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.  

 

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.

 

JobsOhio Discusses New Brownfield Incentive Program

On October 22nd, Kristi Tanner, a managing director of JobsOhio presented regarding Ohio's new brownfield redevelopment incentive program which will replace Clean Ohio.  Many in the brownfield redevelopment community have been anxiously awaiting the roll-out of the new program.

According to Ms. Tanner, JobsOhio will start discussing potential projects now, but awards under the new program are not likely to be made until March 2014.  

Under the new program, the amount of funding available will be comparable to the Clean Ohio- approximately $43 million annually.  However, the State is making a major shift away from a grant based program under Clean Ohio to a low interest loan program through JobsOhio.

Review of Ohio's Prior Brownfield Incentive Program- Clean Ohio

Since 2002, Clean Ohio provided over $400 million in grants for brownfield redevelopment projects.  The Clean Ohio Revitalization Fund (CORF) was Ohio's centerpiece brownfield funding program with some of the largest incentives available Under Clean Ohio the basic program consisted of the following:

Clean Ohio
Revitalization Fund Assistance Fund
Competitive Pool- awards 1 or 2 times per year Non-Competitive Selection Process
Complete Application- Phase I, Phase II and Proposed Remedy Only available in eligible areas
Up to $300k for Phase II Assessments Up to $300k for Phase II Assessments
Up to $3 million in grants for cleanup  Up to $750k for Cleanup
Eligible costs = demolition, purchase, infrastructure and cleanup costs Eligible costs = demolition, purchase, infrastrucutre and cleanup costs 
Required to complete VAP Required to complete the VAP

Many liked the openness the CORF selection process which used a competitive pool where all projects were pitted against one another for funding.  Award were made either once or twice per year.  

Projects were selected was through the Clean Ohio Council with heavy involvement from the local communities.  One major drawback of the program was that an applicant could spend approximately $30,000 just to develop the application (assuming a Phase I and Phase II was already complete) with no guarantee of being funded.

Still, as one of the best brownfield incentive programs in the country, CORF/COAF allowed many projects to move forward that may not have occurred otherwise.  As discussed in a Dispatch Article, Clean Ohio provided funding for over 70 projects in just Northeast and Central Ohio alone. 

JobsOhio Revitalization Program

Under the new JobsOhio program, the State will be making major changes to the structure and process for selection.  Here are the basic elements of the the new program:

Incentives Available

  • Up to $200k for Phase II Assessments-  JobsOhio had commented that it felt $300k for Phase II's under CORF/COAF was excessive.  However, in order to qualify for the cleanup grant or loan, the developer is required to meet the applicable standards established by Ohio EPA's Voluntary Action Program (VAP).  Therefore, a Phase II must generate sufficient data to be deemed VAP compliant.  With reduced funding, some projects may not be able to satisfy Ohio EPA's rigorous Phase II VAP standards.
  • Up to $500k for Asbestos & Lead Paint-  This is a new component of the Ohio brownfield program which appears to target existing structures that may be idle due to asbestos and/or lead paint issues.  Under the proposal, the funds can be used for asbestos abatement, demolition, site preparation and disposal of universal waste.
  • $5 million cleanup loan with possibility of $1 million cleanup grant-  As the biggest change with the new program, JobsOhio has shifted from a grant cleanup funded model to a loan model.  Developers and companies looking to expand may have an opportunity to secure a $1 million cleanup grant if need is demonstrated and the grant is coupled with a loan.  Details on the requirements for securing a $1 million dollar cleanup grant were not provided.

 Selection Process

  • Open funding versus competitive pool-  JobsOhio has done away with the competitive pool process utilized by CORF.  Under the old process all grant applications were scored and the top projects were funded.  The positive aspect of this process was its transparency. The negative was that an applicant could spend a significant amount of money ($30k just for the application) without knowing whether they would receive an award.  The new process will be more flexible and less costly than Clean Ohio.  Projects can receive awards throughout the year and will not compete with one another.  Also, JobsOhio will likely notify an applicant it will receive an award before it has to put together the more detailed aspects of the application. 
  • Criteria for selection-  The JobsOhio selection process will utilize three basic criteria
    • Jobs- Retained or created with priority for projects with higher-than-average wage rate (generally must retain or create 20 jobs)
    • Investment- private versus public, capital investment in addition to site prep and priority will be given to JobsOhio targeted industry project
    • Certainty of completion-  must have an end user committed to the project, have redevelopment plans and sufficient funding to complete the project.

Conclusion

More details should be forthcoming regarding the program this fall.  However, JobsOhio has made clear that they will discuss prospective projects now.  However, awards will likely not be made until March 2014.  

The most likely users of the program will be commercial/industrial clients looking to expand onto brownfield properties.  With $200,000 available in grants for Phase II assessments and the possibility of $1 million in grant cleanup funds, the program offers very strong incentives. 

Due to the focus on job creation, cities looking to cleanup properties in hopes of attracting future development will have to look elsewhere for incentives.  Also, residential development projects will find it harder to compete without a jobs component.  

While there are good aspects of the new program, its overall success will depend upon whether loans will will be sufficient to attract redevelopment of contaminated properties.  

With the last $15 million of Clean Ohio Spent...What is next?

This past spring, the Kasich Administration put another $15 million in grant funding into the Clean Ohio program. (See prior post).  While a public announcement has yet to be made regarding grant awards for the remaining $15 million, it is my understanding that the money is allocated. Announcements may be made next week at the Ohio Economic Development Association 2013 Summit.

After this last $15 million has been spent, what is the future in Ohio for brownfield grant funding?  The Administration has discussed a possible rollout of a new program by year's end.  On multiple occasions, the Kasich Administration has indicated the new JobsOhio brownfield grant program will closely approximate the size of the old Clean Ohio program- roughly $43 million annually.

The changes made to the Clean Ohio program this past spring provide some indication of what a new program could look like.  

  • Streamlined application process where selection decisions are made before investing significant money in preparing detailed applications;
  • Selection criteria that will emphasis end use, job growth, job retention and enhanced tax revenue post development;
  • More involvement of local economic development organizations in the selection process; and
  • Continued use of Ohio EPA's Voluntary Action Program as the benchmark for determining whether a property has been adequately cleaned up

With the incredible success of the Clean Ohio program there is a lot to emulate when JobsOhio launches its new program.

The uncertain rollout date for the new program has hindered getting new brownfield projects in the que.  Projects can take months before all the pieces (end use, infrastructure, financing, incentives, etc.) can be fit together.  Hopefully, an announcement can be made before the end of the year so we don't lose any more momentum in this critically important area of economic development.

In the meantime are there other brownfield incentives available? 

Yes.  Many of the major and medium sized metropolitan areas have their own brownfield redevelopment programs.  They don't provide the same level of grant funding, but they can be attractive.  

