July/August 1995
New cleanup laws are encouraging the reuse of contaminated urban sites—called “brownfields”—by offering companies economic incentives and minimizing their environmental liability.
By R. Michael Sweeney
R. Michael Sweeny is pursuing an L.L.M. in environmental Law at George Washington University ’s National Law Center and serves as a research associate for the Institute ofScrap Recycling Industries (Washington, D.C.). Previously, he was in private practice with a Syracuse, N.Y.-based firm, specializing in environmental law.
Barney & Dick's Iron & Metal, (B&DI&M) a scrap recycling facility located in a Northeast industrial city, was ready to expand its business with the installation of a shredder. But its plant was just too small to accommodate such a large machine.
Fortunately, the company was located in the perfect spot to expand its facility--right next door to an open land parcel, a former oil tank farm that had sat dormant since the tanks were removed several years earlier. Unfortunately, the scrap firm was concerned the site could be impaired-- that is, contaminated by hazardous substances and/or petroleum. If B&DI&M bought the site and the property turned out to be contaminated, it could face steep remediation costs and potential environmental liability under Superfund.
Then B&DI&M's owners heard about the new voluntary cleanup program in their state that encourages companies to redevelop and reuse abandoned and underutilized urban industrial areas-dubbed "brownfields”--by providing economic incentives, qualified liability protection, and minimal regulatory oversight for any necessary remedial activities. This program, they soon realized, was an opportunity to turn their expansion dreams into reality.
Such brownfield restoration and voluntary cleanup initiatives are on the cutting edge of environmental law, with states taking the lead on the issue. These initiatives-- designed to aid property owners, prospective purchasers, developers, and lenders--provide economic incentives and minimize environmental liability for private parties interested in redeveloping and reusing industrial property contaminated by hazardous substances and or petroleum. The goal of such efforts is to advance urban industrial redevelopment while ensuring environmental protection.
Among their benefits, these laws preclude future public or private actions against cleanup "volunteers" for future, unanticipated cleanup work; prevent "false-start" negotiations between industrial property owners, prospective purchasers, and developers; and offer liability protection to lenders providing commercial financing for such redevelopment projects. The big caveat in most brownfield restoration and voluntary cleanup programs is that they only apply to those who are not responsible for a site's contamination.
While these programs weren't designed with scrap recyclers specifically in mind, recyclers can benefit from them in a few ways. For one thing, as with Barney & Dick's, recyclers can use voluntary cleanup laws when buying, remediating, and reusing potentially impaired industrial property. Recyclers can also use these laws to clean up contamination on their own property, provided the contamination was pre-existing or caused by a third party and not by themselves. Moreover, by minimizing liability for the purchase of property contaminated by hazardous substances and or petroleum, voluntary cleanup laws can give recyclers the chance to sell their own impaired brownfield property, rather than being forced to let it sit idle due to liability fears.
Defining the Problem
Brownfields are generally defined as inactive, abandoned, and underutilized industrial sites in urban areas. Aside from degrading the environment, such brownfields represent lost opportunities to bring jobs and tax base back to inner cities and other industrialized areas. Adapting them for new uses is not only a way to restore buildings and the physical environment, but also to rejuvenate the vitality of the surrounding communities. Further, by making better use of existing infrastructure, brownfield redevelopment and reuse can help reduce urban sprawl and prevent the continued exploitation of virgin land and resources.
Redeveloping brownfield sites can be an attractive proposition. For one, site-preparation costs for brownfield redevelopment projects are significantly less than those for virgin, or " greenfield ," sites. Specifically, the costs of installing roads, water lines, sewers, and electricity are de minimis at brownfields when compared with developing similar features at new locations. As added benefits, brownfields are usually already zoned for industrial or commercial uses, and they often offer close access to labor, transportation, and materials.
Despite these advantages, efforts by private parties to redevelop and reuse brownfield sites have, until recently, been thwarted by the specter of potential strict, joint, several, and retroactive liability under the federal Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA)--the legislation that created Superfund--as well as state environmental statutes. Simply put, fears of incurring environmental liability under these laws have chilled the transfer of industrial and commercial real estate, particularly in the Northeast and Midwest .
