Key Update on JobsOhio Revitalization Brownfield Program

Last week, we hosted a very successful seminar covering commercial and industrial property redevelopment.  I participated on a panel that included JobsOhio, the City of Cleveland and TeamNEO discussing brownfield redevelopment, in particular, incentives.  A major focus of the discussions was the relatively new JobsOhio Revitalization Program.  

I have worked with JobsOhio on brownfield projects and have experience with how the new program operates.  It is very different then the old Clean Ohio program which operated for over a decade.

Here are some of the key pieces of information that I learned either at the seminar or through my experience working with the program over the last year.

Available Grant and Loan Brownfield Incentives

  1. Phase II Assessment
    • Up to $200,000 in grant funds for Phase II sampling
    • Phase I must be completed prior to application
    • JobsOhio said a project "needs a high likelihood of job retention or creation, not certainty at this stage"
  2. Revitalization Loan Fund
    • Low interest loans up to $5 million, covering 20-75% of project costs
    • End user and job creation/retention
    • Industrial, commercial or mixed use w/office
    • Principal & interest free during construction (i.e. until certificate of occupancy)
  3. Revitalization Grant Fund
    • Up to $1 million in grant funds for cleanup and other eligible costs
    • Typically coupled with a loan where grant acts to fill funding gaps

Who and What is Eligible

The JobsOhio program has wider eligibility than Clean Ohio.  Businesses, developers and non-profits can all apply for incentives without going through a local governmental entity.  However, the entity cannot have been directly responsible for the environmental contamination (with some limited exceptions based on the structure of the deal).

Eligible Use of Funds

A wider array of costs are eligible for reimbursement under the JobsOhio program.  In fact, it was noted during the program that 50% of the projects JobsOhio has funded did not involve contamination.

Eligible costs include any of the following:

  • Phase II environmental assessments
  • Demolition and disposal
  • Environmental remediation
  • Building renovation
  • Site preparation
  • Infrastructure
  • Environmental testing & lab fees

Criteria for Evaluating Projects

JobsOhio utilizes three basic criteria when evaluating projects:

  1. Jobs (private sector)
    • Retained
    • Created
    • Wage rate 
  2. Investment 
    • Private v. public & JobsOhio investment
    • Capital investment in addition to site preparation
    • Priority for JobsOhio targeted industry projects
  3. Certainty of Completion
    • End user commitment
    • Completeness of redevelopment plans
    • Adequacy of project funding

Key Differences between JobsOhio and Clean Ohio

Having worked on multiple projects under both programs, it is fair to say there are very significant differences between the two programs.  Here is a list of key differences:

  1. No VAP Covenant-Not-Sue Required under JobsOhio- As discussed above, 50% of the projects don't even involve contamination.  All brownfield Clean Ohio projects involved contamination.  Even with sites that have contamination, JobsOhio says they will not require you to complete Ohio EPA's Voluntary Action Program in all cases.
  2. Application Costs and Timing-  The JobsOhio application process is significantly faster than Clean Ohio.  All applications can be filed on a rolling basis.  The amount of information required to find out whether you will receive an award is vastly different.  Under JobsOhio you can find out whether you will qualify for funding very inexpensively.  Under Clean Ohio it could cost $20k-$50k to find out whether you would be funded.  Also, funding under Clean Ohio was more of a political process that was largely determined by which projects were most favored locally.
  3. Flexibility-  JobsOhio provides greater flexibility in terms of the projects that can qualify.  Also, a wider array of costs are eligible for reimbursement under JobsOhio.  There is also greater flexibility to structure the incentives under JobsOhio to fit your project.  No rigid match requirements or artificial caps on certain costs.
  4. Confidentiality-  The Clean Ohio process was entirely public.  All applications and reports were public records.  Under JobsOhio, a company can keep deals confidential until a public announcement is made regarding the award.  There is even the opportunity to sign a Non-Disclosure Agreement with JobsOhio.  
  5. Funding- Unfortunately, JobsOhio does not provide the same level of grant funding as Clean Ohio.  For smaller, less contaminated sites this is not an issue.  For sites involving very significant contamination or complex cleanups, the $1 million in available grant funding may not be sufficient.
  6. Jobs Requirement-  All JobsOhio projects must involve either job retention or creation.  Under Clean Ohio, there was the opportunity to cleanup sites without firm job commitments in order to attract development to strategic areas.  
  7. Criteria for Award-  Clean Ohio had a published scoring system that could provide potential applicants some sense of whether they would qualify for money.  JobsOhio has the three criteria discussed above (jobs, investment and certainty of completion), but there are no hard and fast rules of when they will fund a project.

 

 

Only About 1/2 of Phase I Assessments Analyze for Vapor Migration Risks

Phase I Environmental Assessments (Phase I ESA) are the first step in the environmental due diligence process.  A Phase I ESA is a review of available information regarding a property to determine the possibility contamination may be present.  The assessment includes a review of environmental databases, file reviews, interviews with regulators/property owners and a site walkover by an environmental consultant.

To encourage more reuse of brownfields, Congress amended CERCLA to provide a liability defense to prospective purchasers of property who perform adequate due diligence pre-acquisition (i.e. the "Bona Fide Purchaser Defense" or BFPD).  In 2012, U.S. EPA made the BFPD potentially available to tenants who perform adequate environmental due diligence before signing a lease.  

U.S. EPA enacted the "All Appropriate Inquiries" (AAI) rule to specify the requisite level of due diligence necessary to establish the BFPD.  Under AAI, a purchaser/tenant must obtain an Phase I ESA prior to taking ownership or signing the lease.  The Phase I ESA must meet the standards set forth by ASTM 1527.  