Both the City of Cleveland and Cuyahoga County maintain their own brownfield incentive programs. They are similar in their approach.  Here are the key aspects of the Cuyahoga County Commercial Property Reutilization Program:

  • Phase I Funding: Up to $6,500
  • Phase II Funding: Up to $35,000

 

Cleanup Loans

  • Up to $1 million- 4% over 10 years
  • 40% forgiveness
    • 15% for VAP NFA
    • 15% job creation (1% per job over $44k per year)
    • 10% for use of vendors in the County
  • Wider eligibility for types of clean up costs covered by the program (i.e. BUSTR, RCRA, etc.)
     

Brownfield Redevelopment Tax Incentives

Ohio also has on it books tax incentives for brownfield redevelopment.  The automatic abatement described below has been widely used, but is tricky to navigate.  There was considerable debate following a determination that the automatic tax incentive didn't cover new buildings.  

Automatic Abatement (R.C. 5709.87)

  • 10 year Ohio Property Tax Abatement for Brownfield redevelopment
  • Abatement is on the increase in value of land and buildings post clean up
  • Abatement does not include new structures or fixtures after clean up (Caution: process for fixing abatement is complicated)

A more broad based tax incentive is available that does allow coverage for new structures as well as machinery.  However, do to the fact these incentives must be negotiated with local officials, the local tax abatement has not been utilized frequently.

Local Tax Abatement (R.C. 5709.88)

  • Tax abatement for real or tangible property(machinery and equipment)
  • Up to 100% abatement for increase in value in land or buildings(including new structures)
     

Quick Primer on Voluntary Action Program (VAP) Cleanups

Ohio EPA has established its own voluntary cleanup program for addressing hazardous substances and obtaining a legal release from liability- the Voluntary Action Program (VAP).  The VAP program has been on the books since 1995. 

When the VAP was created its purpose was to allow the private sector to address historical contamination at industrial or commercial properties.  The key word in the program's title "Voluntary" means that Ohio EPA does not order companies to complete the VAP.  Rather, the program offers an opportunity to either:

  • Address historical contamination at brownfield sites that may otherwise limit or prohibit redevelopment; or
  • Allow an operating company to address its potential liability for historical contamination at a property it is still utilizing.

In the nearly twenty years of the VAP, approximately 360 properties have completed the cleanup process and obtained an legal release. (You can visit a map of VAP properties here)   In reality, 360 VAP cleanups is not that many considering there are thousands of properties in Ohio with historical contamination.  

Process

A complex set of rules and guidance documents govern VAP cleanups.  Those documents are accessible through Ohio EPA's website.  Here is a very brief overview of the process:

  1. Hire a Certified Professional (CP)-  In order to perform a VAP cleanup and receive a legal release from the State you must retain a CP.  A CP is an environmental consultant that has been certified by Ohio EPA has being technically capabale of completing a VAP cleanup.
  2. "No Further Action" (NFA) Letter-  Unlike other regulatory cleanup programs, VAP is intended to allow a CP to complete a cleanup without Ohio EPA review of sampling and cleanup plans prior to initiating work.  The CP can develop a NFA without oversight by the Agency.  However, if a company wants a legal release from the State, the NFA must be submitted to Ohio EPA. The components of an NFA would likely include: the Phase I/Phase II assessment, a Risk Management Plan, an Operation & Maitenance (O&M) Plan, an O&M agreement and an Environmental Covenant.
  3. "Covenant Not to Sue" (CNS)-  If the company decides it wants a legal release from the State upon completing a VAP cleanup, it must have its CP submit the NFA for review.  If the Ohio EPA agrees that the NFA meets VAP cleanup regulations and the property meets VAP standards, it will issue the CNS. 

Issues/Considerations with VAP Cleanups

While the VAP has been a success, there are complex issues that must be evaluated prior to initiating a cleanup under the program.  Some of those considerations include:

  • Benefits-  Company's looking to address potential liability exposure, the VAP is worth considering. Performing a VAP to address contamination will make property more marketable as most major banks are familiar with the program in Ohio.  Furthermore, the VAP is a key tool for brownfield redevelopment in order to attract new tenants or users of the property who may otherwise be concerned with environmental liability or exposures associated with old industrial or commercial properties.
  • Limits on CNS-  The CNS does not release you from liablity from third party property damage or injury lawsuits, including toxic tort claims related to exposure to releases of contamination.  Furthermore, the State takes the view that the CNS is also limited to the property itself, not contamination that has left the property. Finally, the CNS does not include a release from U.S. EPA (although you can obtain certain comfort that U.S. EPA won't pursue separate action once the VAP cleanup is complete).
  • Eligibility Issues-  Certain regulatory requirements must be addressed before a property can be deemed eligible to participate in the VAP.  Properties subject to State environmental enforcement may not be eligible.  Portions of the property required to be cleaned up under hazardous waste regulations (RCRA) are ineligible until cleanup is completed.  The presence of underground storage tank (USTs) can complicate VAP eligibility. 
  • Complex Cleanup Issues-  Each site cleanup is different.  However, it doesn't take much for a site to present complex cleanup challenges.  Existing buildings and structures may present vapor intrusion issues.  Off-property migration of contaminated groundwater may also need to be addressed.  Impacts to surface water or other ecological features may need to be evaluated.
  • Costs-  Again, each site cleanup is different.  However, the cost of cleanup can be expensive.  State and local brownfield grant programs can help mitigate those costs.  Even the costs of preparing and submitting the documents to Ohio EPA can be costly.  Due to such cost considerations, some businesses have decided to utilize the VAP standards to address historical contamination without submitting the NFA to the Agency for review. 

Options to Address Environmental Liability in Ohio

The VAP has been a very useful tool for addressing historical contamination.  However, the costs and complexities involved in completing such cleanups make it less attractive, particular for smaller sites with very limited contamination.

As discussed in prior posts, Ohio currently does not have a less formal means of addressing historical contamination, such as Michigan's Baseline Environmental Assessment Program.   This leaves may buyers or tenants with choosing between costly VAP cleanups or performing due diligence to try and establish the federal "Bona Fide Purchaser Defense."  

Delay in Clean Ohio Funding Doesn't Appear Connected to JobsOhio Lawsuit

The Kasich Administration has decided that it wants to put the legal challenges to JobsOhio to rest once and for all. Through legal maneuvering the Administration has put the ultimate question- is JobsOhio constitutional- before the Ohio Supreme Court.  At issue is whether transfer of liquor profits to JobsOhio violates the Ohio Constitutional prohibition on providing credit/funding to a private corporation.

As discussed in the Columbus Dispatch, David Goodman, Director of the Department of Commerce, has refused to sign the Franchise and Transfer Agreement which would transfer Ohio's liquor distribution operations to JobsOhio.  Director Goodman's refusal was in reality a legal maneuver to allow the Ohio Supreme Court to hear the legal challenges to JobsOhio.

