for all cleanup costs can be assessed against the owner at the time of cleanup (as well as anyone who was an owner at the time wastes were released at the site, as well as anyone who sent wastes to the site). This liability exists regardless of fault and regardless of when the activities that contaminated the site occurred. The current owner of the site can avoid liability if it can show that it is an "innocent" landowner. But the statutory definition of innocence is so strict that few can qualify. (Only a person who had "no reason to know" about the contamination "despite all appropriate inquiry" can meet the test.)

In addition, many current owners of brown field property are reluctant to sell. The reason is that any person who owned (or who operated a facility on) the property when contamination occurred remains potentially liable for cleanup, even if the property has been sold and they had nothing to do with the new contamination that is the immediate cause of the problem. This will be true even if the property is cleaned up to regulatory standards when sold, because some contamination often remains on site and thus provides a liability linkage between the former owner (or operator) and the new problem.

For example, assume that company A owns property that was contaminated with a common industrial chemical, such as tricholoethylene (TCE), during company A's time of ownership. Even if company A conducts a first-rate cleanup, a small amount of TCE will remain on the property, although presumably in a concentration below regulatory concern. Assume that company A then sells the property to company B, and the new owner (company B) causes new and very serious TCE contamination. Company B attracts the attention of government authorities, but is unable to pay for a new cleanup. Under Superfund, EPA could sue company A for the full cost of cleanup. This would be true even if company A had no role in the new contamination, and even if company A possessed an indemnification agreement from company B.

Banks, too, fear lending to potential new owners because the bank may become liable. For example, if the bank needs to foreclose, it may become an "owner" for Super-fund liability purposes. Investors and developers are wary of participating in brownfields redevelopment for fear that Superfund liability may cause the transaction to go sour. As a result, the U.S. Conference of Mayors estimates that tens of thousands of brownfield sites around the country are sitting unused ((ital) Impact of Brownfields on U.S. Cities, A 39 City Survey, (end) released Jan. 25, 1996).

Calls for Superfund reform

The problems posed by Superfund for brownfield sites have generated calls for reform of the statute from across the political spectrum. Legislation introduced two years ago in Congress and again last year would have alleviated the problem, but was caught in the controversy surrounding other provisions of the bills and never enacted.

This year influential members of both parties have again called for brownfields legislation. Such legislation would protect banks and new owners of sites from liability, would encourage state voluntary cleanup programs and would provide money to help local communities with brownfield sites deal with contamination problems. However, once again, the fate of such legislation is entangled with larger Superfund debates, and the prospects for legislative relief are therefore in doubt.

In the meantime, the Environmental Protection Agency (EPA) has taken a number of steps to alleviate the problem. For example, the agency announced that it is prepared to offer liability protection to new owners of sites (called prospective purchasers) in return for some contribution to the cleanup (in the form of cash or work). The contribution that the new owner is expected to provide can be much less than EPA commonly seeks from responsible parties, especially if the new development offers significant public benefits (such as jobs). The EPA's policy lists certain factors officials consider on a case-by-case basis.

EPA also has issued a policy offering lenders a "bright line" test (something that clearly delineates the parameters for liability) so that they can take steps to avoid becoming a liable party. EPA also has decided that owners of uncontaminated properties that overlie contaminated groundwater are generally not liable parties. In addition, EPA is in the process of issuing grants to 50 communities to help them deal with brown field problems, and the agency has encouraged states to develop voluntary cleanup programs.

EPA recently removed thousands of sites found to pose litle or no risk from its Superfund data base (known as CERCLIS) to alleviate the concerns of those who may have an interest in these sites. The agency also has indicated that it is more willing than in the past to redefine Super fund sites so as to exclude uncontaminated parcels. Interested parties must first petition the EPA to redefine the site.

State efforts

Many states have laws similar to Superfund and have run into brownfield problems of their own. Indeed, state laws potentially affect far more brownfield sites than Superfund, because the federal program focuses only on the approximately 1,200 sites nationwide that have been placed formally on the National Priority List. Therefore, many states are actively crafting ways to deal with this issue and have developed, or are developing, their own brownfields redevelopment programs.

