BROWNFIELD REDEVELOPMENT: DESCRIPTION

It was not that many years ago that the range of problems associated with purchasing and developing contaminated property meant that it rarely happened. Potentially devastating cleanup costs, tort liability to residents and owners of nearby property, unpredictable restrictions on use and development of the property, and interminable legal headaches and regulatory distractions all combined to lead most real estate professionals to conclude that redeveloping former industrial property was simply not worth the risk.

However, dwindling supplies of “green” sites and a growing body of success stories in the Brownfield arena have spurred a wave of interest in putting once abandoned properties back into reuse. There are still potential pitfalls in purchasing and owning contaminated property, and careful planning accompanied by informed advice is required. But it is not too much to say that there are now legal, technical, and economic means available to overcome nearly all of what were formerly considered insurmountable obstacles.

The attorneys at McKenna Long & Aldridge LLP have long recognized that successful Brownfield development requires a careful balance of legal, environmental, and economic insights. Further, through experience, the McKenna Long & Aldridge attorneys have learned how to manage the wide variety of disciplines involved in any Brownfield project to assure that the right balance is achieved to complete a successful project.

Based on decades of experiences and knowing how to find creative solutions to environmental challenges, the attorneys at McKenna Long & Aldridge have learned several key lessons that guide all of our work for clients in the Brownfield area:

Transactions in contaminated property are driven by the underlying real estate value. The nature and extent of the set of feasible environmental solutions is heavily influenced by the profitability of the underlying deal.

Very few environmental problems are unsolvable. While everything can be addressed given enough time, money, and effort, the challenge is to control cost to enhance profits.

The best business approach to contaminated property is to treat the environmental issues just like any other contingent liability or unavoidable cost. Smart developers work the risks and cost into the economic evaluation of the deal just as one would for any other future contingent cost.

There is no “one size fits all” solution. Even the simplest transaction will require a mix of contractual, regulatory, and informational solutions; many will also benefit from an insurance component.

Private Brownfield Transactions

One of the most common, and oftentimes most effective, ways to deal with contaminated property is also one of the oldest: simply allocate the duties and risks associated with the contamination through contractual measures. For example, either in the purchase and sale agreement, or in a host of related side agreements, the buyer and seller exchange various warranties about the condition of the property, may assume future cleanup obligations, may provide escrow accounts to fund investigations or cleanups, or may undertake any of countless other financial or cleanup obligations.

McKenna Long & Aldridge’s attorneys have had wide experience in using contractual measures to create wholly private Brownfield structures that address the risks of Brownfield development. For example:

We represented the former owner of a site that had been impacted not only by residues from our client’s former operations, but also by the remnants of a former municipal incinerator and a railroad. The site was further complicated in that it was underlain by fractured bedrock (making a cleanup technically tricky), was adjacent to a river (making possible “ecotoxicity” effects a matter of concern), and was scheduled to be part of a riverfront urban redevelopment project. We were able to assemble a series of complicated cost-sharing arrangements, establish cleanup standards based on negotiated land use plans and restrictions, and head off several threatened lawsuits, all of which resulted in the successful completion of the redevelopment project.
We represented an environmental consulting firm, who in turn represented the seller of a contaminated industrial park. On behalf of the consulting firm, we negotiated a three-way liability transfer agreement. Among other things, the consultant agreed to assume liability for the property and to perform a cleanup of the property pursuant to the state voluntary cleanup program. In addition, we negotiated an environmental insurance policy with a major insurance company that protects the consultant from the potential for the cost of cleanup to exceed current estimates and from third-party liability.
In an especially unusual Brownfield transaction, we represented a rapidly growing suburban church that was land-locked by an abutting city hall property. Directly across the street from the church, however, sat a partially vacant contaminated property mired in receivership both because of the environmental problem and the loss of its anchor tenant. We helped the church buy the mortgage on the property across the street through a limited liability company, take a deed in lieu of foreclosure through the LLC to get the contaminated site out of receivership, worked with the local governments to re-route a road across the contaminated area, and arrange a swap transaction with the municipal government to move its city hall across the street onto the uncontaminated portion of the property. As a result, the church doubled the size of its campus, and the municipal government gained a greatly expanded city hall complex and solved a major traffic tangle.
We represent a manufacturing company in the acquisition of a railroad property, which is subject to a state/federal/company Consent Decree. The property was used for decades as a railroad tie-treatment facility. This heavily contaminated property is a Superfund site and will likely be redeveloped by our client as a large bulk raw material rail transfer and storage facility. We are in the process of negotiating the acquisition agreement and obtaining administrative approvals.