Though I personally question the validity of these constitutional challenges, I believe my oath of office to uphold the Ohio Constitution precludes me from executing the Franchise and Transfer Agreement until the Ohio Supreme Court is given an opportunity to address the merits of these claims,” Goodman wrote in a letter this week to Mark Kvamme, interim president and chief investment officer for JobsOhio.

Implications for Brownfield Redevelopment in Ohio

The Kasich Administration has made clear that their ultimate goal is for JobsOhio to take over most of the economic development activities from the former Ohio Department of Development.  Those responsibilities would include control over brownfield funding and redevelopment.

JobsOhio officials and the Kasich Administration have hinted that the future of Ohio brownfield funding will be much different than the $40 million per year that has been handed out as grants over the last decade through the Clean Ohio program.  The most controversial aspect of changes to funding is the Administration statements that brownfield redevelopment funding will be more heavily geared towards loans instead of grants.

While it is clear that the legal fight over the constitutionality of JobsOhio has delayed any announcement regarding Ohio's future brownfield programs.  The Kasich Administration's midterm budget (H.B. 487) set aside $15 million in funding.  The availability of this funding does not appear to be in any tied to the legal fight over JobsOhio.

Here is the language from H.B. 487 regarding the $15 million in funding:

SECTION 301.21. The items set forth in this section are hereby appropriated out of any moneys in the state treasury to the credit of the Clean Ohio Revitalization Fund (Fund 7003) that are not otherwise appropriated.

Appropriations DEV DEVELOPMENT SERVICES AGENCY

C19500 Clean Ohio Revitalization $ 12,000,000

C19501 Clean Ohio Assistance $ 3,000,000

Total Development Services Agency $ 15,000,000

TOTAL Clean Ohio Revitalization Fund $ 15,000,000

The foregoing appropriation items C19500, Clean Ohio Revitalization, and C19501, Clean Ohio Assistance, shall be used in accordance with sections 122.65 to 122.658 of the Revised Code, and are subject to all provisions of Am. Sub. H.B. 482 of the 129th General Assembly that are generally applicable to such appropriations.

The budget language makes clear that the current Clean Ohio Revitalization Fund (CORF) and Clean Ohio Assistance Fund (COAF) will be used to administer the $15 million in funding.  The language also seems to suggest that the current process for awarding grants under COAF and CORF will be utilized.

While H.B. 487 passed in May, the Administration has yet to announce when the $15 million in funding will be made available. The need for this funding is great.  New brownfield projects are not entering the pipeline due to the lack of assessment money. 
 

A Phase II environmental assessment answers the biggest question with regard to a property- how much will it cost to clean up and is redevelopment feasible.  Unless a property is just perfect for redevelopment, most companies and re-developers are unwilling to pay for the cost of a Phase II assessment out of their own pocket. 

COAF funding for Phase II environmental assessment ended last December.   Since that time no new funding opportunities at the State level have been presented.

While the shape of the State's brownfield funding may be uncertain until the JobsOhio fight is resolved, the $3 million in COAF funds could be made available immediately so we do not continue to lose momentum on brownfield redevelopment in the State.

The Benefits of Clear Environmental Provisions in Sale or Lease Agreements for Industrial Property

The contractual language appearing in purchase or lease agreements for industrial property is critical.  I have seen a number of contracts that were fraught with vague terms or even silent on liability allocation.  Those contracts now define the company's liability exposure.   Protections the company thought they may have are either non-existent or in question.  

That is why it is so important to pay very careful attention to the environmental provisions in the contract for sale or lease of property.  Particularly important are the representations, indemnity and release provisions.  On an industrial property with a legacy of environmental issues, these provisions can often be the most difficult to negotiate because they shape liability risks for years to come. 

A recent federal court ruling provides further proof of the importance of paying careful attention to contract provisions allocating environmental liability.   The Court in United States v. ARG Corporation, Case No. 10-3111 (N.D. Ind. 2011) dismissed a complaint filed by the seller which sought to recover $841,000 in response costs incurred by U.S. EPA in performing clean up activities at the former industrial site.  In dismissing the complaint, the Court found that the purchase contract contained a clear allocation of environmental liability.  In essence, the purchaser avoided nearly $1 million in clean up costs based on the contractual provisions it negotiated prior to purchase.

The contract language at issue stated as follows:

The Seller shall remain solely financially responsible for the Remediation Activities arising from the Seller’s ownership, use or operation of the property prior to the Closing Date, provided however, that the Purchaser covenants not to execute against the Seller’s assets to satisfy the Seller’s financial responsibilities for remediation of pre-closing environmental damage except for the proceeds of recoveries under the general liability policies issued to the seller prior to closing.

The Purchaser shall be solely financially responsible for the Remediation Activities arising from the Purchaser’s ownership, use or operation of the property after the Closing Date.

"Remediation Activities" shall mean investigation and remediation activities, including but not limited to installing, operating, and maintaining all monitoring wells; collecting soil and/or groundwater samples; measuring groundwater levels in measuring wells; soil removal; groundwater treatment; and performing other related assessment activities, necessary to investigate and remediate environmental damage caused by the release of hazardous substances in accordance with any environmental laws.

The Court held that

"this language unambiguously states that ARG is solely responsible for remediating hazardous substances on the property arising from ARG’s ownership, use, or operation prior to the closing...South Bend is solely responsible for remediating hazardous substances on the property arising from South Bend's ownership, use, or operation after the closing date.

The Court also held that if South Bend believes ARG is responsible for cleaning up pre-closing hazardous substances, it will only seek recovery from ARG's insurance policies.  The court found the contract did not indicate South Bend would indemnify ARG if ARG was forced to pay the Government for remediating hazardous substances.

This case is a good example of the benefits of clear contractual language when allocating environmental liabilities.  Due to the high costs involved with clean up, there is a strong incentive for the party on the losing end to put forth creative interpretations of the language in an attempt to pass on or mitigate their liability.   Clear and unambiguous terms can be your best defense in such an instance.

Are You Losing Out on Federal Tax Incentives for Clean Up Expenses?

Are you performing a Voluntary Action Program Clean Up?

Are you cleaning up contamination for a release from a petroleum underground storage tank (BUSTR)?

If you answered yes to either of these questions you may qualify for a significant federal tax incentive which allows you to deduct the clean up costs incurred this year as well as years past. Under the tax incentive, certain environmental cleanup costs at targeted sites may be fully deducted by eligible taxpayers in the year in which they are incurred, rather than having to be capitalized and spread over a period of years.  

What types of expenses could be deductible?

  • Site assessment and investigation;
  • Site monitoring;
  • Cleanup costs;
  • Operation and maintenance costs;
  • State voluntary cleanup program oversight fees; and
  • Removal of demolition debris.