There have been several versions of ASTM 1527.  Under ASTM 1527-05, consultant stated it was unclear whether the assessment must include the evaluation for potential vapor migration risk into buildings.  In order to make it clear, ASTM updated the standard, releasing 1527-13 in November of 2013.  

One of the most significant changes was the addition of specific language requiring the Phase I ESA to assess vapor migration risk.  In December 2013, U.S. EPA incorporated ASTM 1527-13 into AAI. Since December of last year virtually all Phase Is purport to satisfy ASTM 1527-13.

What is Vapor Intrusion?

Vapor migration occurs when soil and groundwater contamination can volatilize and migrate up through soil into buildings over or near the contamination.  Volatile Organic Compounds (VOCs) and Semi-VOCs are the most likely to cause vapor migration issues.  

Common sources of contamination that can cause vapor migration issues are gas stations, dry cleaners or other industrial sites (especially those that utilized solvents).  

Prospective purchasers or tenants of buildings with vapor migration risk can face issues regarding exposure of occupants to air deemed unsafe.  

ASTM revised the Phase I ESA to mandate an assessment of vapor migration risks due to the increased knowledge regarding the risk presented.

Survey Indicates a Large Portion of Phase Is Still Don't Evaluate Vapor Intrusion Risks

Environmental Data Resource, Inc. (EDR) surveyed over 100 environmental consultants who regularly perform Phase I ESAs.  Of those surveyed, only 55% indicated that they began to review vapor intrusion risks as part of their Phase I ESA when ASTM 1527-13 was finalized in November 2013.  

EDR stated that the survey results show the review of vapor migration risk has become "industry practice."  The number of consultants reviewing vapor migration risks had dramatically increased since it was adopted in November 2013.  However, nearly 1/2 of all Phase I ESA don't evaluate the risk.

With the amendment of AAI to reference ASTM 1527-13, every Phase I ESA should be reviewed to make sure vapor migration risk was evaluated by the consultant.

What is the Appropriate Methodology for Evaluating Vapor Migration?

With the dramatic risk in the number of consultants evaluating vapor migration risk, the issue has pivoted from whether to perform the analysis to the proper methodology for evaluating the risk.  In 2010, ASTM 2600 was published which provided a screening method for vapor migration risk. However, many deem ASTM 2600 too rigorous.

The EDR survey found that only 27% of respondents screened for vapor migration using ASTM E2600- the only industry recognized standard for screening brownfield sites for potential vapor migration.  Of those responding, 44% said they just review the data compiled by the Phase I to determine if further research is needed.

From a legal perspective, it is important to remember that the BFPD is a defense.  Meaning, a party who asserts the defense must demonstrate they met the requirements of the AAI.  Properly documenting what was done to evaluate vapor intrusion could be a critical issue in establishing the BFPD.  Therefore, Phase I ESA should be reviewed carefully to determine whether there is adequate documentation included in the report.

Army Corps Wetland Jurisdictional Determinations Are Not Reviewable

According to the 5th Circuit in Belle v. Army Corps of Engineers, nothing has changed with regard to the inability of a property owner to challenge an Army Corps of Engineers (ACOE) decision that federally protected wetlands exist on the owner's property.  

The initial step in the federal wetland permitting process is the ACOE's determination whether federally protected wetlands are present on a property- called the Jurisdictional Determination or JD.  The ACOE must use the "significant nexus" test to determine whether wetlands are isolated or connected to a federally protected waterway.

The "significant nexus" test arose from the Supreme Court's determination in Rapanos v. U.S. The "significant nexus" test involves a complex evaluation of whether the wetlands significantly affect the chemical, physical and biological integrity of federally protected streams and rivers.

In the years since the Rapanos decision, the EPA and ACOE have been unable to develop clear technical guidance for the application of the "significant nexus" test.  The lack of clear guidance have left property owners with uncertainty in regards to the cost and time it would take to develop properties that contain wetlands.

A JD that concludes federally protected wetlands exist means a property owner will be required to obtain a 404 permit from the ACOE and a 401 permit from the State EPA to fill the wetlands.  The 404/401 permitting process can be long and costly.  Therefore, property owners have a strong incentive to challenge JDs if they believe the determination lacks technical support.

Nevertheless, Courts have held that JDs are not reviewable. Many had hope the Supreme Court's determination in Sackett may serve as a basis to allow challenges to JDs.

Sackett- Compliance Order can be Challenged

In Sackett, the Supreme Court revisited the issue of what constitutes final agency actions under the Clean Water Act.  The Sacketts had filled a portion of their undeveloped property with dirt and rocks in preparation for building a house.  The U.S. EPA issued a compliance order that contained findings that the property contained wetlands with the Sackett's had filled.  The EPA order directed the Sacketts to restore the wetlands or face penalties.

The Sacketts tried to challenge the EPA order, but EPA denied their request for hearing stating it was a non-appellable administrative order.  Both the District Court and Ninth Circuit agreed with EPA.

The Supreme Court reversed, finding the order constituted a final agency action under the Administrative Procedures Act (APA) and could be challenged.  The Court said the order was appeallable because it determined the rights and obligations of the property owner.  The Court focused on the fact the Sacketts had to restore the wetlands or face penalties for failure to comply.

The Sackett Case and Jurisdictional Determinations

In Belle v. U.S. Army Corps of Engineers, Belle Company and Kent Recycling (hereinafter "Belle") challenged the ACOE jurisdictional determination that their property contained wetlands subject to regulation under the Clean Water Act (CWA).  The District Court dismissed the suit, concluding the JD was not " final agency action" and is not reviewable.

