Blue Skies for Brownfields

If you are involved in commercial or industrial property transactions, you have likely had one or more transactions sidetracked due to concerns associated with a property’s environmental condition.

If the deal didn’t fall through altogether, then significant discounts are sought by a purchaser to offset these concerns, which are often based on perception.

Unfortunately, many sales involving environmental conditions that could have been made to the benefit of both parties did not occur—though options existed for managing both perceived and actual risks associated with the property. Following are highlights of various risk management tools that can be used in supporting transactions that involve these types of environmental issues. And check out the case examples, which demonstrate how these various tools can be used to effectively support property transactions.

The transfer of real property customarily is preceded by one of the transaction parties performing a Phase I Environmental Site Assessment (ESA). The Phase I ESA will often identify “recognized environmental conditions,” which the American Society of Testing Materials (ASTM) E 1527-00 standard defines as:

The presence or likely presence of any hazardous substances or petroleum products on a property under conditions that indicate an existing release, a past release or a material threat of a release of any hazardous substances or petroleum products into structures on the property or into the ground, groundwater, or surface water of the property. The term includes hazardous substances or petroleum products even under conditions in compliance with laws. . . .

The findings of subsequent assessment(s) of these recognized environmental conditions will usually begin to influence the direction of the transaction. If conditions are identified suggesting potential threats to human health and the environment are present, then evaluation of alternative risk management tools may become important in salvaging the sale.

Environmental Risk

The acquisition of environmentally distressed properties carries a number of risks that can range the scale from irritant to major liability. Most familiar are the risks associated with the Comprehensive Environ-mental Response, Compensation and Liability Act (CERCLA), more commonly known as “Superfund.” No one wants to find themselves the owner of one of these sites. The Phase I ESA process is basically designed to avoid the unknowing acquisition of a property that may one day be designated a “Superfund” site. Potentially more problematic are a number of other risks of contaminated site acquisition and development including, but not limited to:

• impacts on the ability to secure financing at favorable terms;

• impacts to the site development and construction schedule;

• uncertainties associated with project costs and related impacts on the project proforma; and

• potential effects associated with unknown conditions.

Risk Management Tools

Fortunately, a number of programs have been developed to aid parties involved in these types of transactions. To varying degrees, each has been recognized within the marketplace as commercially acceptable. The programs most frequently utilized include:

• United States Environmental Protection Agency (USEPA) and Illinois Environmental Protection Agency (IEPA) Brownfields Program

• IEPA Site Remediation Program (SRP)

• Environmental Insurance

Often, one or more of these programs can be employed to facilitate a property transaction or development. The manner in which each is used is dependent upon the objectives and risk tolerance of the individual parties.

Brownfields Program

The Brownfields Programs sponsored by the USEPA and IEPA generally are directed towards promotion of redevelopment of former industrial properties. Often some form of local community participation may be necessary to participate in the various program benefits. Participation in the USEPA Brownfields Program is designed to limit potential Superfund liabilities. USEPA has also entered into a Memorandum of Understanding (MOU) with the IEPA acknowledging that participation in the SRP offers similar protections as provided by the USEPA program.

The Illinois Brownfields program has a number of components that may apply to a particular property acquisition. Each offers some form of regulatory assistance and funding support. Specific programs and select eligibility criteria include the following.

Redevelopment Grant Program – This program is only eligible to municipalities undertaking redevelopment of brownfields properties. Grants of up to $120,000 are available to cover costs associated with assessment, investigation and remedial planning. Costs for actual cleanup activities are not eligible.

Redevelopment Loan Program – This program offers low interest loans to municipalities and private parties that cleanup brownfields through the SRP. Eligible costs include investigation, remediation and demolition. Land acquisition costs are not eligible. Loan amounts of up to $1,000,000 per project can be obtained at a five-year term.

Environmental Remediation Tax Credit – This program allows a property owner to obtain a credit towards their Illinois income tax for cleanup costs incurred under the SRP. A key eligibility requirement is that the owner cannot have caused or contributed to the contamination. Another significant limitation of this program is that only costs incurred between 12/31/97 and 12/31/01 are eligible.

As noted, eligibility to participate in certain programs is often limited to municipalities. However, private parties may still be able to benefit by entering into creative partnerships with local communities whose principal interest is generally seeing a property return to the active tax rolls. Additional information on these programs can be obtained at the IEPA Web site at www.epa.state.il.us/land/brownfields.

Site Remediation Program

The Illinois Site Remediation Program was promulgated (35 IAC 740) in 1997. It quickly became the leading program in the state for pursuing private, voluntary cleanups of contaminated properties. Several unique structural features have allowed it to become one of the IEPA’s most effective programs. Two key elements are that it is self-funded (participants pay for site enrollment and IEPA oversight services), and statutory deadlines exist for IEPA action on participant submittals. Consequently, we have found that the program tends to be pragmatic and solution-oriented.

Environmental Insurance

Within the last several years, a common mechanism for managing risk associated with acquisition and development of contaminated properties has been offered by the commercial insurance markets. A number of insurance companies have developed an insurance product often referred to as a Pollution Legal Liability (PLL) policy. These policies can be structured to be fairly broad in scope, covering a wide range of environmental exposures. Select coverage’s often offered by these policies include the following.

• Remediation Stop Loss, Cost-Cap or Cleanup Cost Containment coverage which, in summary, limits the dollar amount at risk for remediation implementation. Coverage is provided for cost overruns incurred during remediation implementation after a minimum deductible or self-insured retention (SIR) has been spent by the insured.

• Costs associated with cleanup of unknown conditions discovered in the future or conditions that arise during the policy term (both sudden and non-sudden).

• Costs associated with third-party claims for bodily injury, property damage and cleanup costs.

• Costs incurred as a result of a regulatory re-opener (i.e., future standards adopted by a regulatory authority require that a previously completed closure be “re-opened”).

This is only a brief summary of the different coverages offered by this type of policy. While a PLL policy generally is regarded as being the broadest in scope, individual policies can often be secured addressing one or more potential loss scenarios. Also to be considered is the information needed to submit for underwriting review. The amount of information required can vary considerably.

Conclusion

As the case examples (see sidebar) demonstrate, there are various means for addressing environmental impacts to support a successful property transaction. Often, they can be addressed at a reasonable cost to the mutual satisfaction and benefit of all involved parties. However, it must be noted that not all projects are implemented as successfully as those noted above. While the purpose of these measures is to manage or mitigate risk, it cannot be eliminated. A quality due-diligence effort and the involvement of consultants and attorneys with expertise in these areas are important for successful acquisition and development of contaminated properties.   

About the author: Douglas G. Dorgan Jr., LPG, is Principal with Weaver Boos and Gordan, Inc., www.weaverboos.com, 200 S. Michigan Ave., Chicago, IL 60404. You can reach him at 312-922-1030 or ddorgan@weaverboos.com.

May 2003 Illinois REALTOR magazine