Amended Returns to Capture Costs Spent in Previous Years

Even if you incurred such expenses in years past, but failed to take advantage of the tax incentive you may still be entitled to the deduction.   The excerpt below is from the U.S. EPA tax guide describing the potential to amend prior year returns:

"The Brownfields Tax Incentive is not frequently used, despite its great potential to support property cleanup and reuse. A key reason for the limited use of the incentive may be uncertainty over its availability over an extended period of time. The tax provision has never had long-term authorization and Congress allowed the provision to lapse five times since it was first introduced in 1997. However, retroactive reauthorizations allowed coverage to be available throughout the entire time period from the incentive’s introduction in 1997 until today. In December 2010, the incentive was reauthorized for two years and is retroactive to January 1, 2010. The incentive will remain in effect through December 31, 2011.

Site owners may want to consult their state program or a tax attorney to determine activities that may be considered qualified expenditures. If a taxpayer decides to claim the incentive in future years because cleanup was completed during one of the periods in which the incentive’s authority lapsed, an amended tax return can be filed up to three years after the original return was filed. An amended tax return must be filed within two years if a refund is sought.

Requirements to Qualify for the Tax Incentive

  1. Ownership- The property must be owned by the taxpayer incurring the eligible cleanup expenses, and be used in a trade or business or for the production of income.
  2. Contamination- Hazardous substances or petroleum contamination must be present or potentially present on the property.
  3. Brownfield Property- Taxpayers must obtain a statement from a designated state agency (typically, the state’s environmental agency overseeing the state’s voluntary cleanup program (VCP)) that confirms the site is a brownfield and therefore eligible for the tax incentive. Participation in a state VCP satisfies this requirement.  In Ohio, the VCP is known as the Voluntary Action Program (VAP).

U.S. EPA Resources on Available Federal Tax Incentives

The federal tax incentive for clean up of brownfield properties is not the only tax incentive that may be available for brownfield redevelopment projects.  U.S. EPA has released its 2011 Tax Guide which summarizes a variety of tax incentives for various brownfield and renewable energy projects.  Possible tax incentives include:

  • Brownfield Expensing Tax Incentive:
  • New Markets Tax Credits
  • Low Income Housing Tax Credit
  • Historic Rehabilitation Tax Credit:
  • Energy Efficiency Tax Credits:
  • Renewable Energy Tax Credits

U.S. EPA Brownfield's Tax Incentive Web Page also contains additional resources which describe various tax incentives for brownfield clean up and revitalization.

State Modifies Clean Ohio Brownfield Grant Program

The State has announced the latest modifications to the Clean Ohio Assistance Fund (COAF) policies which provides up to $300,000 for Phase II environmental assessments and up to $750,000 for brownfield clean up.  The State released its COAF policy update last month.

Unlike the Clean Ohio Revitalization Fund (CORF), COAF grants are given out on a rolling basis as long as the State had money during the funding cycle. COAF has traditionally been used to obtain funding for Phase II assessments on brownfields.  The use of the COAF for clean up has been less frequent due to limited funding available and the larger clean up grants available under CORF (up to $3 million). 

The changes to the COAF program this time include:

Asbestos- 

The policy now explicitly states that abatement of asbestos are eligible clean up costs.  See, 3.06

Matching Funds- 

For the first time, the State is requiring a 10% match for use of COAF for clean up grants.  This means for a max clean up grant, the applicant will need to supply $75,000 toward clean up. While its understandable the State wants to see the applicant have some "skin in the game,"  the no-match component of COAF was one element that made it more attractive than CORF. 

Another issue is that the policy says the match must be spent by the "project approval date."  The policies don't define this term, but it would appear to be the date the Controlling Board approves the issuance of the grant.  This timing seems odd in that applicants would need to spend the 10% before they knew for sure they were getting the grant.

Jobs Commitment-

Perhaps even a larger change than the 10% match, is the requirement that COAF clean ups for industrial or commercial use must generate or retain at least 10 jobs.  See 6.09  Not every project has a job component at the get go. 

The State previously recognized that some brownfields may not have redevelopment committed but are located in prime locations for future development.  This is why for the CORF the State created the "Redevelopment Ready Track."  Perhaps the limited amount of COAF clean up funds available is driving the State to use the money only for projects that have a job component.

No Longer a "First Come/First Serve" Program-

In the e-mail to interested parties providing notice of the changes to the COAF policies, the Ohio Department of Development also stated the following:

"During the month of July, cleanup applications will be reviewed and approved based on project merits rather than a first come/first serve basis."

While the indication is projects will be evaluated on their merits, there were no other changes to the policies which shed light as to how they will be evaluated on their merits.  Unlike the CORF application process there is no defined scoring methodology for projects.  This statement from ODOD can probably only be interpreted to mean the Director retains discretion to reject your clean up project as not worthy of COAF funding. 

Policies Released on Brownfield Loan Program

The Ohio Department of Development working with the Ohio Water Development Authority (OWDA) has released their policies for use of the revamped low interest brownfield loan program.  Under the program, private companies (among others) can get a low interest loan up to $500,000 for performing sampling (assessment) and up to $5 million for clean up.

As discussed in my prior post announcing changes to the loan program, the single biggest change is that the loan program now allows companies that own contaminated property and caused or contributed to the contamination to qualify for the program.  Any company that caused or contributed to contamination is not directly eligible for Clean Ohio funding.

Here are some key requirements that are spelled out in the new policies governing the program.

  • Clean Up Loans- Must already have done all the assessment and have designed a remedy to qualify for a clean up loan. 
  • Redevelopment Requirement?-  The ODOD website says the project must involve redevelopment for the property to be qualify for the loan.  Therefore, it would appear an existing company with no expansion plans cannot qualify for the loan if they simply want to address historical contamination issues on property they own.  As discussed below, the actual wording of the policy may provide greater flexibility.
  • Eligible Costs- assessment, demolition, remediation and consultant costs
  • Payment Term- below market interest rate over a 10 year term

Biggest Disappointment

The most disappointing aspect of the policies governing the new loan program is the requirement for redevelopment of the property.   The loan program will have a very limited appeal to only existing companies responsible for historical contamination wishing to expand. 

However, the actual wording of the policy says projects are eligible "where expansion or redevelopment is complicated by known or potential releases of hazardous substances.”  This is far more open ended that requiring a demonstration actual expansion or redevelopment will occur.

Hopefully, ODOD and OWDA will allow a more expansive interpretation of this language. Why not give the benefit of the low interest loan to companies who simply want to address historical contamination on their property?  Certainly the State could justify rewarding these "volunteers" because the policy explicitly make clear any company that is under a legal mandate (order or permit requirement) to clean their property is ineligible. 

 Policy 1.03 CERCLA Limitation for Eligible Borrowers:

Policy 1.03- Borrowers must be exempt from Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), as amended CERCLA liability for hazardous substance cleanup applications.

I don't know what "exempt from CERCLA" really means.  Is this a reference to Bona Fide Purchaser defense?  There are very few exemptions from CERCLA for companies responsible for existing contamination.  Policy 1.03 could use further clarification.