Belle's argued the Sackett case required the Court to determine the JD was reviewable.  The 5th Circuit agreed a JD met the first prong of the test for determining an reviewable action- consummation of the Agency's decision making process.  However, the 5th Circuit determined a JD fails to meet the second prong-  an action "by which rights or obligations have been determined, or form which legal consequences will flow."

The 5th Circuit distinguish the JD from the Sackett Order on the following grounds:

  • The Sackett Order imposed legal obligations because it ordered the Sacketts to promptly restore their property.  The JD does not require Belle to do or refrain from doing anything on its property;
  • The Sackett Order contained coercive consequences for violating the order because the Sacketts were exposed to penalties for non-compliance.  The JD contains no such penalty scheme.
  • The Sackett Order prevented the submission of a 404 permit.  The JD, by contrast, elicits a permit application.
  • The Sackett Order determined a violation of the CWA had occurred.  A JD makes no such determination.

Practical Consequences of Non-Reviewable JDs

While there may be a sound legal rationale for the holding that JDs are not reviewable, this decision has significant practical consequences for property owners.  If an owner believes the ACOE issued a JD without proper technical support or misapplied the "significant nexus" test, the owner has little legal recourse to challenge the ACOE determination.

If the owner doesn't believe the wetlands are protected under the Clean Water Act, they are left with the false choice of either:

  1. Filling the wetland and face significant penalties and a requirement to restore the wetlands if ACOE's determination is upheld; or
  2. Proceed with securing 404/401 permits for the filling activity which in many cases will be very costly and slow development.

 

EPA's Decision to Deny Ozone Petition Based in Reality

Combating ozone pollution is really about time.  When I was back at Ohio EPA, we had countless meeting discussing how Ohio could (or whether it could) accelerate progress dramatically in reducing ozone pollution.  During that time we would discuss "on-the-books controls" versus new state initiatives.  

"On-the-book controls" referred to a suite of federal air pollution regulations that were put in place to help combat air pollution, including ozone.  The regulations target the two largest contributors to ozone pollution-vehicles and power plants.  The "on-the-books controls" include:

All of these federal air regulations will continue to be phased in over time greatly reducing the precursors that lead to the creation of ozone (smog). The full benefit of some of these major regulations won't be seen for another 15 years as the vehicle fleet turns over. In addition, CSAPR has just emerged from litigation and the full reductions have not taken place.

What we learned in our discussions eight years ago was that the state's had almost no ability to significantly reduce ozone pollution beyond what would be attributable to these federal regulations. At the time, the deadlines for compliance simply didn't match up with the process for phasing in the federal regulations.  The states needed time.  

Flash forward almost 8 years later and it appears those federal regulations are having a dramatic effect on reducing ozone.  The picture above is taken from a story on Gizmodo regarding improvements to air quality in the last decade.  (Click here to see the very cool video showing reductions).

EPA Denies Request for Redesignation of Attainment Areas for Ozone Standard

On August 14, 2014, EPA Administrator Gina McCarthy denied the 2013 Sierra Club petition that requested U.S. EPA to redesignate as nonattainment 57 areas for violations the 2008 national ambient air quality standards (NAAQS) of ozone.  

Under EPA regulations, ozone levels are based on a three year average of the 8-hour ozone concentration.  The concentrations are averaged because weather plays an important role in the creation of ozone (i.e. hot summers = more ozone).  The averaging is intended to smooth out the variations that may occur due to weather.  

In the Administrator's McCarthy's letter denying the petition, she says one of the reason for the denial is to give the states more time.  She specifically cites forthcoming reductions due to federal regulations already in place.  

EPA states that emissions of the ozone precursors are expected to decline significantly:

  • NOx is expected to decline by 29 percent from 2011 through 2018; and
  • VOCs are expected to decline by 10 percent from 2011 through 2018

(Click here for EPA's extended response setting forth the reasons for denying the petition)

EPA's decision to deny the petition was sharply criticized by environmental groups.  However, redesignation to nonattainment would force the states to adopt additional reductions beyond these federal "on-the-books" controls.  Those state regulations are no where near as cost effective at reducing ozone pollution and would likely not significantly improve air quality.

EPA decision to give time to the states to allow federal regulations to take hold is based upon practical reality.  The last decade has shown dramatic improvements.  More reductions are locked in and the states would have little ability to accelerate those improvements.

 

New Ohio EPA Public Records Procedures Impact Phase Is

More than one environmental consultant has reported that Ohio EPA has changed its public records review procedures.  Ohio EPA has centralized its document review process.  It has developed a new public records request form that it asks any consultant requesting records to fill out (click here for the form).

After files are compiled in response to the request, Ohio EPA will typically not release the records until the Legal Office completes a review.  The purpose of the review is to ensure attorney-client or other privileged documents are not released.  That is understandable.  However, the practical effect, as reported by more than one consultant, is that records are not being released or files made available for review as quickly.

Many times it can take more than three weeks before files will be made available.  This causes practical issues for consultants performing Phase I Environmental Assessments.

Under the new ASTM 1527-13, the consultant performing a Phase I is required to review records from pertinent regulatory files. The consultant must review files that are deemed "reasonably ascertainable."  With regard to records, the new ASTM standard defines reasonably ascertainable as a file review or copies made available within twenty days of making the request.  

More and more Phase Is will note that file requests were issued, but no response was made when the report was finalized.  While proper documentation in the Phase I does not render the report inconsistent with ASTM, it does create practical ramifications for the user of the report.

State EPA files are more often than not the best source for identifying environmental issues with properties.  Those issues could include information about prior releases of contamination, enforcement actions, permitting issues, etc.  

