Redevelopment

Brownfield Bonanza

Federal Legislation Provides More Funding for Redevelopment Projects.

Many private developers rarely take advantage of public-agency brownfield cleanup programs at either the state or federal level. As a rule, they like the environmental oversight process to remain at the local level, if possible, to keep it simple and close to the project. In fact, many view involving the U.S. Environmental Protection Agency in a remediation project as something to be avoided.

But the passage of the newest federal brownfield legislation — H.R. 2869, the Small Business Liability Relief and Brownfields Revitalization Act — may change that. Along with providing liability protection for prospective purchasers and contiguous and innocent landowners, the bill increases the funds available for brownfield assessment and cleanup.

It won't be clear for some time what impact this legislation will have on the pace of brownfield remediation. Applications for the first round of federal funding associated with the act were due in mid-December 2002, and it will take months for these applications to be reviewed, approved, and funded.

However, the timing is good for the commercial real estate industry, as buyers often reject transactions that involve environmental risk. Of 140 companies recently surveyed, 50 percent declined to purchase property with environmental damage, according to a Wall Street Journal report. In those failed transactions, 59 percent failed because either the buyer or seller refused to cover the cost of environmental remediation.

But brownfields are a growing niche in the commercial real estate industry. Recycling contaminated land increases the amount of product available in overbuilt urban markets. It also helps small markets attract new residents and job opportunities in the service economy by redeveloping unused and unsightly industrial complexes into mixed-use, residential, retail, and office projects. Commercial real estate professionals looking for brownfield redevelopment opportunities should consider how the new legislation might affect their future projects.

Details of the ActSigned into law by President Bush on Jan. 11, 2002, the act provides for $200 million per year over the next five years to promote the investigation, cleanup, and reuse of brownfields.

The act defines a brownfield site as “… real property; the expansion, redevelopment, or reuse of which may be complicated by the presence or potential presence of a hazardous substance, pollutant, or contaminant.” It expands potential federal financial assistance for brownfield revitalization, including grants for assessment, cleanup, and job training. New potential advantages are:

  • protection against lawsuits for prospective buyers and others who didn't create the brownfields, but want to help clean up and develop them;
  • an increased number of entities eligible for funding; and
  • opportunities for excluded sites to be eligible for funding based on “property-specific determination.”

Entities eligible for funding as described in the EPA's “Proposal Guidelines for Brownfields Assessment, Revolving Loan Fund, and Cleanup Grants” include local government agencies, land clearance authorities operating under or as agents of local governments, government agencies created by state legislatures, state-sanctioned redevelopment agencies, regional councils or groups of general purpose local government units, Indian tribes excluding those in Alaska and specific Alaska Native American communities and organizations, and nonprofit organizations.

The ChallengesThe first developers to make use of the new act's funding likely are to be either the qualifying agency on its own or companies already in partnership with a qualifying agency. Unfortunately, private developers will have to overcome a few challenges to take advantage of these new opportunities.

First, a private developer must partner with a public agency, a nonprofit organization, or an Indian tribe. Typically, partnering with a public agency adds time, cost, and complexity to a remediation project. Developers must build these factors into a transaction in advance — which means they must have a relatively patient seller.

The law is likely to encourage another kind of partnering between brownfield sellers that already have some responsibility for the cleanup and developers and their qualifying entities, as the legislation specifically excludes owners who have some existing cleanup liability. A brownfield seller would have to structure the purchase contract to provide for the time and complexity of qualifying under this program and accept a closing only after the application has been approved — another requirement of the legislation.

The new law also places “windfall” EPA liens on remediated properties to ensure that the federal government recovers any increase in property value from the cleanup. This creates financing complexities and potentially diminishes the private developer's profit, as well as the incentive to remediate brownfields. This again suggests that prospective projects likely will have some public-interest component to them, potentially including subsidies from the qualifying agency.

One of the law's attractive features is the protection from further federal and state environmental liability. However, since the legislation is new, it has no litigation history. As a result, until the law is tested in U.S. courts, no one, specifically conservative lenders and institutional owners, is assured that the liability protection will hold up.

This liability protection is offered as an alternative to prospective purchaser agreements issued by either the state or federal government and presumably environmental insurance. PPAs generally release a prospective borrower from historical environmental liability that might be pursued by either a state or the federal government. However, most buyers today, particularly institutional buyers, want PPAs prior to acquiring remediated property to provide them with the assurance that they will not be the targets of future environmental enforcement action. Until sufficient experience demonstrates that this new federal legislation really protects buyers, they will continue to require PPAs whenever possible, as not having one potentially reduces a property's market value.