Will There Be Interest?

Whle the greater flexibility provided by the new policies make the program more attractive, it will be interesting to see whether it garners any interest.  Even with the changes, the program will appeal to a small subset of companies looking to address historical contamination.  Any other party that has no responsibliity for contamination has a far better option under the Clean Ohio program.

Ohio EPA Budget Testimony Sheds Light on New Initiatives

On April 5th, Ohio EPA Director Nally testified on the Agency's proposed budget before the House Finance and Appropriations – Agriculture and Natural Resources Subcommittee.  According to the Director's Testimony, Ohio EPA is not asking for any fee increases.  Ohio EPA's proposed budget calls for a reduction of 11.8% for fiscal year 2012 and 13.8% for fiscal year 2013.  To meet these budget reductions, the Agency is planning on reducing 53 current positions through attrition.

The Director also mentioned the consolidation of the Division of Hazardous Waste Management  (DHWM) into the Division of Solid & Infectious Waste (DSIWM) along with other components in the Division of Emergency Remedial Response (DERR).  DHWM's permitting and inspection activities will be in DSIWM and clean up will be with DERR.

In addition to budget reductions and the consolidation of DHWM, Director Nally also hinted at other initiatives the Agency is planning to undertake in the near future. 

New Ohio EPA Initiatives

“In-lieu Fee” Program –  The Director signaled potential significant change on wetland and stream mitigation requirements.  Typically the 404/401 permit applicant must find appropriate mitigation projects and include those proposals in their permit application.  With an “in-lieu fee" program, the applicant is relieved of the burden of finding a mitigation project .  Rather, the applicant pays a few based on the acreage of wetlands or feet of stream impacted by the project.  The Director has recently announced a "listening session" to hear from the regulated community and others regarding the proposal.

Permitting efficiencies/Permitting Backlog – Most every Ohio EPA Director faces the pressure to get permits out the door faster.  Director Nally is no different.  Upon taking office, he announced this would be a top priority of his administration.  His testimony suggests he will be re-looking at permit-by-rule and general permits to streamline permit approvals.  While the Agency has utilized these tools in the past, business complain that the terms and requirements are too onerous.  Modifying air permitting requirements can present unforeseen issues, as the business community learned after the Courts stepped in blocking major changes adopted in Senate Bill 265.

IT initiatives and Compliance Assistance –  Ohio EPA has moved toward allowing more reports and permitting to be performed using the web or through special electronic systems.  These systems provide flexibility, but businesses complain they can be difficult to use.  The Director announced training sessions to assist businesses with understanding how to use these systems better. 

Brownfields redevelopment – The Director testimony contained a vague reference to a new initiative with brownfield redevelopment.  The current structure has the Ohio Dept. of Development passing out the grant money and Ohio EPA monitoring the clean up.  It will be interesting to watch whether Ohio EPA announces new initiatives in this area to accelerate re-use of  brownfields.

Marcellus and Utica Shale – ODNR has the lead with regard to permitting for gas exploration.  However, U.S. EPA has indicated it will be closely watching and may exercise enforcement authority at sites where drilling has gone wrong or resulted in polluted groundwater.  The Director intends to support ODNR's efforts in light of U.S. EPA's scrutiny.

Expedited Settlement Program (ESP) -- No details were given regarding this new concept to accelerate resolution of enforcement actions.  Here was the Director's testimony...Given my priority of compliance first, I am initiating modifications to the current enforcement process to help drive quicker compliance.  Historically, the existing enforcement options have been time consuming and resource intensive for both the agency and the regulated entity. By developing new steps to be used early in the enforcement process, I hope to resolve uncomplicated cases
expeditiously, putting a facility on notice of a problem, and quickly achieving compliance. 

Perhaps Ohio EPA intends to make modifications at the Notice of Violation (NOV) stage.  The Agency could improve tracking of NOVs and notify businesses more quickly when issues have been resolved.

The Director's testimony did provide a good insight into his early priorities.  Details were not provided so we will need to watch closely as they are released.

Is the Voluntary Clean Up Program in Ohio Working?

In 1994, the State created the Voluntary Action Program (VAP) to promote voluntary clean up of industrial and commercial sites, including those currently utilized as well as brownfields.

By 1994 standards the VAP program was cutting edge.  It utilized certified professionals (CPs) who performed the investigation and implemented clean ups to meet standards established by Ohio EPA.  In this sense it was a privatized program.  Letting the company or developer ("volunteer") control the clean up process.

By allowing CPs to direct the clean ups to meet standards, costs would be reduced comparative to other clean up programs.  Rather than having sampling plans reviewed back and forth, the CP had to meet the rule.  Rather than debating appropriate remedies in documents back and forth, the CP designed the remedy and it was acceptable as long as it met VAP standards. 

There are many positive elements of the VAP program seventeen years later.  However, a look at just the numbers raises the question as to whether its enough or whether other programs need to be developed to get ahead of Ohio's growing brownfield problem. 

Here are the VAP statistics presented by Ohio EPA this winter: 

  • 422 No Further Action Letters ("NFAs") have been issued by CPs-  A NFA is the document that details the clean up meets VAP standards. 
  • 386 requests for Covenants not to Sue ("CNS")- There is no requirement that a volunteer h submit the NFA to Ohio EPA in order to obtain a CNS (the legal release)
  • 18 denied CNSs
  • 25 Withdrawn
  • 29 pending review 
  • 314 CNSs have been Issued

To summarize, to Ohio EPA's knowledge 422 NFAs have been issued by CPs in the seventeen (17) years the program has been in operation.  I say "to Ohio EPA's knowledge" because there is no requirement that you even disclose to Ohio EPA that an NFA was prepared.  In fact, many companies elect to simply obtain an NFA an never pursue the CNS from Ohio EPA due to the added administrative costs.

In seventeen (17) years, 314 sites have received a CNS, meaning Ohio EPA has verified the site meets VAP standards and issued a legal release. 

Brownfields-  Ohio Needs More Tools in its Tool Box

Focusing on brownfields, VAP is the only State tool to remove environmental legal liability with contaminated properties. (Click here for discussion of gaps in federal "AAI Rule")  To only have 314 sites addressed in 17 years has to raise the question whether we need other tools than VAP to address these sites in order to get ahead of a growing inventory of brownfield properties.

For comparison, a 1996 study identified approximately 350 brownfields and 1,000, to 2,000 condemned structures in Cleveland.  I can't imagine these number improved following the recent recession.

If you broaden out to Cuyahoga County, the Cuyahoga County Planning Commission found that 40,000 acres, or 14%, of the County’s land, has at some time been devoted to an industry that has historically been known to be a higher risk for environmental contamination.

Those are staggering figures - 314 VAP sites in 17 years versus an estimated 350 sites in Cleveland alone.  This represents only one city and one county in Ohio.  Just looking at the statistics suggests the VAP alone isn't  enough to encourage reuse of brownfields sites in the State.