The more time it takes Ohio EPA to produce files, the more likely these critical reviews will not be completed before the Phase I report is finalized.  This leaves the purchaser or tenant who ordered the Phase I with significant risk that problems exist with the property that will not be identified until after the transaction closes.

Users of Phase Is are left with the choice of delaying their transaction while they wait for the files to be reviewed or moving forward without potentially critical information regarding the property.

Federal Vacant and Brownfield Properties Present Opportunities and Challenges

The federal government is the nation's largest property owner.  It holds over 900,000 buildings and structures totaling three billion square feet.  

In 2010, the federal government spent more than 1.5 billion dollars to maintain approximately 77,000 underutilized and vacant properties.  Another 14,000 properties are no longer used by the federal government and could be transferred to new owners.

With large federal deficits it is easy to see the sale of these vacant properties as an opportunity to save money.  The government can reduce maintenance costs as well as recover funds through the sale of these properties to the private sector.  According to a Republican report, $1 billion could be saved just by reducing vacant courthouse space.

Back in 2011, President Obama targeted the issue of underutilized and vacant federal properties as part of his budget.  This quote from President which appeared in an article in the Washington Post:

"Now, some of the savings will come through less waste and more efficiency," he said. "To take just one example, by getting rid of 14,000 office buildings, lots and government-owned properties we no longer need, we can save taxpayers billions of dollars." 

However, three years later little progress has been made in addressing the issue.  This despite the President's executive action and legislation to try kick-start the process.

Red Tape- The Biggest Impediment to Addressing the Issue

According to a 2013 Congressional Research Service Report, the single biggest impediment to efficient sale of these properties remains the federally mandated process.  As an initial step. a federal agency that no longer needs a property must go through extensive reviews just to declare the property as "excess" and move it to the GSA for processing.  Between 2010-2013 only 565 of the 11,600 underutilized properties transferred to the GSA.

One of those impediments is the extensive environmental reviews necessary to transfer properties.  With very little incentive to spend the manpower to navigate the complex environmental statutes, many agencies simply don't initiate the process to declare property as "excess."

If a property is declared "excess," it then moves to the GSA for final sale.  However, before the GSA can sell the property, it must be offered first to other federal agencies, then to homeless providers and other public entities, including state and local governments. Only after all of these stakeholders evaluate taking the property and decline can it finally be offered for sale.  This process can take up to three years for a single property.

Congressional Roundtable 

I have been asked by Congressman John Mica (R-Fla) to participate in a roundtable discussion on underutilized and vacant federal properties on July 24th.  Congressman Mica has assembled various experts to offer their opinions on how to streamline the process for selling such properties.

My comments will focus on leveraging the expertise of the private sector to evaluate environmental issues and mitigate their risks. The private sector can efficiently evaluate whether properties present environmental risks. If such risk are identified, multiple strategies exist that can be implemented to address or mitigate risks.  

I look forward to participating in the roundtable.  Addressing this issue presents a tremendous opportunity to save federal funds.  It also presents an opportunity to place these properties back into productive use.  

 

Why the Latest Supreme Court Climate Change Ruling is a Big Deal

On Monday, the U.S. Supreme Court issued the next major climate change decision in Utility Air Regulatory Group v. EPA (UARG).  In reading commentary across the web it appears most think the Court's decision isn't really a big deal.  After all, the Court upheld EPA's permitting authority to regulate greenhouse gases (GHGs) from stationary sources.  This from the Guardian:

"The US Supreme Court largely upheld Barack Obama's plans to cut carbon pollution from power plants on Monday, delivering critical support for his climate action plan."

The Court's ruling did limit EPA authority, but most commentators note that the difference in covered emissions is only 83% of the sources instead of 86% of the sources.  So, really what is the big deal?

The Court's ruling is, in fact, a very big deal for two principle reasons:

  1. The Court held EPA has discretionary authority to regulate GHGs under major source permitting authority, not a mandate as EPA claimed; and
  2. The Court took EPA off its frightening path of ever increasing regulation of smaller and smaller sources of GHGs.

The news media have largely focused on the 83% versus 86% figure in concluding EPA got most of what it wanted.  However, the impact of the decision is more complicated then this simple figure. A review of how EPA got before the Supreme Court is important in order to understand the significance of its ruling. 

Massachusetts v. EPA

The Supreme Court already determined that EPA had authority under the existing terms of the Clean Air Act to regulate GHGs.  At issue in the Court's landmark decision in Massachusetts v. EPA
was the language in Section 202(a)(1) of the Clean Air Act (CAA) which requires the Administrator of EPA to set emission standards for "any air pollutant" from motor vehicles "which in his judgment cause(s), or contribute(s) to, air pollution which may reasonably be anticipated to endanger public health and welfare."

Back in 2003, the Bush Administration was trying to delay or avoid regulating GHGs under the Clean Air Act.  One action it took was to deny a petition from twelve states and several cities to regulate GHGs under Section 202(a)(1).  EPA took the position that it did not have the authority to regulate GHGs under the CAA and EPA should be more deliberate before embarking on such a massive regulatory expansion.

In a 5-4 climate decision, the Court ruled against the Bush Administration in Massachusetts v. EPA. The Court pointed to the extremely broad definition of "air pollutant" under the CAA and held that EPA was required to evaluate whether GHGs endanger public health and welfare (i.e the so called "Endangerment Finding")

Following the ruling, the Obama Administration attempted to pass comprehensive climate change legislation (cap and trade).  One argument the Administration used to support the proposed legislation was  the threat that without such legislation it would have no choice but to move forward with promulgating rules under the existing CAA.  Even then the Obama Administration commented that the CAA was ill-suited to regulate GHGs.

