What developers need to know before beginning this type of challenging undertaking.
THE FOCUS ON redeveloping brownfields — abandoned or underutilized sites where there is known or suspected environmental contamination — goes back almost 20 years. In 1998, New Jersey enacted the Brownfield and Contaminated Site Remediation Act. Other states and the federal government similarly took steps to address the unintended consequences of laws like the federal Comprehensive Response Compensation and Liability Act (CERCLA, also known as Superfund), enacted in 1980, which imposed strict cleanup liability on property owners. CERCLA and other early cleanup laws created a disincentive for developers, who did not cause the contamination, to acquire and redevelop contaminated sites because of concerns about potential unknown and seemingly limitless liability.
Later brownfields laws, such as the 2002 Small Business Liability Relief and Brownfields Revitalization Act, and programs, including the U.S. Environmental Protection Agency’s (EPA’s) funding incentives and liability relief program, were designed to ameliorate these concerns by providing a means of liability protection and other incentives to encourage developers to acquire and remediate contaminated properties. The programs have had many successes. Now, as more developers are considering brownfields opportunities, it’s helpful to consider six lessons from the past 20 or so years.
1) Be Sure the Purchase and Sale Agreement Addresses All Risks. The purchase and sale agreement for a brownfield transaction should contain specific and detailed environmental provisions. The contract should allow for adequate due diligence time and contain provisions specifying how due diligence investigations are to be done. (See lesson No. 2.) It should allocate environmental responsibility among the parties involved in the transaction. In many instances, a seller simply wants to be done with a site and walk away. A buyer typically wants to avoid releasing the seller from liability or, at least, to ensure that the purchase price reflects the risk the buyer is assuming. The contract needs to address the allocation of these risks. The contract also should ensure that potential claims against other parties that may be responsible for the cleanup are preserved. This could include claims against prior owners or operators of the site and their insurance carriers.
2) Conduct Adequate Due Diligence. Liability protections under the cleanup laws require due diligence. Therefore, once the purchase and sale agreement is signed, the next step is to conduct adequate due diligence concerning the site and potential contamination. The EPA and many state environmental agencies all have their own standards for conducting due diligence, which must be followed. However, these standards specify only the minimum due diligence required. On most sites, it will be important to consider going beyond the minimum to ensure that all potential environmental liabilities are understood and can be considered when planning for project remediation expenses.
Selecting the right environmental consultant and environmental counsel is key to effective due diligence. Finding professionals who understand the developer’s perspective and can factor in the proposed end use of a development in the due diligence process is crucial to a successful project. Spending a few extra dollars on due diligence can save money later.
3) Consider Agency Interactions. Before embarking on a brownfield project, it is important to know which regulatory or other agencies may be involved. Knowing the process for oversight and approval of a remediation and redevelopment project is a key factor in understanding what approvals will be needed, how long it may take to obtain those approvals and what other requirements may come into play that will factor into how the project may actually be completed. For instance, if the EPA is involved at a site, requirements will differ from those at a site overseen by a state agency. In addition, economic development agencies that may provide financial incentives are likely to have their own requirements. In some cases, financial incentives may not be available unless the developer approaches the funding agency before committing to a project. Knowing the agency playing field before beginning the brownfields game is critical.
4) Factor in Remediation Efforts. Brownfield redevelopment involves cleaning up a contaminated site to the level required for the proposed new use. The goal of this cleanup is to reduce the risk associated with the site, based upon exposure scenarios tied to who will be on the site after it is redeveloped. Depending on the type and amount of contaminants on the site, remediation may involve use of caps, extraction wells or other engineered measures. If a cleanup is done to less than pristine conditions, ongoing monitoring and maintenance will typically be required. The costs of both the initial remediation and the ongoing efforts should be factored into the site budget.
5) Be Aware of Emerging Contaminants. As time goes on, additional environmental risks are identified, leading to new regulation in new areas. For example, significant concern now exists about the impacts that volatile organic compounds can have on indoor air quality as they evaporate from groundwater and enter buildings through the process of vapor intrusion. A brownfield development project may need to incorporate methods that ameliorate the risk of vapor intrusion, which could include vapor barriers or venting systems.
Another concern is the growing list of contaminants that are being regulated and changes in cleanup standards. As new risks are identified, new remediation standards may be set for hazardous substances that were not previously regulated, and cleanup requirements may become more stringent. When conducting due diligence at a site that has already been remediated, developers should always investigate whether remediation standards have changed in a way that would require additional cleanup.
6) Consider Environmental Insurance. Environmental insurance is an important tool to manage the risk of a brownfield transaction. Insurance products are available to protect developers from third-party claims, from costs associated with the discovery of unknown contamination and from other risks. These policies can be used to bridge a gap between a buyer and seller in allocation of environmental risks. Lenders also like to see these policies, since they lessen financial risk. It is helpful to have an environmental insurance broker review insurance-related contract and indemnity provisions as part of the negotiation process. For more on one type of environmental insurance, see “Protecting Against Environmental Loss and Challenges”.
As these lessons demonstrate, even after almost 20 years, brownfield redevelopment transactions remain challenging. However, with the benefit of experience, the risks associated with these transactions are manageable.
Dennis M. Toft