State efforts have tended to focus on two areas. First, many states have developed so-called voluntary cleanup programs designed to encourage cleanup of sites (including brown-fields) using streamlined procedures and reduced government involvement. The goal is to make cleanups faster and more reasonable in cost.

Second, a number of states have passed or are working on legislation designed to reduce the state law liability concerns of new owners, lenders and other parties involved in brown-fields redevelopment. However, these laws vary from state to state in terms of who is eligible for protection and what conditions must be met before protection is provided.

For anyone with potential liability at a site that has redevelopment prospects, or who might want to participate in the redevelopment of old industrial properties, the brown fields arena offers opportunities, as well as risks. The unwary can find themselves in considerable difficulty. But those who understand the new EPA and state policies and know how to take advantage of them can often manage the risks.

Basics on how to proceed

Set out below are some of the key elements that should be part of an analysis of how to proceed at a brownfield site with regard to liability and other Superfund-related issues.

* Evaluate the feasibility and desirability of entering into an agreement with federal authorities to resolve the Superfund liability of the new owner and plan the best way to negotiate such an agreement.

As mentioned earlier, EPA is prepared to enter into what it calls prospective purchaser agreements that are considerably less onerous than the usual agreements it will make with liable parties. The agency generally will require less in the way of contribution to cleanup. But perhaps more important, it will provide a covenant not to sue that comes much closer to providing complete liability protection than the usual Superfund covenant with its broad "reopener" provisions (that allow EPA to reassert liability if new problems are discovered at the site).

One important element of a prospective purchaser agreement is that it protects against third-party suits under Super-fund as well as against EPA action. Section 113(f)(2) of the Superfund statute provides as follows: "Settlement - A person who has resolved its liability to the United States or a State in an administrative or judicially approved settlement shall not be liable for claims for contribution regarding matters addressed in the settlement...." Thus, a carefully crafted agreement can supply important safeguards.

In evaluating this possibility, one needs to bear in mind that such an agreement is not free. To be a bone fide resolution of liability, something of value (cash or cleanup, normally) will have to be provided. But the price may be reduced if EPA is convinced that the development plan involves substantial public benefits. Therefore, the approach used and the presentation made to EPA has to be carefully planned so that these public benefits are emphasized.

An additional issue to be weighed is how best to get the agency's attention. Your target is the EPA regional office, because site-specific decisions under Superfund are almost always made at the regional level. However, many people compete for the ear of the regulator. Therefore, you need to think about how to stand out from the crowd.

This is not just a matter of being visible. What can be most important is whether you are offering the EPA regional office an opportunity to meet important agency policy objectives. Besides traditional concerns over environmental protection, EPA also is now attuned to such issues as increasing employment, reviving urban areas and aiding in economic development (especially in poor and minority areas). These additional policy goals are hot buttons at EPA these days. On the other hand, EPA officials are not particularly interested in the profits that the development may generate for investors and lenders.

Therefore, your approach to EPA should emphasize the ways the project will meet EPA policy objectives and dearly indicate what actions by the regional office are needed to realize these benefits.

One of the best ways to get the agency to pay attention can be to join forces with local political and/or community leaders who are enthusiastic about the development plan. EPA is more likely to pay heed to the desire of such people for an audience and to try to meet their needs than it might be for a developer or lender.

* Evaluate the pros and cons of working exclusively with state authorities.

The only way to obtain legal assurance of liability protection (i.e., a covenant) from the federal government is to enter into an agreement with EPA. The absence of such legal assurance can make some people uneasy. However, EPA participation at a site also carries with it some very considerable drawbacks. It is commonly believed, and I think with good reason, that EPA involvement usually slows down the remediation process and leads to more expensive cleanups. In contrast, states frequently can get the job done more quickly, with less formal procedures and at lower cost. In addition, formal listing of a site by EPA on the National Priorities List (which becomes more likely if EPA gets involved) carries a severe stigma.