While legislation was close to passing, health care was the priority, and cap-and-trade died in the Senate.  The Administration soon moved forward with its Endangerment Finding and regulation of GHGs from motor vehicles.

Point of No Return?

EPA has asserted that once the rulemaking process under the Clean Air Act was initiated, there was no turning back.  EPA argued that once it issued its Endangerment Finding and GHGs became a "regulated pollutant" under the CAA, other regulatory provisions under the Act pertaining to stationary sources were automatically triggered.  

Of grave concern was the stationary major source permitting provisions (PSD and Title V programs) which were triggered anytime a source emitted 250 tons or, in case of Title V, 100 tons of a pollutant.  While these thresholds only captured truly large sources when applied to emissions of traditional pollutants, this would not be the case with GHGs.

EPA warned that applying the 100/250 ton threshold to GHGs would result in an unprecedented expansion of regulatory authority over even small sources.  In fact, thousands of previously unregulated sources would be captured and EPA would be overwhelmed with the new permits.  

When EPA was questioned as to why it would embark on regulating GHGs under the PSD and Title V programs when it would cause such dramatic results, EPA said it had no choice.  The Agency claimed the plain language of the Act as well as the decision in Massachusetts v. EPA, legally compelled the Agency to regulate GHGs under the PSD and Title V programs.

In an effort to mitigate the impact of such regulations, EPA published the Tailoring Rule.  EPA said the rule was necessary due to the fact application of the 100/250 tons threshold to GHGs would produce "absurd results."  Therefore, due to these absurd results, EPA claimed it had authority to tailor the thresholds to more practical thresholds.  

EPA's Tailoring Rule set the GHG trigger at 100,000 tons per year of GHGs and 75,000 tons for existing sources making major modifications.  However, EPA clearly stated that its authority to rewrite the CAA in this manner was only temporary and over time it would be forced to apply the 100/250 tons threshold to GHGs.  In other words, EPA would eventually regulate thousands of new small sources of carbon emissions.

Supreme Court Finds EPA has Discretion But Cannot Rewrite the Clean Air Act

On June 23, 2014, in another 5-4 climate change ruling, the Supreme Court found EPA (as well as the D.C. Circuit Court) were incorrect when it asserted regulation of GHGs from motor vehicles mandated regulation of GHG emissions from major sources under the PSD and Title V programs. The Court held EPA had a choice whether to regulate GHGs under the PSD and Title V program.

The Court also ruled that EPA could not rewrite the CAA through its Tailoring Rule raising the 100/250 trigger thresholds to 100,000 tons.  The Court ruled that the absurd results that would come from application of the 100/250 ton threshold to GHGs really meant the PSD and Title V requirements were not meant to apply to sources solely on basis of their GHG emissions.  Rather, new pollution controls to address GHGs would only be required if the source emitted a previously regulated pollutant over the 100/250 ton threshold (so called "Anyway Sources").

Why the Ruling is So Significant

First, the Court has invalidated EPA's Tailoring Rule.  The Court said the history behind the 100/250 ton threshold established by Congress showed the legislature's intent that they not apply to pollutants such as GHGs.  As a result, regulations will not be slowly ratcheted down to cover thousands of previously unregulated sources.  

Second, the Court clearly held that EPA has discretion whether to include regulation of GHGs under the PSD and Title V programs.  It is much easier to justify a large regulatory expansion when you can argue it is mandated under the law.  The Court's decision eliminates that justification.  This means the Agency actions to regulate GHGs under the PSD and Title V programs could be undone by a future Administration.  

 

Practical Issues with Ohio's Brownfield Tax Abatement Law

I have written before regarding the flaws in Ohio's automatic ten year tax abatement for brownfield cleanups.  In my prior post, I discussed both timing issues and exclusion of new buildings/improvements from coverage under the tax abatement.

Over the years, ass I have dealt with this law in practice for clients, another reality has come to light. Even if you do everything right in terms of timing, the law is really hard to take advantage of due to the bias against reducing property values in Ohio based on pre-existing contamination.

The Law

The applicable statutory provision is set forth in  Revised Code Section 5709.87 "Exempting increase in assessed value of realty cleaned of contamination." The key language is as follows:

(C)(1)(a) Upon receipt by the tax commissioner of a certification for property under division (B) of this section [i.e. a VAP Covenant-Not-to-Sue from Ohio EPA], the commissioner shall issue an order granting an exemption from real property taxation of the increase in the assessed value of land constituting property that is described in the certification, and of the increase in the assessed value of improvements, buildings, fixtures, and structures situated on that land at the time the order is issued as indicated on the current tax lists.

The way the law is supposed to work is as follows:

  1. Pre-cleanup, contaminated property has a reduced value due to costs to remediate and potential liability of the owner;
  2. Buyer expends the costs to take the property through the Ohio Voluntary Action Program (i.e. VAP- Ohio's brownfield cleanup program);
  3. Ohio EPA confirms the property meets VAP cleanup standards by issuing a covenant-not-to-sue;
  4. Ohio EPA sends certification to Tax Commissioner that the property has been cleaned up under the VAP;
  5. Tax Commissioner issues a order granting an exemption from the increase in value of the property post VAP cleanup.  The exemption (i.e. "freeze") is good for ten years.

The Real World Issue with the Ten Year Freeze 

The law assumes that the land and buildings have a reduced value due to the presence of contamination.  Once clean, the law assumes the values of both the land and buildings will likely increase significantly.  As an incentive to address costly brownfield properties, the law attempts to provide the Buyer an exemption from additional taxes attributable to the increase in value due to the cleanup.