The problem is that these laws have given industrial property owners seeking to redevelop, clean up, or sell brownfield sites three options: clean up the property, sell it, or "landbank" it--that is, do nothing with it for fear of being held retroactively liable under Superfund for past site contamination.
As for the first option, without economic incentives and specific liability protection, most private parties are unwilling to underwrite the cost of remediating property they didn't pollute. Further, many environmentally sophisticated companies are also discouraged by the indifferent treatment federal and state courts have shown toward industrial property owners who, in good faith, disclosed the presence of contaminants on their property and voluntarily offered to clean up such contamination.
The second option also carries a heavy burden since selling the property would leave a company open to future Superfund liability as a past owner or operator.
As a result, many property owners have opted to landbank contaminated industrial property and focus their growth on new industrial facilities using virgin land and resources. The result has been brownfield paralysis. To the rescue have come state--and, to a lesser extent, federal--brownfield restoration and voluntary cleanup initiatives, which have been promulgated specifically to resolve this paralysis. These laws provide private parties, including scrap recyclers, legal and economic incentives to voluntarily buy, clean-up, or sell contaminated industrial property.
The Federal View
In August 1994, the U.S. Environmental Protection Agency (EPA) launched the federal Brownfields Economic Redevelopment Project as part of the Superfund reauthorization and reform process. This project conducts studies on how to return old industrial sites to productive use and appropriates grants to qualified communities to help achieve this goal. The initiative has two basic goals: to revitalize urban economies in the Northeast and Midwest by encouraging manufacturing and other industries to reuse brownfield sites, and prevent the unnecessary development of virgin land resources.
As part of the initiative, the EPA has begun to "de-list" 25,000 of 38,000 sites from CERCLIS, the Superfund site-tracking system. These sites have been screened out of active investigation and designated as "No Further Remedial Action Planned." The EPA also plans to launch an outreach program to correct any real estate market distortions or impediments to redevelopment created by listing brownfields on CERCLIS. Specifically, the agency plans to provide information to interested parties in the financial and real estate sectors about the true status of federal liability for the de-listed sites.
In addition, the EPA's brownfield initiative will provide funding for approximately 50 pilot projects in 1995 and 1996, with each eligible to receive up to $200,000 to support two year demonstrations of redevelopment solutions. The goal of the pilot programs is to create a national policy on brownfield development to offer guidance to states and localities struggling with this issue. As such, the pilot programs will help test redevelopment models by removing regulatory barriers without sacrificing environmental protection; encourage community groups, investors, lenders, developers, and other affected parties to work together to clean up contaminated sites and return them to productive use; create models for states and localities to follow; and establish guidance for cities cleaning up and returning contaminated, abandoned property to productive use.
Finally, the EPA expects to develop new guidance regarding prospective purchaser agreements this year. By limiting the liability of prospective purchasers, the agency should add to the comfort level of parties participating in brownfield reuse or redevelopment.
States Take the Lead
There has been even more brownfield restoration action at the state level. As of late spring, nine states-- California, Colorado, Illinois, Indiana, Michigan, Minnesota, Ohio, Tennessee, and Virginia--had enacted substantive brownfield restoration and voluntary cleanup laws, and a bevy of others—Arizona, Arkansas, Delaware, Mississippi, New Hampshire, New Jersey, New York, Pennsylvania, and Texas—were considering passing similar measures.
Among their features, most such state laws generally allow cleanups with minimal regulatory oversight; provide liability protection to lenders that accept industrial property as security for commercial financing; protect trustees from assuming liability when forced to administer impaired estates; hold volunteers harmless for unanticipated cleanup work in the future; and exempt volunteers from environmental enforcement actions through written assurances such as covenants not to sue (agreements in which a state promises not to institute civil or administrative actions against participating parties in consideration for the proper and timely completion of the voluntary cleanup program). Depending on the jurisdiction, volunteers may even be shielded from private third party actions and citizen suits.