If the state is actively managing the site, the potential for EPA action may be exceedingly small. This is especially true if EPA is generally aware of what the state is doing, or if the site has not been put on or has been deleted from CERCLIS (EPA's official list of sites). Thus, in many situations the risk posed by the absence of a formal blessing by EPA can be very low. In addition, EPA is sometimes willing to issue what it calls a "comfort letter" (or a "status letter") to a person who is working with state authorities. Such a letter is not binding, but it provides some measure of confidence that EPA has no intention of intervening in the matter.

Several EPA regions also have recently entered into, or are negotiating, memorandums of agreement with particular states that deal with cleanups of brownfield sites. Under these agreements, EPA agrees to consider cleanups conducted under state auspices to relieve certain parties of Superfund (and the Resource Conservation and Recovery Act) cleanup liability. However, these agreements contain various limitations and vary from state to state. The agreements also do not constitute an absolutely binding legal commitment by the United States. Therefore, the provisions of the individual memorandums of agreement need to be carefully evaluated and their limitations understood. Nevertheless, a person who meets the criteria contained in such an agreement can take considerable comfort.

There may be situations where formal EPA involvement at the site may ultimately provide an additional degree of certainty. But in many other situations the increment of added protection may be low while the price may be high. As a result, an important decision sometimes must be made as to whether to encourage or actively discourage EPA involvement.

* Carefully consider various aspects of cleanup liability.

For example, it may be necessary to evaluate the potential liability of an owner of a property whose surface is uncontaminated but the property overlies a plume of groundwater contamination that originated elsewhere. Although EPA has recently declared such landowners generally not liable under Superfund, that policy has several limitations. (One of these limitations is where a groundwater pumping well is located on the property and is affecting the plume.) These limitations need to be considered.

Moreover, EPA's policy will not necessarily bind third parties that may bring a Superfund contribution action (i.e., a lawsuit brought by a private person who has spent money to clean up a site against other persons who may have Superfund liability for the site). If such landowners want protection from third parties, they can seek a settlement with EPA whereby, for a relatively small monetary contribution, they can receive a formal covenant (which, as noted earlier, also protects against contribution suits). The potential desirability of such settlements and a strategy to maximize the prospects for obtaining the best possible settlements require careful consideration.

* If the property is uncontaminated but is included in a site listed on the National Priorities List, evaluate the chance of having EPA redefine the Superfund site so as to exclude the uncontaminated parcels.

Traditionally, EPA's public description of a Superfund site has tended to encompass a more extensive area than is actually contaminated. The agency has stated publicly (when pressed to narrow its site definitions) that the description was only a matter of bureaucratic convenience, with no direct legal significance. However, more recently, EPA has come to realize that its description of a site can have severe adverse consequences for owners of uncontaminated parcels included in the designated area. It is now possible to approach the agency to seek a redefinition of a site or a public acknowledgment that a particular parcel is not contaminated.

To win such relief from EPA requires that properly conducted investigations of soil, surface water, ground water and other environmental media be marshalled to support the contention that the parcel is uncontaminated. It will also be wise to organize a presentation that emphasizes the public benefits that will flow from the agency's action and how the relief sought is consistent with national policy. For example, a demonstration that redesignation of the area will foster more rapid economic revitalization will be extremely helpful.

* Use the prospect of a brownfields redevelopment as an opportunity to convince regulatory authorities to be reasonable in their choice of cleanup remedy.

The prospect of an extremely costly cleanup can itself stand as a substantial barrier to successful redevelopment. Even EPA has acknowledged through its support of statutory reform that Superfund cleanups have often been excessively stringent and expensive. At many sites, there may be ways to adequately protect human health and the environment at far less cost than the cleanup methods EPA (or a state) is contemplating.

In trying to convince regulators that a less stringent remedy is appropriate, the prospect that redevelopment may be jeopardized by an overly costly cleanup can serve as important leverage. Thus, it can pay to emphasize to regulators the adverse consequences that can flow from the more expensive remedy EPA or the state is considering, while demonstrating the protectiveness of a less costly alternative. Creating alliances with local governments and community groups can be very useful in making this effort succeed.