However, the reality is that the tax value of the majority of brownfield properties do not accurately reflect their true value in the market place.  This is due to the fact that local governments have no ability to account for the contamination when assigning a tax value to properties.  As a result, the taxes assessed to land and existing buildings on brownfields, in reality, presume both are free of contamination.

What good is a "freeze" in the value if it simply freezes an over inflated valuation of the property?

To overcome this situation, any owner attempting to take advantage of the 10 year brownfield tax abatement, must first, successfully challenge the current tax valuation of the land and existing buildings so as to properly account for the presence of contamination.  While the Board of Revision process under Revised Code Chapter 5715 is seen as the opportunity for a owner to make such a challenge, the history of Board of Tax Appeal decisions (i.e. the most common administrative appeal tribunal) demonstrate the difficulty in making such a challenge.

Board of Tax Appeals Case Law Regarding Valuation of Contaminated Property

Dollar for Dollar Deduction is Not Appropriate

The easiest way to allow an owner of contaminated property to determine its value is to take the current fair market value and deduct the cleanup costs.  This method allows for the variation in levels of contamination.  The higher the cleanup costs, the bigger deduction, which seems appropriate.

Using this method, in some cases, the value of a property may be zero because the cleanup costs are higher than the current market value.  However, this is reality in the market place.  I have negotiated a number of deals in which a property transferred for one dollar in recognition of the costs and liability associated with contamination.

While the dollar for dollar deduction is the simplest method for determining value of contaminated property, unfortunately this methodology has been rejected in Ohio.  Multiple cases have held that introduction of evidence regarding the cost of cleanup and a request to reduce the value by that cost is inappropriate in Ohio. Chem-Masters Corp. v. Geauga Cty. Bd. of Revision (Dec. 21, 1990) BTA Case No. 88-J-994, unreported; Society National Bank v. Carroll County Board of Revision, BTA Case No. 94-M-454 (April 19, 1996); Hufford v. Montgomery County Board of Revision, BTA Case No. 95-M-855 (May 2, 1997); McDonald Local School District Board of Education v. Trumbull County Board of Revision, Case No. 94-A-757 (1996).

The dollar for dollar deduction methodology has even been rejected when an appraiser has endorsed the methodology as the best means of determining value of the property.  In Vogelgesang v. CECOS International, Inc., 85 Ohio App. 3d 339 (1993), CECOS challenged the property tax valuation. At the hearing, CECOS provided an appraisal report in which the appraiser deducted current and future environmental cleanup costs from the valuation. The Court upheld the BTA’s decision to reject this approach. The Court said deduction of the cleanup costs may reflect the effect these costs had on the company’s profitability, “but it fails to demonstrate their effect on the facility’s property value…” Therefore, the Court case rejected the approach of simply deducting cleanup costs from a valuation even in the context of an appraisal report.

Other Options for Determining Current Tax Value of Contaminated Property

The Board of Tax Appeals seems to favor the introduction of an appraisal which considers the impact of the contamination on the value of the property. For example, in Company at 34 v. Lake Cty. Bd of Revision (Mar. 25, 1994), 92-T-763, the BTA held that evidence must be submitted on the “diminutive effect the contamination has upon the value of the property.”   It appears the BTA wants to hear testimony from a property valuation expert.  Testimony from a consultant or someone familiar with the property will more than likely not be sufficient.

Based on the case law, the appraiser must utilize a different method for determining value other than dollar for dollar reduction based on cleanup costs.  But what other method is viable?

For example, a review of comparable sales of contaminated properties may be very difficult.  Each property is different and levels of contamination can very widely.  How an appraiser accounts for these variables in performing a market analysis would appear to be very daunting.  

Conclusions

The law in Ohio supports reduction in value of property based upon the presence of contamination. However, in reviewing the case law surrounding valuing property with environmental contamination, none of the cases discussed above provide examples in which the BTA or a Court validated a specific approach to reducing value based on contamination.

Courts and the BTA appear to endorse the use of an appraiser in determining the fair market value of contaminated property.  However, it appears no appraisal methodology has been specifically endorsed in Ohio.  

This leaves owners of contaminated property with no clear path toward reducing current tax values to reflect existing contamination.  Without successfully reducing current values to reflect pre-existing contamination, owners and developers of brownfield properties face a real challenge in capturing the value intended by the State's ten year tax abatement for cleanup of contaminated properties.

Due to the challenges facing redevelopment of brownfields, particularly in Ohio where such underutilized properties are abundant, incentives are critical to overcoming such impediments to redevelopment.  The ten year tax abatement was seen a major incentive, but in reality, it is has limited applicability and its difficult to fully take advantage of.

The ten year tax abatement in R.C. 5709.87 has been on the books for twenty years.  Perhaps its time to revisit the law to make it better conform to reality.

 

EPA's Power Sector Carbon Pollution Standards

 On June 2, 2014, U.S. EPA released its Clean Power Plan Proposal to address carbon dioxide (CO2) emissions from existing power plants.  EPA continues to move forward with climate change initiatives as gridlock in Congress persists over the issue.  EPA's strategy has been to target transportation and the power sector, the two largest sources of greenhouse gas emissions.

The Clean Power Plan is an interesting mix of federal regulation while attempting to provide maximum flexibility to the states to achieve emission reductions.  EPA would require a 30% reduction in CO2 emission from existing power plants from 2005 levels by 2030.  

However, rather than establishing specific emission limits for each plant, the regulation would establish "goals" for each state to achieve by 2030.  The goals were established by examining each state's current carbon output and the potential to reduce those emissions.