Parties that satisfy all requirements of a voluntary cleanup program generally qualify for state-issued certificates of completion or "no further action" letters, which are submitted to state environmental regulators in lieu of issuing a covenant not to sue to volunteers.
Among their other features, some state programs require the state to petition the U.S. EPA on behalf of volunteers, asking the agency not to list certain brownfield sites on CERCLIS or the National Priorities List of Superfund sites, and to refrain from bringing federal enforcement proceedings against volunteers that have successfully completed the voluntary cleanup program.
Several programs also provide economic incentives to encourage parties to voluntarily clean up, reuse, and redevelop brownfield sites. Many states, for example, have created voluntary cleanup funds to assist qualified small and mid-sized businesses that lack the financial capacity to underwrite environmental assessments and voluntary cleanups. A few offer economic incentives in the form of tax credits and abatements.
While such voluntary cleanup programs offer many benefits, they also have a few limitations. For instance, the existence of groundwater contamination may bar a property owner from participating in voluntary cleanups, as can involvement in ongoing state or federal environmental enforcement actions or being listed on the National Priorities List. Moreover--as previously noted--most programs apply only to property owners and volunteers who are not responsible for existing site contamination.
Recyclers should also keep in mind that, although voluntary cleanup programs may limit their liability and hold them harmless for future unanticipated cleanup work, liability protection applies only to the contamination identified in the state-approved voluntary cleanup plan. The discovery of contaminants not covered by such a plan could lead to federal and or state environmental enforcement actions. Thus, those undertaking voluntary cleanup plans must be somewhat tolerant of risk.
As a result, parties engaging in voluntary cleanup activities should possess at least a minimum degree of environmental sophistication. Prior to commencing remediation activities, a thorough knowledge of the extent and nature of site contamination is required. Such knowledge allows volunteers to quantify the harm posed to human health and the environment. In addition, by doing so, the cost of remediating a site to a level consistent with its planned future use may be accurately estimated, and the sale price of a brownfield site can be adjusted to reflect the loss in property value attributed to the presence of contaminants.
Using the Law
So, let's assume that your scrap recycling company is kicking around the idea of redeveloping and reusing a brownfield site. Among the many considerations to keep in mind are the potential to incur environmental liability through the acquisition of such property, the costs of remediating any existing contamination, the ability to secure commercial financing for the project (if needed), site preparation costs, the tax rate in the site's area, the cost of land and labor in the area, and the property's access to labor, markets, materials, and transportation, among others.
If these factors look favorable, you might decide to forge ahead with your redevelopment plan under your state's voluntary cleanup law, if it has one. How should you go about it?
For some answers, let's return to the case of Barney & Dick's Iron & Metal.
After deciding that the purchase of the neighboring property was feasible, the company hired a certified environmental consultant and an environmental attorney to help undertake "all appropriate inquiry" into the site's condition--a method to determine whether a site is in "substantial compliance" with applicable federal and state law. This phase I environmental site assessment entailed a review of the oil tank farm's environmental compliance history--including circumstances surrounding its closure-deeds and other documents in the chain of title, previous environmental site assessments, and aerial site photographs, as well as interviews with former employees to determine the current and past uses of the property.
B&DI&M then made a written request to the U.S. EPA regional office and state environmental agency under the Freedom of Information Act and state equivalent seeking "any and all documents relating to outstanding environmental enforcement actions and/or consent decrees, site inspection reviews, and compliance history, including closure and post-closure compliance records" regarding or respecting the oil tank farm property.
Because this assessment indicated potential contamination of the oil site, B&DI&M then conducted a phase II assessment--a physical review of the property, including sampling of the potentially contaminated environmental media and an analysis of potential pathways for migration contaminants.
To B&DI&M’s chagrin, the phase II assessment confirmed that the property was indeed contaminated, so the firm addressed several questions before proceeding.
- Is the property eligible for remediation under the state’s voluntary cleanup program?
- Is the property listed on CERCLIS or the National Priorities List?
- Is the site subject to pending federal or state civil or administrative environmental enforcement proceedings?