It may be possible to obtain a less expensive remedy if certain constraints are placed on future uses of the site or if other steps are taken to reduce future risks. However, be prepared to convince regulatory authorities that the protections to be put in place can be relied on to be effective for a lengthy or even indefinite period.

It may appear difficult in some situations to consummate a formal arrangement with regulatory officials in the limited time available before a transaction must be consummated. Where the need for expedited action is clearly demonstrated, it is sometimes possible to get governmental authorities to act with uncharacteristic speed. Even if this effort is not successful, there can nevertheless be real benefit in having early discussions and, perhaps, informal understandings. These encounters can greatly improve prospects for cooperation in later interactions with the regulators.

* Evaluate private arrangements to minimize liability risks.

The emphasis so far in this article on working with governmental authorities should not obscure the importance of private arrangements that can be made to reduce risks. For example, well-recognized contractual tools, such as indemnitication and hold-harmless provisions, can be used to shield a party from the consequences of liability. Federal law does not make such private arrangements binding on the government, so a hold-harmless provision in a contract, for example, cannot stop EPA from pursuing the protected party. But such arrangements do allow the parties to ultimately sort things out among themselves. Obviously, however, the protection provided is only as good as the resources that stand behind it, a problem made more acute by the perpetual nature of potential Superfund liability.

Other options, such as insurance, also are worth evaluating. For instance, a market is emerging in which at least a few carriers are now offering policies tailored to the environmental liability risks of new owners. In addition, there may be ways to reduce risks by taking steps to restrict the future uses of the property. There are two basic issues here. One is the nature of the people likely to be present on the site and the activities in which they are likely to be engaged. A site where children are going to be playing in the dirt obviously raises more serious concerns than an industrial facility with all open areas paved.

The second key issue is the nature of the future operations to be conducted on the site. To take an extreme example, one can compare a site to be used as a wood-treating facility versus one to be used as a warehouse for nonhazardous materials. The first scenario raises a higher risk of recontamination than the second.

Given the broad nature of Superfund liability, a prudent seller will want some assurance that new problems are unlikely to arise. This assurance can be accomplished through contractual terms, regulatory restrictions (such as zoning) and the nature of the new development itself. The degree of protection provided through such terms will, of course, vary with the precise circumstances and the arrangements worked out.

Those active in property development are adept at working out complex financing arrangements, intricate real estate transactions and a variety of related activities, including working with zoning boards and other similar governmental institutions. But at the same time many are relatively inexperienced in dealing with Superfund and other high-stakes environmental issues. Yet the keys to success in the environmental field are really similar to those required in property development. Participants need to carefully scope out the problem and employ a well-thought-out plan of action.

There may not be methods available to completely eliminate Superfund risks, at least in the absence of legislation. But there are means at hand to manage those risks. Those who master these means of risk management will have a real advantage in the marketplace.

Bruce Diamond practices with Swidler & Berlin in Washington, D.C. Mr. Diamond was employed at the EPA from 1974 to 1995, where he most recently served as director of the Office of Site Remediation Enforcement in EPA's Office of Enforcement and Compliance Assurance, in charge of the enforcement of Superfund and other hazardous waste cleanup laws.
COPYRIGHT 1996 Mortgage Bankers Association of America
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1996 Gale, Cengage Learning. All rights reserved.

Article Details
Printer friendly Cite/link Email Feedback
Title Annotation:EPA Superfund; rehabilitation of abandoned industrial areas
Author:Diamond, Bruce
Publication:Mortgage Banking
Article Type:Cover Story
Date:Jul 1, 1996
Previous Article:A turning point.
Next Article:From main street to Wall Street.

Related Articles
EPA's Brownfields initiatives.
Legislation boosts Connecticut revitalization.
Philip Services Corp. and Cushman & Wakefield form alliance for brownfield site development.
Prospective purchaser agreements: EPA's new outlook on landowner liability.
Brownfields and Other Distressed Communities: Assessing Neighborhood Characteristics.
Financing brownfield cleanup and redevelopment.
NADC hopes to reap Brownfields benefits.
Turning brown green in New York.
In the brownfields.

Terms of use | Copyright © 2018 Farlex, Inc. | Feedback | For webmasters