Formula for Arriving at Goals

EPA has authority under Section 111(d) of the Clean Air Act (CAA) to regulate and set emission standards (42 U.S.C. Section 7411(d)).  Under Section 111(d), EPA must determine the "best system of emission reduction" (BSER) for existing sources.  EPA then must apply the system to determine the level of emission reductions required (referred to as "emission guidelines").

State's are then tasked with developing their own plans to meet the emission guidelines.  This is where the flexibility comes in.  Rather than specifying each plant must meet a specific emission limit, EPA is allowing the state's to choose from a variety of options on how to achieve their emission guidelines (i.e. "goals").

EPA provide four general approach to achieving the reductions and refers to those approaches as "building blocks."  These include:

  1. Reducing the carbon intensity at individual power plants through heat rate improvements;
  2. Reducing emissions from the plants that produce the most CO2 emissions by using those sources less frequently;
  3. Replacing high carbon intensity plants (i.e. coal) with low or zero-carbon generation (which means renewable sources or natural gas);
  4. Implementing demand-side energy efficiency programs that reduce the amount of generation needed in the state.

In its proposal, EPA takes the four building blocks and applies them to each individual state through a seven step process.  This formula generates a state-specific CO2 emission performance goal which is measured in average pounds of CO2 per net megawatt hour from all sources in the state.  

(To see the CO2 emission-rate goals for each state click here)

State Flexibility

After determining the amount of reductions needed in each state, EPA then defers to each state to develop its plan for achieving the emission reduction goals.  States can use any component of EPA's four building blocks or even develop an entirely different methodology for achieving its state goal.

States are also given the option to utilizing either a rate-based or mass-based emission reduction goal.  Under a rate-based approach, emission reductions are determined by comparing the rate of CO2 emission per unit of electricity output (expressed in emissions per megawatt hour).  To establish a rate-based emission limit in the power sector, EPA has traditionally looked at the difference between coal-fired units and natural gas units.  

Under a mass-based approach, the emission reduction is based upon a quantity of reduction from an established baseline.  For example, 30% reduction of the state's total power plant C02 emissions from 2005 baseline.

States have argued that rate-based method forces states to shut down coal plants and switch to natural gas.  A mass-based approach provides states more flexibility to choose from a menu of options to achieve reductions.  (See, Kentucky's Comment Letter to EPA on Greenhouse Gas Reduction Policy)

After Congress failed to pass national cap-and-trade legislation in President Obama's first term, the option is back on the table. State's can develop an in-state only program or join with other states, such as has already been done by the Western States and Eastern States (RGGI).  Cap-and-trade, while criticized, has proven to be the most cost effective means of achieving emission reductions. 

State's even have flexibility when it comes to compliance deadlines.  While initially states will be required by 2016 to create a plan that will include some emission reductions, states can qualify for extensions of 1 or 2 years.  

No matter when plans are submitted, states will have to achieve interim goals for reductions between 2020-2029, then meet the state final goal no later than 2030.  By providing for this flexibility, the states can choose when to accelerate their emission reductions.  

In commenting on the flexibility provided states under the rule, the New York Times reported:

“I’ve never seen anything like this, where states get this much flexibility. It’s astounding,” said Dallas Burtraw, an expert on electricity markets with Resources for the Future, a Washington research group. “The E.P.A. is signaling maximal deference to the states.”

Criticism of the Proposal

Too Strong

 Those criticizing the proposal, concentrated on the costs of achieving the proposed reductions.  Business groups, utilities and Midwest states were harshly critical of the proposal.  Opposition is probably best summed up by Indiana Governor Pence who was quoted in the New York Times as stating:

“These proposed regulations will be devastating for Hoosier workers and families,” Mr. Pence said. “They will cost us in higher electricity rates, in lost jobs, and in lost business growth due to a lack of affordable, reliable electricity. Indiana will oppose these regulations using every means available.”

Too Weak

EPA had been criticized for utilizing 2005 as a baseline.  As noted in Bloomberg, half of the emission reductions required have already been met without even a single new regulation being adopted. 

Criticism also is directed at the overall emission reductions required under the proposal.  Some think the cost of compliance has dropped dramatically in recent years.  As noted Harvard Business Review- the cost of renewable have come way down; states have already implemented regional cap-and-trade programs; and natural gas has displaced coal as the fuel of choice.

Comment Period

EPA will accept comments for 120 days after the proposed rule is published in the Federal Register.  Due to the sweeping nature of the proposal,  EPA will, no doubt, be inundated with comments.  

[Photo courtesy www.TheEnvironmentalBlog.org]

Ohio EPA Proposed Voluntary Action Program (VAP) Rule Changes

Ohio EPA is moving forward with substantial changes to the rules for the Voluntary Action Program (VAP) which governs the procedures and standards for voluntary cleanup of industrial sites and brownfields.  The Agency provided an overview of the changes and its response to public comments last week at the Ohio Brownfields Conference in Columbus.

The Agency describes the changes as mostly providing greater clarity or trying to streamline the processes.  However, many of the changes are significant.  Some of the more significant changes are discussed in this post.

Note:  A detailed overview by Ohio EPA of the proposed rule changes can be accessed here.

Process Changes- Faster Turnaround but Greater Risk of Surprises

Under the current VAP process, when the volunteer is ready to seek concurrence that the property meets VAP standards, they request their consultant submit a No Further Action Letter (NFA).  Under current process, the consultant must submit the NFA along with all of the supporting documentation.  This includes the Phase I property assessment, Phase II property assessment as well as any risk assessment work.  The supporting documentation can be hundreds, if not thousands of pages.

