Construction Insurance and Real Estate
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Brownfields Properties Offer Opportunities
By:James T. Price

Practice Group(s):Environmental

(This is a slightly expanded version of an article published in the June 1997 issue of Ingram's magazine, a Kansas City business monthly.)


New state and federal initiatives are encouraging transactions involving environmentally contaminated real estate. This is part of an effort designed to reuse and recycle such properties, frequently referred to as "Brownfields." The initiatives include agency agreements with prospective property purchasers so they do not become liable to clean up contaminated property they buy; economic development incentives designed to encourage reuse of such property and job creation there; protection for lenders against liability arising from loans secured by contaminated property; voluntary cleanup programs; and common-sense remedial measures based on past and anticipated future uses of the property rather than residential use cleanup levels.

Many see these initiatives as a way to spur investment in former industrial sites in urban areas such as Greater Kansas City. Such sites often come with the advantages of infrastructure already in place and able workers nearby. Indeed, Kansas City, Missouri, and Kansas City, Kansas, are participating in a joint Brownfields pilot program launched with a grant from the United States Environmental Protection Agency and have several Brownfields redevelopment projects completed or under way. As a rule, the term "Brownfields" is not meant to include the nation’s most contaminated properties, which are listed on the Superfund National Priorities List maintained by the United States Environmental Protection Agency. Rather, "Brownfields" are less-contaminated properties such as industrial manufacturing plants, warehouse facilities, railroad yards, tank farms, military bases, service stations, dry cleaning facilities, asbestos-contaminated buildings, and the like. With these new Brownfields initiatives, purchase, sale and re-use of these less-contaminated properties are much more likely than before.

Brownfields initiatives attempt to alleviate one of the unintended consequences of the Comprehensive Environmental Response, Compensation and Liability Act, commonly known as the Superfund law. The Superfund law imposes liability on several classes of persons, regardless of fault, to clean up contaminated properties. One is the present owner of such property, whether or not that owner contributed to the contamination. This liability scheme, along with horror stories about uncertain cleanup goals and spiraling costs of cleaning up properties, led property buyers and developers to shun even mildly contaminated property. Many lenders did the same. Even owners of contaminated properties often refused to sell because they could lose control over any ensuing cleanup requirements. As noted, these Brownfield sites included industrial property, much of which had become at least mildly contaminated by industrial operations through the decades. Consequently, as industrial America restructured and downsized, reusable industrial property lay fallow. Certainly in Greater Kansas City we see ample evidence of that.

Federal changes. At the federal level changes are both statutory and administrative. In September 1996 Congress passed a law that contains long-sought protections for lenders against liability from contaminated sites. Lenders do not become owners of property for purposes of Superfund liability merely because they foreclose on the property to protect their loans. They also do not become liable as an operator of the contaminated facility if they follow certain provisions in the statute.

EPA has issued guidance that outlines the terms EPA will employ in negotiating prospective purchaser agreements. Under these agreements the government agrees not to pursue the new purchaser of the property to pay for the cost of cleaning up pre-existing contamination. In 1995 EPA issued another policy making clear that it did not view a party to be liable under the Superfund law if its only connection to the site was ownership of property that had become contaminated by offsite groundwater plumes. This policy especially is important in locations such as those in Wichita, Kansas where numerous parcels of property have been contaminated by the migration of contaminated groundwater. EPA also has issued guidance on transfers of contaminated federally owned property. The Department of Defense has its own policies on transferring contaminated DOD installations, such as closed military bases.

Voluntary cleanup programs. Some of the most interesting Brownfields developments are at the state and local levels. State voluntary cleanup programs allow persons with an interest in property, frequently property owners, lenders or prospective buyers, to approach the state environmental departments with proposals voluntarily to clean up contamination. Typically these programs require the participant to investigate the extent of property contamination and voluntarily implement the state’s approved remedial plan. The participant generally pays the costs of the state’s technical review and oversight and is willing to do so to speed project review. When the contamination identified in the reports is remediated as specified in the plan, the state issues a "no further action" letter to the participant. This gives the participant some degree of comfort that the state will not require additional cleanup. These comfort letters have been a key feature in promoting Brownfields transactions.

Recently EPA has signed memoranda of agreement with many states under which EPA agrees it will not seek further cleanup at a site that has completed the state’s cleanup program. The state of Missouri for several years has had a voluntary cleanup program designed to simplify cleanups and encourage property owners, prospective purchasers and lenders to reuse contaminated property. Missouri and EPA have entered a Memoranda of Agreement covering this program. Kansas has had an administrative program of this type called the "Cooperative Cleanup Program" and recently adopted a broader statutory program.

Economic Development Incentives. Most observers believe that economic development incentives are essential to successful completion of most Brownfields transactions. The Clinton administration has proposed federal tax credits. The Department of Housing and Urban Development has a number of economic incentives for Brownfields transactions. Missouri has one of the nation’s most aggressive economic development programs for Brownfields properties, offering state tax breaks and other incentives to persons who redevelop contaminated properties and create new jobs there. Local governments frequently offer local property tax abatement, tax increment financing and other economic development incentives to accomplish the same thing. In Greater Kansas City many of the Brownfields sites are located in a designated Empowerment Zone, which offers various tax incentives.

Simplified remediation requirements. Brownfields initiatives also seem to have spurred regulators to adopt common-sense approaches to setting cleanup requirements. One such approach is the use of risk-based cleanups. Risk-based cleanups are an effort to match a site’s cleanup requirements to the anticipated future use of the property instead of utilizing an overly conservative "one-size fits all" cleanup plan. Institutional controls are imposed to ensure that the property continues with the anticipated use. Risk-based cleanups generally lower cleanup costs (at least in the short run) in exchange for a somewhat higher residual contamination level. They help spur Brownfields transactions because they lower the cash outlays associated with developing property.

In 1995 EPA issued guidance encouraging the use of risk-based cleanups. This guidance increases the likelihood that contamination in industrial areas will have to be cleaned up only to standards appropriate for industrial areas, not to the more stringent and expensive levels required for residential settings. States, including Missouri and Kansas, also are experimenting with risk-based cleanups. Most programs utilize risk-based cleanups only after public notice and community involvement or after setting presumptive standards.

Conclusion. Much of the national focus on Brownfields centers on trying to jump-start large redevelopment and reuse projects, and some of that type of reinvestment is taking place. Possibly the most useful part of these Brownfields initiatives, however, is to allay fears of independent businesses that must make individual decisions where and whether to expand, purchase, build and loan. Thanks to Brownfields initiatives, regulators are becoming much more aware of the way they affect these business decisions. No longer must viable businesses shun reusable industrial property that already has available roads, bridges, sewers and work forces, merely because the property may be associated with some contamination.