The redevelopment of "brownfields" is a major issue in the 1990's. Recent federal initiatives are designed to remove barriers to redevelopment of brownfields by reducing the circumstances under which the developer and lender will be held liable for environmental problems at the sites.
I. WHAT ARE BROWNFIELDS?
There is no uniform definition of "brownfields." The term is most often used to refer to contaminated, abandoned industrial urban sites. However, the term is also sometimes used to refer to contaminated sites which are "commercial" rather than "industrial" and "under-utilized" rather than "abandoned." Brownfields has been defined in the draft federal superfund reform legislation (HR 2500) as "abandoned or under-utilized industrial sites that may contain environmental contamination, often located in urban and economically distressed areas." The General Accounting Office has estimated that up to 425,000 brownfields sites require cleanup nationally at a cost of $650 billion.
II. WHY REDEVELOP BROWNFIELDS?
Many brownfields sites are located in prime areas due to their proximity to large numbers of people and available infrastructures, and hence, but for environmental concerns, would be attractive for development today. By increasing the redevelopment of brownfields, we will be revitalizing our urban areas and reducing the development of our limited remaining open space in rural and suburban communities.
III. WHAT ARE THE IMPEDIMENTS TO BROWNFIELDS REDEVELOPMENT?
Although other federal and state environmental laws affect the redevelopment of brownfields, the most significant federal law affecting redevelopment of brownfields sites is the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA or Superfund). 42 U.S.C. 9601 et seq. CERCLA governs the cleanup of most contaminated sites, and imposes strict liability for the cleanup costs on site owners, among others. 42 U.S.C. 9607. CERCLA liability is joint and several, so that any responsible party at a site can be held liable for the entire cost of the cleanup, whether or not it caused the contamination. Moreover, there are few defenses available to a current property owner under CERCLA. 42 U.S.C. 9607. The CERCLA liability scheme creates a major impediment to redevelopment of brownfields since prospective developers and lenders are oftentimes scared away from getting involved with such sites as a result of the potential environmental liabilities associated with such sites.
IV. FEDERAL BROWNFIELDS PROGRAMS.
A. Brownfields Action Agenda.
In January, 1995, the United States Environmental Protection Agency ("EPA") announced a number of reforms as part of its "Brownfields Action Agenda" which are designed to address the concerns of prospective purchasers and lenders involved in brownfields. The Brownfields Action Agenda includes the following:
1. Federal Guidelines Regarding Prospective Purchaser Agreements.
In May 1995, EPA issued new guidance and a model agreement for prospective purchasers of contaminated property as part of EPA's Brownfields Action Agenda. 60 Fed. Reg. 34,792 (1995). The new guidance, entitled "Guidance on Settlement With Prospective Purchasers of Contaminated Property," sets forth the conditions under which EPA will enter into prospective purchaser agreements. The benefit of a prospective purchaser agreement to a purchaser is that the EPA covenants not to sue the prospective purchaser for pre-existing contamination and provides contribution protection. Accordingly, these prospective purchaser agreements are only available to prospective purchasers who are not otherwise potentially responsible for the contamination. This new EPA guidance document supersedes the 1989 policy on this issue, and expands the covered sites to include any site where federal involvement is expected to occur and at which Superfund liability is likely to be incurred. However, EPA Region 9 has made clear that prospective purchaser agreements will not be applied to most sites in light of the time and expense involved in preparing such agreements. Instead, EPA Region 9 urges prospective purchasers to seek alternative ways to reduce risk. Those methods include, for example, obtaining a "comfort letter" from EPA which reports the status of the site at issue and EPA's enforcement plans for the site, obtaining insurance or negotiating an indemnification agreement with the seller, entering into a lease-option deal, and participating with responsible parties in a remedial action consent decree for the site.
a. Provisions in the federal guidelines.
EPA's new guidance establishes certain conditions which a prospective purchaser must be able to satisfy in order to qualify to enter into a prospective purchaser agreement with the EPA. These conditions are:
- The site involves EPA action, either presently or is anticipated in the future by EPA. EPA does not want to expend its limited resources in connection with purely private real estate transactions or on sites undergoing cleanup pursuant to a state program.
- EPA will receive a substantial direct benefit from the agreement, which could be in the form of money paid for the cleanup or some substantial indirect benefit to the public with a lesser direct benefit to EPA. E.g., the development may (i) provide jobs to the local community, (ii) provide an increased tax base, (iii) provide opportunities for disadvantaged groups, (iv) serve to reduce substantially the risk posed by the site, (v) develop a blighted area, (vi) create conservation or recreation areas or (vii) provide community services such as improved public transportation or infrastructure.