As added protection, today's remediated property buyers also look for environmental insurance coverage from sellers. Both cost cap and pollution litigation liability insurance are readily available and reasonably priced. Most buyers increasingly view insurance as a necessary backup to an agency PPA, because pursuing a claim is a time-consuming process and could jeopardize a buyer's insurance coverage on other properties. In some cases, institutional buyers and other large owners of real estate have so much exposure with a particular environmental insurer that they are reluctant to process anything but a major claim so as to not polarize their relationship with the insurer.

As a result of these challenges, pursuing federal funding provided by the new legislation will be most attractive in urban infill areas that are in high demand or on projects that have a compelling public interest. Because of timing and the complexity of the new legislation, private-sector projects — and probably many public agency projects as well — will continue without federal assistance, at least until the program acquires a favorable track record.

New Available FundingThe new legislation provides three types of funding. These include assessment grants, revolving loan fund grants, and cleanup grants.

Assessment Grants

This money can be used to inventory, characterize, assess, and conduct planning and community involvement related to brownfield sites. An eligible entity may apply for up to $200,000 to address a site contaminated by hazardous substances, pollutants, or contaminants, including substances commingled with petroleum hydrocarbons. Sites contaminated by petroleum may apply for an additional $200,000, but assessment grant funds may not exceed $400,000 per applicant unless a waiver is requested. Waiver requests are based on the anticipated level of contamination, site size, and the site's ownership status.

If a waiver is granted, sites may receive up to $350,000 for those contaminated by hazardous substances and an additional $350,000 for those contaminated by petroleum. No entity may apply for funding assessment activities in excess of $700,000 due to budget limitations. Developers have two years to complete work associated with these grants.

Revolving Loan Fund

These grants allow recipients to capitalize a revolving loan fund and provide sub-grants to carry out cleanup activities at brownfield sites. An eligible entity may apply for up to $1 million for an initial RLF grant. Coalitions of eligible entities may pool their revolving loan capitalization grant funds. RLF grant recipients must use at least 60 percent of the funds to capitalize a revolving loan fund to provide no-interest or low-interest loans for brownfield cleanups. In addition, RLF awards require a 20 percent cost share, which may be a contribution of money, labor, material, or services for eligible and allowable costs. A waiver of the 20 percent may be requested based on hardship. Work associated with these grants must be completed within five years.

Cleanup Grants

An eligible entity may apply for up to $200,000 per site for brownfield cleanups. No entity may apply for funding cleanup activities at more than five sites due to budget limitations. Cleanup grants also require a 20 percent cost share. The eligible entity must own the site for which it is requesting funds. Entities must complete work associated with these grants within two years.

The EPA excludes or limits certain sites from eligibility for funding unless a property-specific determination application is filed and approved. These sites include facilities with permit requirements or removal actions enforced by a variety of environmental regulations. Such sites include:

  • sites listed (or proposed for listing) on the National Priorities List;
  • sites subject to unilateral administrative orders, court orders, and administrative orders on consent or judicial consent decree issued to or entered into by parties under the Comprehensive Environmental Response, Compensation, and Liability Act; and
  • facilities under the jurisdiction, custody, or control of the U.S. government.

In most cases, these funding limits may be sufficient to cover the costs of projects' site investigations, but not the remediation. Thus, the act may encourage public agencies to pursue the investigation, assessment, and even the preparation of an approved work plan without a clear source of funding for the remediation itself.

The act provides a two-step proposal submission process. The EPA evaluates the initial proposal based on threshold and ranking criteria. Threshold criteria include eligibility information, community notification, a letter from the state or National Tribal Environmental Council, and a site description. Ranking criteria include community need, leveraging of additional resources, grant management experience, and site selection process. These criteria change slightly depending on the type of funding being requested. After initial proposals are submitted, the EPA invites final proposals.

The cost, complexity, and timing of using this new brownfield legislation may be discouraging. However, it represents an important step in the right direction and is encouraging new discussions among brownfield developers. As a result, perhaps a few more contaminated sites will be cleaned up to become productive community assets.

Dave Wald

Dave Wald is president of Wald Realty Advisors in Los Angeles. Contact him at (310) 979-3850 or dwald@waldrealtyadvisors.com. Brownfield Resources The U.S. Environmental Protection Agency\'s Web site (www.epa.gov) contains information about the Small Business Liability Relief and Brownfields Revitalization Act including legislation details, a summary of the legislation\'s benefits, comments by President Bush, and “Brownfields Legislation Implementation Listening Sessions” with various stakeholder groups. The site also reviews the EPA\'s “Proposal Guidelines for Brownfields Assessment, Revolving Loan Fund, and Cleanup Grants.” The site includes Enviromapper, a brownfield tax incentive zone map with previous tax code requirements for geographic regions from the period Aug. 5, 1997, to Dec. 21, 2001. The Trust for Public Lands (www.tpl.org) provides information on national, state, and local brownfield and conservation programs. The National Brownfield Association (www.brownfieldassociation.org) provides information, resources, and educational programs designed to stimulate brownfield redevelopment nationwide.

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