Transactions Under Brownfield Statutes and Regulations

During the 1980s and early 1990s, the government began to realize that the potentially devastating liabilities it had imposed on owners of contaminated properties were having an unanticipated effect: completely innocent developers were avoiding contaminated properties, which were often located in urban areas most in need of redevelopment, and locating instead in the suburban sprawl-zone, areas called “greenfields” to distinguish them from the contaminated “brownfields” located elsewhere. To counter this perverse incentive, the government began to enact various “brownfield” laws that immunize purchasers of contaminated property against cleanup liabilities. McKenna Long & Aldridge attorneys have handled numerous developments under these Brownfield statutes. Representative matters include:

We represented a charter school in a public bond finance offering involving the acquisition of an existing school property sited next to a former U.S. Air Force base that has significant groundwater contamination issues that impact neighboring properties. We negotiated a clean-up agreement under the state Brownfield Law and led confidential due diligence evaluations and transaction management.
We represented the purchaser in the acquisition of a site actually listed on the National Priorities List. Before the purchaser would proceed with the transaction, it was necessary to (1) allow the former owner to conduct a partial cleanup and confirm that the cleanup met the purchaser’s requirements; (2) obtain what was the functional equivalent of a “prospective purchaser agreement” from EPA, even though this was years before EPA issued such PPAs; (3) obtain indemnities from the party conducting the cleanup, backed by financial mechanisms sufficient to cover all foreseeable contingencies if the responsible party defaulted on the cleanup obligations; and (4) do all of this to the satisfaction of the purchaser’s investors and lenders who were, to say the least, skeptical of the entire process.
As a method of further facilitating a transaction described below, we were able to conceptualize and obtain regulatory approval of a highly innovative application of a state Brownfield law. Specifically, while the state law normally required that the prospective purchaser assess and remediate the site, we were able to develop an approach under which the purchaser piggybacked on the environmental work of the PRP, yet obtained the full measure of cleanup immunity.
We are currently representing a hospital, which EPA believes to be a potentially responsible party for the cleanup of a nearby municipal landfill. The hospital is currently negotiating with EPA the possibility of settling its potential liability in a transaction that would involve the hospital’s applying for and donating EPA Brownfields grant money to a community organization that is attempting to redevelop the landfill and surrounding residential property.
We are representing a large, national commercial mortgage lender, whose portfolio includes hundreds of gasoline station loans. The lender is in the process of cleaning up many of these properties voluntarily, pursuant to various state Brownfield and voluntary cleanup programs.

Environmental Insurance

Environmental insurance can be one of the most important tools in the risk-reduction arsenal, although the cost and exclusion of environmental insurance may limit its value in many transactions. There are many variations of environmental coverage. McKenna Long & Aldridge attorneys bring to bear a wealth of experience in the insurance area, enabling us not only to advise clients on when insurance would be (and would not be) a valuable element of a Brownfield component, but even in drafting and finding underwriting for the coverage itself. For example:

A real estate investment company first approached the environmental practice group for assistance in buying a shopping center that had the dubious distinction of being the very first site to ever be removed from the a state’s hazardous site inventory. As part of that acquisition, the firm counseled the client on the acquisition of environmental insurance to protect against the risk that the state environmental agency might change its mind about de-listing the property. When the state did, in fact, change its mind two years later (making the property the first site ever to be re-listed on the hazardous site inventory), the McKenna Long & Aldridge attorneys successfully secured coverage under the environmental insurance policy for the costs of defending against both the state claim and a toxic tort claim brought by an adjoining landowner. Approximately three years later, we helped the client sell the property at full fair market value to a buyer under one of the first “Brownfield” letters ever issued by the state agency for a property listed on the hazardous site inventory.
A client owned an industrial building that had been used for a dying and weaving facility for approximately 20 years. Those operations resulted in a large quantity of pure-phase chlorinated solvents in soil and groundwater beneath the site. The initial clean up involved soil vapor extraction and a pump and treat system. After about two years, the remediation system reached a point of diminishing returns with concentrations still well above “clean closure” levels. A prospective buyer initially approached the client about a statutory Brownfield program. However, the cleanup required in the Brownfield program was more stringent than that using site specific risk analysis. Therefore, the parties agreed to proceed with the sale without formal Brownfield protection subject to a post-closing remediation agreement under which the client purchased environmental insurance to protect both the buyer and itself from third party claims, and the client agreed to perform whatever cleanup was affirmatively required by the government. The arrangement has been in place for four years, and the total amount spent by the client since closing has been approximately 10% of what it would have cost to qualify for the applicable Brownfield program.
An in-town developer identified an ideal property for high-end residential redevelopment. Unfortunately, the target was contaminated by a neighboring property. The environmental practice group worked with the developer to perform isolated corrective action, secure a “no listing” letter from the state environmental agency, placed environmental insurance coverage, created key land use restrictions and disclosures in the subdivision documents, and located residential mortgage companies willing to finance homeowners buying in the new subdivision notwithstanding the pre-existing conditions. The nearly two-dozen houses in the subdivision sold out in less than one year.
A property owner and his business were sued by the state to recover past costs as well as to remedy site contamination, which had resulted from fifty years operation as a lead smelter. Both parties had almost no assets, but we were able to secure defense coverage after locating older CGL insurance policies. With the insurance coverage we retained a consultant which performed a comprehensive site and risk assessment that significantly reduced the cost of the cleanup. A settlement was reached with the state using insurance proceeds.
We represented an environmental consulting firm that took responsibility for a cleanup of a site. By doing so, our client facilitated the sale of the property, indemnifying both the seller and buyer for cleanup costs. In turn, our client negotiated an insurance policy that protects it from cleanup cost overruns and third-party liability.