- The development will not contribute to the contamination or interfere with the remediation of the property.
- The development will not pose health risks to the community.
- The prospective purchaser must be financially viable.
As noted above, EPA Region 9 has indicated that even if a prospective purchaser can meet all of these conditions, EPA will enter into prospective purchaser agreements only where the prospective purchaser is at substantial risk of incurring environmental liability and no other alternatives are available. EPA's use of prospective purchaser agreements may become more routine as the transaction costs associated with such agreements decrease. Between 1989 and 1994, EPA only entered into 17 prospective purchaser agreements. Since issuing the new guidance, EPA has only entered into 7 prospective purchaser agreements.
b. Recent applications of the federal guidelines.
In California, EPA Region 9 has issued at least two prospective purchaser agreements for property within the San Gabriel Superfund site. Under the first agreement, which applies to a 14.5 acre parcel located in the South El Monte operable unit, F.R. Acquisition agreed to pay $500,000 toward groundwater cleanup, make an additional contingent payment of up to $300,000 to cover state cleanup costs, and develop a pollution prevention plan for the site. Under the second agreement, which applied to a parcel within the Baldwin Park operable unit, Aftermarket Technology promised to pay $200,000 for cleanup costs, and to establish an account with $1 million which would be available for additional cleanup costs. Sources state that EPA probably will be able to recover enough money from responsible parties so that EPA will not use the extra money in that account. Key provisions of these agreements are:
- Consideration for the covenant not to sue includes payment of cash to EPA for site cleanup costs and an agreement to complete environmental upgrades within a set time frame.
- Limitations on the covenant not to sue allows the U.S. to pursue claims against the purchaser for the release of any hazardous substances by the purchaser, or for worsening the existing contamination.
- Contribution protection clauses acknowledge that the prospective purchaser is protected by statutory provisions within CERCLA from private cost recovery suits.
- Transferability clauses establish that the covenant not to sue can be assigned, subject to certain conditions, so that protection from environmental liability can "run with the land."
2. Pilot Brownfields Projects.
EPA has committed to funding 50 two-year pilot demonstration projects of up to $200,000 each for cleaning up brownfields. These pilot projects are intended to support creative two-year demonstrations of assessment, cleanup and redevelopment solutions for brownfields sites. The idea is to find out what works and use that experience to serve as a basis for future brownfields efforts and, possibly, a national policy. To date, EPA has awarded 40 brownfields pilot projects for various locations across the country. By the end of 1996, EPA plans to have awarded a total of 50 pilot projects.
3. Proposed Tax Incentives.
The Clinton administration has proposed a $2 billion dollar tax incentive program designed to drive development of brownfields. The program allows private parties who cleanup and redevelop contaminated properties in certain areas to deduct the cleanup expenses in the same year in which they were incurred. Eligible areas include areas already designated by EPA as brownfields areas, areas where the poverty rate is 20% or higher, and designated Empowerment Zones and Enterprise Communities. EPA describes the package as an accelerated tax deduction, which will be included in the administration's proposed budget.
4. Flexible Cleanup Standards.
On May 24, 1995, EPA issued a policy designed to incorporate community plans for redevelopment and future land use in designing the remedy for Superfund sites. The policy, Office of Solid Waste and Emergency Response (OSWER) Land Use Directive No. 9355.7-04, should encourage redevelopment by allowing the development of flexible site-specific cleanup standards.
5. Removal of Sites from CERCLIS.
EPA maintains a computer database known as CERCLIS, which contains a list of CERCLA cleanup sites. As part of EPA's administrative reforms designed to encourage brownfields development, EPA has purged over 27,000 of the 38,000 sites on the list. EPA hopes that this action will remove some of the stigma which may have attached to those sites by virtue of being included on the CERCLIS list, and that potential developers will be more likely to consider sites for development that have been taken off the list. However, EPA's removal of these sites does not guarantee that they are free from contamination. Rather, EPA removed some sites from the list because EPA determined that remediation was proceeding under state programs. Other sites were removed because EPA determined that they were not contaminated.
6. Contaminated Aquifer Policy.
Developers and lenders may be reluctant to initiate projects which involve property near contaminated sites, especially where the parties fear that groundwater contamination could migrate onto the development site. On May 24, 1995, EPA issued a policy designed to reassure owners of property where contaminated groundwater has migrated onsite. This policy, entitled "Final Policy Towards Owners of Property Containing Contaminated Aquifers," states that EPA does not plan to sue owners of property to which subsurface groundwater contamination has migrated. This announcement formalizes EPA Region 9's long-standing practice.