Under the proposed change, a volunteer would submit just the NFA letter (the executive summary of the Phase I and Phase II, operation & maintenance documentation and draft environmental covenant). After the covenant-not-sue (CNS) is issued, the Volunteer would be required to file the supporting documentation.  

While the supporting documentation must be submitted, the Agency would not review it immediately.  Rather, the documentation would be maintained in Ohio EPA's public files.  

Through this process change, the Agency is trying to speed up their review process by reducing the amount of paperwork that must be reviewed prior to issuance of a CNS.   Less review means faster turnaround.  This is good news for developers whose projects or transactions were slowed waiting for the CNS to be issued.  

However, as with everything, there are trade offs.  Ohio EPA is also going to revise its audit protocols.  A VAP audit is similar to a tax audit.  Under a VAP audit, the project is thoroughly reviewed by Ohio EPA, including the NFA and all supporting documentation.  The probability of an audit is highest after the first year the CNS is issued, but can occur anytime.  Under the process change, Ohio EPA proposes to increases the frequency of its audits.

If through the audit, Ohio EPA identifies issues with the investigation or cleanup, a notice is sent to the volunteer.  If those issues are not addressed, the volunteer could lose their CNS.

One outcome of this process change may be more surprises for property owners after they thought a project was finished.  For example, two years after the CNS is issued, Ohio EPA could audit the project, find deficiencies and require more investigation and/or cleanup.  This may come as a major surprise to a new owner who bought the property after the CNS was issued.

Revised Generic Cleanup Standards

The VAP rule change also proposes a major overhaul to the methodology for calculating VAP generic cleanup standards.  Ohio EPA is moving toward use of U.S. EPA Regional Screening Levels.  

In some cases the standards get more stringent and in other cases more lax.  At the Brownfield Conference, Ohio EPA stated the only dramatic change is to the cleanup value for trichloroethylene (TCE).  At the conference, the Ohio EPA stated it notified all sites it was aware were currently performing a VAP cleanup where TCE was a constituent of concern of the proposed change.

In order to have the current generic cleanup standards apply to your VAP cleanup, then the volunteer must submit a NFA to the Agency before the rules are finalized.

Urban Setting Designations- Expanded Use 

Urban Setting Designations (USDs) are an important tool under the VAP.  Cleanup of contaminated groundwater can often be the most costly portion of the cleanup.  Ohio EPA recognized that there may be little benefit to requiring cleanup of contaminated groundwater in urban areas where the population was served by public drinking water systems.  

Requiring cleanup of groundwater in those situations may result in avoidance of brownfield properties.  With a USD designation, a volunteer can avoid a costly cleanup of contaminated groundwater.

Under the proposed VAP rule changes, Ohio EPA is proposing to expand the eligibility of areas for USDs.  For example, a village that meets certain geographic requirements can request a USD.

Off-Property Cleanup Requirements

An area of uncertainty under the VAP program had been what cleanup requirements apply to contamination that may have already left the volunteer's property.  Under the proposed rule, Ohio EPA states it is clarifying the obligations to address off-property releases.

Ohio EPA states a volunteer is required, even under current VAP rules, to cleanup off-property releases of contamination that exceed VAP standards.  Under the proposed rule change, this requirement is being made explicit.  This may be viewed by some as a major program change.

The proposal does include new provisions to provide some flexibility in addressing off-property releases.  A volunteer can attempt to make a demonstration to Ohio EPA that it "used best efforts" to address the release, but something made it impossible or impractical.  Examples:

If a neighboring property owner uses a drinking water well and refuses access to his property to address the contamination, this may be grounds for an exemption from Ohio EPA.

 

 

A release from the property contaminates sediment in adjacent river that exceeds applicable standards.  The volunteer would need to address the sediment unless it can demonstrate it is contaminated from multiple sources.

 

 

However, it is important to note, if an exemption to address a off-property pathway is granted, the CNS (legal release) will not extend to that pathway (i.e. the volunteer could be required to clean it up in the future if circumstances change).

When a Property Must Meet VAP Standards

The proposed rule changes intend to clarify that a volunteer only has to construct the remedy prior to issuance of the CNS, so long as he/she demonstrates the property will meet VAP standards within five years (or some other time agreed to by Ohio EPA).  This allows flexibility where remedy involves ongoing treatment. 

Post CNS Changes to Remedy

The proposal also establishes a process for modification of a remedy post-CNS.  

  • For example, if institutional controls (ex: fence or protective barrier) is used to demonstrate the property meets standards, the Volunteer can remove those controls without the property losing its CNS status during implementation of the new remedy.

Sufficient Evidence- VAP Eligibility Post-Enforcement

A volunteer is eligible for the VAP until it receives notice of enforcement from Ohio EPA.  If a volunteer had initiated a VAP cleanup prior to receiving notice of enforcement, the volunteer can continue if it makes a so-called "sufficient evidence demonstration."  

The proposed rule changes clarify what must be demonstrated and how quickly the cleanup must be completed in order to avoid enforcement.  Under the rules, the volunteer must demonstrate initially that they

  • Completed a Phase I assessment;
  • Retained a VAP certified professional;
  • Developed a schedule of activities for completing the VAP

If the volunteer is deemed to have satisfied sufficient evidence, it must adhere to the schedule and complete the VAP cleanup within three years under the proposed changes.

Schedule

Ohio EPA indicated the final rules would be filed with JCARR on April 15th.  JCARR jurisdiction would end on June 16th, with the final effective date being no sooner than July 1st.  

However, this assumes that significant objections are not raised during the JCARR process.  If such objections are made, the Agency could be forced to pull the rules resulting in delays.