On-the-Ground Solutions

One of the most troubling aspects of dealing in contaminated property is the uncertainty in knowing exactly what one is buying into. McKenna Long & Aldridge attorneys have developed a wide range of means to specify and quantify the risks inherent in Brownfield properties. For example:

We represented a chemical company from whose property contamination had migrated into a residential neighborhood. Rather than follow conventional environmental methods, we negotiated our client’s acquisition of nearby residences and its donation of the properties to the local organization, which built a new library on the donated property. Since the property was no longer residential, the U.S. EPA only required cleanup to a commercial, rather than residential, cleanup standard. Our client took the money that it saved from not having to clean to a residential standard and donated it to the library as well. The library entered into a prospective purchaser settlement with U.S. EPA, which we helped them negotiate. This was a win-win situation for the client, the library and the community.
We represented the seller of a heavily contaminated property located in a historic district. Compounding this challenge, the nature of the property and the historic structures located on the property meant that conventional cleanup methods could not be used, and indeed there were many areas that could not be cleaned up at all. As a result, we developed a comprehensive cleanup and redevelopment strategy that included (1) a renegotiation of applicable cleanup standards, (2) development of innovative cleanup methods, (3) development of a comprehensive set of real estate controls and restrictions that permitted redevelopment of the property in a way that protected human health and the environment, and (4) development of contractual package with the purchaser that gave it the comfort needed for itself and its lenders.
When a local government had the opportunity to redevelop a heavily contaminated waterfront property, the McKenna Long & Aldridge attorneys quickly realized that the ordinary pace of environmental investigation and cleanup would effectively destroy any prospect of a profitable development. Working with EPA, Corps of Engineers, NOAA, and the state, we worked out an alternative remedial process, and were able to prepare the site for redevelopment and obtain all the necessary approvals in two years.
We represent a company that plans to develop a Jack Nicklaus-designed championship golf course on top of a closed city landfill. The golf course will be part of a revitalization of one of the most blighted areas of the city. Our first task was to convince city and state officials that the redevelopment was a good idea and would not expose them to undue risk. We took the lead in creating materials explaining the merits and safety of the golf course and led numerous presentations to government officials. Once the city and state environmental agency accepted the project, we negotiated very favorable terms (for our client) for allocation of liability and for a long-term lease and option to purchase. We currently are advising the client on regulatory permitting issues associated with development of the golf course, as well as ways to limit ad valorem taxes on the property so as to help assure the viability of the golf course.
We represented a Colorado metals recycling company in implementing its large-scale acquisition plans in six states (Florida, California, Texas, Missouri, Mississippi and Oklahoma). The assets and companies acquired were often heavily contaminated and redevelopment involved a broad range of “Brownfield” issues (finance, negotiated voluntary cleanup agreements and CERCLA matters).
A major corporation closed a 20 acre facility in a major suburb after its use for more than sixty years in industrial operations. The site was known to include 23 underground storage tanks and was contaminated with chlorinated hydrocarbons and hexavalent chromium in both soil and perched aquifers. As a result, ongoing remediation was being performed and the site was named in a Superfund site for underlying groundwater contamination. The company entered into an agreement to sell the property to a developer. Part of that agreement included: (1) access for ongoing remedial activities; (2) an agreed upon threshold for hexavalent chromium contamination remediation; (3) a manuscript insurance policy for ten years covering unknown contamination and (4) an agreement by the seller to indemnify buyer from all existing Superfund obligations.

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