Questions Persist Regarding the Quality of Environmental Assessment

Phase I environmental assessments have become the norm in virtually any commercial or industrial property transaction.  Almost any financial institution will require a Phase I report prior to agreeing to finance a transaction.  

In this regard, Phase I's have become a commodity- A box that needs to checked off before a deal can go through.  But buyer beware, beyond securing your financing you may not truly know the condition of your property.  Or even worse, you may not secure the legal protections from environmental liability you intended by procuring your Phase I.

A recent U.S. EPA study evaluated the quality of 35 Phase I reports that were performed on brownfields in connection with federal grant funding.  The Phase I reports were evaluated against basic requirements necessary to secure protections under the "All Appropriate Inquiries Rules (AAI)" (a shield from CERCLA liability for innocent purchasers).

"All Appropriate Inquiries"

Under federal law, in order to establish a shield from liability under CERCLA, a purchaser must, prior to the date of acquisition, perform "all appropriate inquiries" into ownership and uses of the property.  In 2005, U.S. EPA finalized its rule establishing mandatory standards for conducting AAI to secure liability protection.

IG Evaluates 35 Phase I's

In the study, the Inspector General evaluated the 35 Phase I reports to see if they met the required elements of the AAI rule.  Not one of the reports met the U.S. EPA required elements (or alternative ASTM standard).  Worse yet, the missing components were simply formalistic elements necessary for a Phase I to meet U.S. EPA standards.  They did not evaluate the professional judgments in the reports which would be more prone to varying opinion.  Aspects evaluated included:

  1. Environmental Professional Qualification Statement- U.S. EPA AAI rule requires a boiler plate statement to be included in the report that the consultant meets the standards to be considered an environmental professional. 
  2. Signature-  The environmental professional who responsible for the assessment must sign the report. 
  3. Data Gaps-  The professional must identify any data gaps that may have impacted their ability to identify whether conditions at the property indicate a release or potential release occurred at the site.
  4. Opinion Statement-  The report must include a conclusion section that summarizes all "recognized environmental conditions" at the property.  Any areas where there were conditions identified on the property which indicate a release or potential release occurred.

In the opinion of the Inspector General, not a single one of the 35 reports evaluated adhered to all of the requirements set forth above. 

The report is another example of the risks associated with hiring an environmental consultant to perform a Phase I.  From my discussions banks don't often evaluate the quality of the consultant or even whether the report meets the ASTM or EPA rule requirements. 

What are the risks to the future property owners in the transaction?  The Inspector General summarized the risks as follows:

Improper AAI investigations introduce risk that the environmental conditions of a property have not been properly or adequately assessed. Consequently, decisions about appropriate uses of redeveloped or reused brownfields properties may be based on improper assessments. Ultimately, threats to human health and the environment could go unrecognized.

Beyond the risks of the unknown conditions, you also could be jeopardizing the legal protections available under the AAI rule.  The rule is very specific in mandating an ASTM or EPA regulatory compliant Phase I assessment before the legal liability protections kick in.  Years later, when an issue arises, you may find you have no shield from liability due to an inadequate Phase I.

Recommendations:

  • If you want a true evaluation of the conditions of the property hire a quality environmental consultant.  Avoid consultants who are simply churning Phase I's to move deals forward.  Low ball pricing can often be a red flag regarding the quality of the report.
  • Review the Phase I for compliance with standards to secure liability protections.

JobsOhio and Clean Ohio

The Governor's top legislative priority is the privatization of the State's economic development functions.  House Bill 1, known as "JobsOhio", has been introduced and a vote in the Senate may come yet this week. 

The Ohio Department of Development (ODOD) plays a critical role in the administration of the Clean Ohio program which provides millions in grants for brownfield redevelopment.  The Department's current role includes the following:

  • Review for Clean Ohio grant applications for completeness;
  • With the assistance of Ohio EPA, makes eligibility determinations;
  • Meets with applicants to discuss projects (known as "PRAMs");
  • Selects which projects will receive Clean Ohio Assistance Fund (COAF) funding which has recently become Phase II assessment grants;
  • Assists the Clean Ohio Council in evaluating projects for Clean Ohio Revitalization Fund (CORF) funding for clean up; and
  • Determines which projects can be reimbursed with grant funds.

On the brownfield projects I work on, the ODOD personnel are the key point of contact when evaluating projects and through out implementation of the project.  More than once, ODOD personnel have made absolutely critical decisions that impact the viability of projects or have made significant reimbursement decisions that cost  developers hundreds of thousands of dollars. 

With the privatization of economic development functions, ODOD's key role will almost certainly be absorbed by another state agency.  Most likely, Ohio EPA will pick up these functions, but its possible the functions could stay with the newly created non-profit corporate entity.

How far away are we from that transition? House Bill 1 is only the first step in privatization of the Ohio Department of Development and the associated transfer of existing functions to other state agencies.  The bill basically establishes the non-profit corporation to be known as JobsOhio.  The Bill then calls for a six month consultation process to evaluate transition of the other functions of ODOD. 

Here is the relevant section of H.B. 1:

Sec. 187.05. The director of development, as soon as
practical after the effective date of this section, shall, in
consultation with the governor, evaluate all powers, functions,
and duties of the department. Within six months after that
effective date, the director shall submit a report to the general
assembly recommending statutory changes necessary to improve the
functioning and efficiency of the department and to transfer
specified powers, functions, and duties of the department to other
existing agencies of the state or to JobsOhio, or eliminate
specified powers, functions, or duties
. The recommendations shall
be submitted in writing to the speaker and minority leader of the
house of representatives and the president and minority leader of
the senate.

After submitting the report, the director, in consultation
with the governor, shall continue to evaluate the department and
make additional recommendations on such matters to the general
assembly.

We are probably at least a year away from seeing any of ODOD's responsibilities transition to other agencies or to the JobsOhio entity.  For now it will be the status quo.  But in the near future a crucial decision will be made as to who will administer ODOD's critical Clean Ohio responsibilities.

Ohio Bill Introduced to Give Tax Credit for Site Remediation

The Ohio House has introduced a bill that would provide a tax incentive to clean up contaminated properties.  House Bill 10, if enacted, would provide an exemption from penalties as well as a tax credit to encourage companies to voluntarily remediate property.

Similar to other existing tax incentives, the bill encourages companies to remediate property under Ohio's Voluntary Action Program (VAP).  As discussed in my previous post, the VAP offers a much better option for addressing historical contamination on-site than traditional environmental clean up programs such as CERCLA.

One Year Exemption from Penalties

The bill as introduced, would provide any person or company to which a covenant not to sue (CNS) under the VAP was issued, a one year exemption from any fees or civil or administrative penalties that would be imposed under any environmental law. 