- Will the cost of remediating the property outweigh the benefits of purchasing it?
- Does groundwater contamination exist?
- Do environmental "superliens" exist against the property?
- Will the purchase and cleanup of the property trigger liability under Superfund and other environmental laws, such as the Resource Conservation and Recovery Act, the Clean Water Act, or related state laws?
- If cost recovery action is necessary under Superfund, is the abandoned oil tank farm's owner a solvent corporation?
- What are the third-party considerations involved--that is, have pollutants migrated onto neighboring properties?
- Will the company's banker provide financing for the remediation of the contaminated property?
After answering these questions to its satisfaction, B&DI&M submitted its application and fee for inclusion in its state's voluntary cleanup program.
Once the company's application was approved, B&DI&M prepared a cleanup plan based on the proposed future use of the site for scrap recycling. Among other topics, this plan encompassed a detailed summary of remedial investigations and a description of the remedial work to be performed, including quality assurance measures, sampling and analysis information, health and safety considerations, community relations provisions, data management and record-keeping requirements, and a proposed work schedule on the remedial activities.
The B&DI&M cleanup plan also had to specify the cleanup standard it would use in its remediation, with a choice between background, statewide, and site-specific standards. The company decided on a site-specific standard, figuring it would be the most feasible and protective of human health and the environment for its circumstances.
This choice, however, carried with it a requirement to develop a risk assessment report, so the scrap company then had to demonstrate that the potential adverse effects under both the current and planned future conditions caused by the presence of existing contaminants no longer posed a threat to human health and the environment. If carcinogenic contaminants or systemic toxicants were discovered, an exposure-factor analysis would also have had to be incorporated into the risk assessment.
The company's next step was to negotiate the sale of the property, using the results of the phase I and phase II assessments--which quantified all known risks associated with the site contamination—to set its offering price. A contract was then drawn up incorporating the oil company's representation and warranties concerning the environmental condition of the site, which included specific indemnifications regarding remedial activity conducted on or off-site. (This should minimize B&DI&M's exposure to liability from potential future, additional cleanup work for the presence of contaminants not covered under the voluntary cleanup plan.) In addition, the scrap firm established an escrow in the contract of sale to cover unforeseen cleanup costs, calculating the amount by multiplying the estimated cost of remediating the property by a buffer factor.
To execute the purchase, B&DI&M needed to secure a loan, which could have been a problem because many banks are reluctant to underwrite the purchase of impaired industrial property for fear of assuming Superfund or related environmental liability through foreclosure on the property. Under the state voluntary cleanup program, however, the bank was offered statutory protection from lender's liability concerns when it accepted the impaired property as collateral for the loan, so B&DI&M was able to complete the transaction and undertake its cleanup plan.
Once the remedial activities were completed, B&DI&M submitted to the state for approval a certificate of completion prepared by a certified environmental professional supervising the cleanup.
Upon verification and approval of this certificate, the company received a covenant not to sue from the state environmental agency, holding B&DI&M, its successors, and assignees harmless for any unanticipated cleanup work in the future and any civil or administrative action brought by the state regarding the remedial activities covered under the voluntary cleanup plan. The state program also protects the firm against third-party liability and citizen suits and requires the state to petition the U.S. EPA to not initiate potential civil or administrative enforcement actions against B&DI&M. (If the company had been located in another state—even one with a brownfield restoration law--it might not have been granted all of these protections.)
At long last, B&DI&M was able to buy its shredder, expand its operations, and process scrap happily ever after--in large part, thanks to its state's brownfield restoration and voluntary cleanup law.
While B&DI&M's situation is only hypothetical, brownfield sites are, indeed, being reused and redeveloped thanks to the voluntary cleanup laws being promulgated and promoted on the state and federal levels. These laws are giving scrap recyclers new options and opportunities as owners and potential buyers of contaminated brownfield sites and, if used prudently, could achieve the goal of promoting urban industrial redevelopment while ensuring environmental protection.
New cleanup laws are encouraging the reuse of contaminated urban sites—called “brownfields”—by offering companies economic incentives and minimizing their environmental liability.