B. Superfund Reform.
Several key liability reforms are part of EPA's brownfields program.
1. Reliance on EPA's Lender Liability Rule.
On December 11, 1995, EPA issued a policy memorandum which set forth its intent regarding enforcement of CERCLA liability provisions against lenders. See 60 Fed. Reg 63,517 (1995). The policy, entitled "CERCLA Enforcement Against Lenders and Government Entities That Acquire Property Involuntarily," makes clear EPA and DOJ's intent to apply EPA's Lender Liability Rule to enforcement actions involving lenders. The Lender Liability Rule was promulgated on April 29, 1992, and was subsequently vacated by the D.C. Circuit Court of Appeals on the grounds that EPA lacked the authority to issue binding regulations interpreting CERCLA. See "Final Rule on Lender Liability Under CERCLA", 57 Fed. Reg. 18344 (April 29, 1992) and Kelley v. E.P.A., 15 F.3d 1100 (D.C. Cir. 1994), cert. denied, American Bankers Ass'n v. Kelley, 115 S.Ct. 900 (1995). The Lender Liability Rule provides guidelines for lenders about the steps secured creditors can take to protect their security interests without incurring CERCLA liability.
2. Lender Liability Under RCRA for UST Violations.
On September 7, 1995, EPA issued a policy governing the obligations of lenders and other secured creditors under the Resource Conservation and Recovery Act (RCRA) for underground storage tanks (USTs). See "Underground Storage Tanks -- Lender Liability," 60 Fed. Reg. 46692 (September 7, 1995). The policy gives detailed guidance regarding RCRA's "security interest exemption," which exempts from RCRA's UST program requirements, those owners who hold some indicia of ownership primarily to protect a security interest, and do not participate in management of the UST. Under this new policy, foreclosing lenders can avoid regulation as UST owners and operators so long as petroleum is not added to or dispensed from the UST after foreclosure. The policy also allows lenders to empty the UST within a specified amount of time after foreclosure and take certain steps to secure and protect the UST without becoming a regulated party under RCRA.
3. Additional Incentives for Lenders.
EPA has worked to provide additional incentives for lenders to become involved in the cleanup and redevelopment of industrial property. Under the Community Reinvestment Act (CRA), lenders are required to make loans available in low and moderate income neighborhoods. On May 4, 1995, the federal government issued new regulations under the CRA. See Community Reinvestment Act Regulations," 60 Fed. Reg. 22,156 (May 4, 1995). In these regulations, lenders can obtain community-redevelopment loan credits for loans to finance environmental cleanup or redevelopment of an industrial site in a low to moderate income area. Such loan credit may become increasingly important in today's merger and acquisition climate, as the rules make clear that an institution's performance under the CRA can be the basis for the denial of a merger or acquisition application.
4. Proposed Superfund Reform Bills.
There are a number of proposed bills in Congress which seek to address lender liability issues under environmental laws. Both the Senate and the House, for example, have bills under consideration which are designed to give regulatory relief for banks. The Senate Bill (S 650) limits lender liability under CERCLA to the benefit conferred on the lender by remedial action undertaken at the property. The House version of this bill (HR 1858) adds language to the Federal Deposit Insurance Act which limits lender liability to those situations where the lender makes decisions regarding the disposition of hazardous substances or participates in management at the site. S 1285 also exempts lenders from liability if those lenders did not participate in day-to-day management at the site. Other Superfund reform proposals (S 1285, HR 2500) under discussion exempt bona fide prospective purchasers from environmental liability and allow for remedy selection which takes into account present and future uses of the site. Thomas Riley, chairman of the House Commerce Committee, has announced that he would be offering a brownfields amendment to HR 2500 (the GOP's proposed superfund reform legislation) when the bill is marked up in his committee. The amendment would authorize fifteen million dollars a year in grants to local governments for the purpose of performing environmental assessments and thirty million dollars a year in no-interest loans to help cleanup brownfields sites. There is a continuing controversy over whether the brownfields initiatives should be included in the superfund reform legislation or in a separate bill.
V. CONCLUSION.
A number of federal brownfields programs are underway. The extent to which these programs will be successful in stimulating brownfields redevelopment remains to be seen. Although these programs do not eliminate the risk of liability associated with brownfields development entirely, the initiatives reduce the risk involved in such projects. As the reform process continues, legislative changes to Superfund and other environmental laws may provide new solutions to the brownfields problem.