The bill is vague as to how the exemption would operate in practice.  For example, does it exempt penalties associated with violations that occur in that one year period? Or does it exempt the company from any and all violations, including historical violations, if an action is brought during the year following the CNS?

The other component that will likely be tweaked once the bill goes through hearings is the broad nature of the exemption.  It would exempt a company from all penalties, even those totally unrelated to the clean up of the property.

Tax Exemption for Site Remediation Costs

The exemption would cover remediation costs to clean up vacant land as well as property returned to commercial or industrial use.  The tax credit essentially doubles if the property is used for "productive use" which is defined as any trade or business. 

The tax credit applies to the commercial activity tax or the applicable income tax.   The credit would not apply (expire) to any remediation expenditures paid or incurred for a VAP clean up initiated after December 31, 2017.  A VAP is deemed "initiated" if a Phase I is performed.

Conclusion

Any tax exemption is going to be monumentally difficult to pass when the State of Ohio faces a $8 billion dollar budget deficit.  So, the prospects of this bill may not be bright. 

The bill's goal of spurring voluntary clean ups at industrial properties is admirable.  After the recent financial crisis, Ohio and the entire Midwest saw exponential growth in abandoned properties with contamination.  Creating incentives to address these properties is good for the State.

However, rather than a tax credit for remediation costs it may be a more prudent approach to look at expanding the tax exemption for new development on brownfields. (See prior post discussing issues with current brownfield exemption).   The tax impact on revenues would be less dramatic and even could be neutral.

Regardless, it is good to see Legislative policy debate regarding more incentives for voluntary remediations and brownfield redevelopment.  After the financial crisis, Ohio needs to get much more proactive to address its ever expanding portfolio of brownfield properties.

Ohio Revamps Brownfield Loan Program

The Ohio Water Development Authority (OWDA) has long had a revolving loan fund to help finance brownfield clean up projects.  However, the OWDA program has rarely been utilized because of two factors:

  • Clean Ohio Program-  Offers grants up to $3 million for clean up and remediation of sites (i.e. why take a loan when there is significant grant money available?)
  • Non-competitive interest rates

At this week's Ohio Brownfield Conference, the State announced that they soon would be revamping the OWDA program to make it more attractive.  The two major changes to be made are:

  1. Responsible Parties-  OWDA will allow companies that have legal responsibility for contamination to be eligible for loans so long as the company is not under enforcement orders. Responsible parties (PRPs) are not eligible for Clean Ohio or other federal grant funding.
  2. Competitive Interest Rates-  The State did not announce the exact interest rate.  They simply stated the the new rates would be competitive.

The biggest change is allowing responsible parties to be eligible for loans.  Now companies have a new financing option if they want to address historical contamination on their property to eliminate liability risks.  Companies can utilize the Ohio Voluntary Action Program (VAP) in performing their clean up.

Clean up under VAP is a far better option than clean up under traditional enforcement or regulatory programs like RCRA (hazardous waste regulatory program).  VAP clean ups are:

  • Cheaper- the program allows use of institutional (i.e. deed restrictions) and engineering controls (physical barriers) as an alternative to more costly removal/disposal of contamination
  • Companies have much more flexibility in how to perform their clean up-
    • Residential versus industrial/commercial standards can be selected
    • Buildings and parking lots can be used to contain contamination versus digging and hauling material off-site
    • Companies private environmental consultant oversees the clean up and selects remedies versus the regulator

The OWDA program may provided needed financing to companies wishing to take advantage of the VAP program.

We will need to see the details for the changes to the program once the State rolls them out.  I was told that would occur in the next few weeks.  However, these changes appear to make the OWDA Brownfield Loan Program much more attractive.

(See extended entry for the current program guidelines which will soon be changed)

WHAT: Brownfield Program

For WHAT:

LOANS for Planning/Design and/or Construction of Brownfield site remediation

WHY:

To clean up contaminated property, especially in urban areas through direct loans or credit

(Purpose)

enhancement.

By WHOM:

Administered by: OWDA

Funded by: OWDA Brownfield Fund (under LED) from OWDA Revenue Bonds Surplus

 

Local Government Agencies (Cities, Villages, Counties) that have:

1. Plans designed by certified professionals;

2. Plan approval by OEPA;

3. Demonstration of revenues adequate to meet annual loan repayments.

And Private Entities that have:

1. A VAP certified engineer directing the remediation effort;

2. Financial strength analysis;

3. Real estate appraisal;

4. Evaluation of potential effectiveness of remediation.

HOW MUCH:

Max Construction Loan: No max

Eligible Costs: Engineering & design fees, construction costs, legal and inspection fees

Application Fee: $2,500 (May be credited to Loan Fee)

Loan Fee: .35% (.0035) of total estimated project, processing and closing costs OR $400 for loans up to $100 million; .00175% for loans between $100 million to $150 million; capped at $150 million

Contract

Interest Rate: Based on the higher of the comparable Treasury Note Rate or the comparable MMD AAA scale, plus 50 basis points

Rate Discounts: NA

Capitalized

Interest Rate: Same % as Contract Interest Rate; Accrues on portion of loan disbursed, until 6 months prior to the Loan Maturity Date

Retainage: 8% of first 50% of labor until project is substantially completed (as defined by the community), for all communities except home-rule, on Construction Loans only

Planning/Design

Repayment Rate: Balloon payment at maturity, if no prior repayment made

Construction

Repayment Rate: Varies by loan

Late Pmt Penalty: Greater of: 10% of amount overdue OR $25 minimum

Default Rate: Greater of: Contract Interest Rate + 300 basis points (3%) OR 16%

Loan Amount: Max Planning/Design Loan: $500,000

HOW LONG:

Planning/Design Loan: Min: None Max: 5 years

(Contract Term)

Construction Loan: Min: None Max: None

WHEN:

Loan Fee: Due when the Loan Agreement is executed

Repaymt Invoice: Mailed approximately every May 15 and Nov 15 by OWDA to loan recipients

Planning/Design

Loan Repayment: Begins earlier of: 5 years, OR at the time remediation begins (May be rolled into subsequent Construction loan)

Construction

Loan Repayment: Negotiated between OWDA and borrower at the time the loan is made

Application: Due 15th of the month

WHERE:

Disbursement request: OWDA Chief Engineer

Repayment to: OWDA Accounting Dept

Application from and to: OWDA Chief Loan Officer

HOW:

To Apply the Borrower must:

1. Fill out and submit application form with supporting documents as listed on the application.

2. Meet with OWDA to negotiate loan terms.

For Cooperative Agreement approval the Borrower must:

1. Receive bids and tentatively approve contract awards.

2. Pass legislation authorizing signing of the Cooperative Agreement.

3. Complete any necessary assessment, tap-in and/or rate legislation.

4. Prepare a Projection schedule of revenues, debt service obligations, and operation and

maintenance costs, over the contract term of years repayments are to be made to OWDA.

For Disbursement of loan funds the Borrower must:

1. Fill out Loan Payment Request form and send with supporting contractors’ documentation.

For WHOM:

U.S. EPA Solicits Proposals for Brownfield Assessment and Clean Up Grants

U.S. EPA has released its fiscal year 2011 request for proposals (RFP) for brownfield assessment and clean up grants.   There is a relatively short window of opportunity to file your application- the deadline is October 15, 2010

[Click here for access to U.S. EPA's RFP for the brownfield assessment, clean up and revolving loan]

There is a total of $92.9 million available.   While the RFP allows for greater funding under certain circumstances, the basic limit is $200,000 per site for assessment or clean up.  EPA is required to expend 25% of the total amount available for sites contaminated with petroleum. 

Ohio is lucky to have one of the best state brownfield grant programs- Clean Ohio.  Often Clean Ohio is a better option than pursuing the U.S. EPA grant funding because U.S. EPA's program is a national competition.  However, there are certain circumstances that make the U.S. EPA brownfield grant program potentially a better option than Clean Ohio.

COAF Clean Up Funding Exhausted for this Fiscal Year

The Ohio Dept. of Development announced that it is no longer providing funding under the Clean Ohio Assistance Fund (COAF) for clean up of brownfields in fiscal year 2011.  However, assessment funding remains.

COAF can provide provide up to $750,000 in funding for clean up of brownfields.  Projects are evaluated and grants awarded on a rolling basis. 

Clean Ohio Revitalization Fund (CORF) is still available to fund clean up.  It provides up to $3 million in funding per site.  However, a 25% match is required and there are only two CORF rounds per year which typically are competitive.  Therefore, for smaller clean up projects looking for funding in the next year, U.S. EPA's program may be the better option.

Abandoned or Vacant Gas Stations

Under the Clean Ohio policies, removal and clean up of BUSTR (Bureau of Underground Storage Tank Regulation) regulated storage tanks and remediation of leaks from such tanks are not eligible costs under either the Clean Ohio Assistance Fund (COAF) or the Clean Ohio Revitalization Fund (CORF).

For local governments that are trying to deal with abandoned or vacant gas stations in their communities, the U.S. EPA brownfield grant may be their best option.  Communities can seek money for sampling of the site to determine if contamination exists. 

The fear of the unknown (whether contamination exists) acts as a strong deterrent to purchase and redevelopment by private parties.  Once sampling data has been generated, it removes one more impediment to purchase and redevelopment of the site.

Of course if sampling reveals contamination, this can act as a major obstacle to redevelopment.  However, communities can secure clean up funding for these sites under the U.S. EPA program.

Community Assessment Grants

U.S. EPA's program may also be better for communities that are interested in creating a brownfield inventory of various sites within their jurisdiction.  Also, U.S. EPA's program is great for local communities that want to create and fund their own local brownfield assessment programs. 

For example, in Northeast Ohio, the Northcoast Brownfield Coalition was created using U.S. EPA funding.  The Coalition is made up of  the Cuyahoga County Board of Commissioners, the City of Cleveland, the Cleveland-Cuyahoga Port Authority and the Northeast Ohio First Suburbs Consortium.  The Coalition makes provides local grant funding for brownfield projects in Northeast Ohio in amounts up to $30,000.

Below are the applicable limits for assessment grants under the U.S. EPA program:

 

 

 

 

 

 

(Photo:  everystockphoto peasap)

Addressing the State Liability Gap in the Federal "Innocent Landowner Defense"

Liability for pre-existing contamination acts as a strong deterrent to re-use of brownfield properties.  Prospective purchasers simply do not want to expose themselves to potential liability especially when they had nothing to do with the contamination.

At the federal level, there has been an attempt to address liability exposure in order to provide prospective purchasers some level of liability protection.  However, even though tools exist at the federal level, potential exposure to state environmental liabilities can act as its own deterrent. 

While Clean Ohio may be one of the best brownfield grant programs, not every redevelopment or re-use of a brownfield is right for Clean Ohio.  Given the number of vacant and idled brownfield properties in Ohio, perhaps its time Ohio looked to strengthen protections for innocent purchasers to encourage re-use and prevent urban sprawl.

Federal "Innocent Landowner" Defense

CERCLA (otherwise known as the Superfund law) establishes joint and several liability to a variety of parties, including property owners, for releases of hazardous substances.  Liability can attach regardless of whether you generated or brought the contamination to the property.

The 2002 Small Business Liability Relief and Brownfield Revitalization Act (“the Brownfield Amendments”) amended CERCLA to provide for protections for purchasers of property.  Under the Brownfield Amendments a person can receive liability protections when purchasing contaminated property, it the person meets certain requirements. This is commonly referred to as the “innocent landowner defense.”

Under federal law, in order to establish the innocent landowner defense the purchaser must, prior to the date of acquisition of the property, perform “all appropriate inquiries” into prior ownership and uses of a property. In 2005, U.S. EPA finalized a rule which establishes mandatory standards for conducting all appropriate inquiries ("AAI Rule").

If the investigation (a Phase I assessment) spots no issues, then the legal protection attaches if procedures are followed set forth in the AAI rule. If the investigation of the property reveals the likelihood that a release has occurred, the AAI rule requires reasonable steps be taken to address the release or contain it before you receive liability protection.

But what about State environmental liability?

State environmental statutes provides separate authority to bring actions for historical contamination on brownfield properties.  While there are certain limitations on that authority, I have had clients express concern regarding this liability exposure.

The State of Ohio does not have a regulation or even a policy that recognizes the "innocent landowner" defense.  Meeting the AAI rule will not establish a legal defense against state statutory environmental liabilities.  While the State may exercise enforcement discretion, some clients don't have the risk tolerance to live with that potential exposure.

Should Ohio adopt some kind of "innocent landowner" protection to attract re-use of brownfields?

At a minimum, some formal recognition of the AAI rule by the State would at least provide some level of comfort.  However, given the number of brownfield sites in the State, something stronger is warranted. 

One potential model is the Clean Michigan Initiative.  Under this law, the State provides liability protection to innocent purchasers similar to the federal AAI rule.  Here is a quick synopsis of the program:

  • Baseline Environmental Assessment (BEA)- A BEA is performed which is a simpler, streamlined alternative to full blown clean up of the site.
  • Establish the Baseline- BEA is used to gather information about a contaminated property when the owner or operator changes so existing contamination can be distinguished from any that might occur once a new owner or operator acquires the property.
  • Timing- the BEA must be performed prior to or no more than 45 days after the date of purchase, foreclosure, or becoming the operator, whichever occurs first; 
  • Disclose -  the results of the BEA must be provided to the Michigan Department of Environmental Quality (MDEQ) and subsequent purchasers and lessee operators.
  • Due Care Responsibilities- Purchasers need only take actions sufficient to ensure that their use of the property: 1) does not allow an unacceptable exposure to contamination, 2) does not worsen the contamination, and 3) protects against the reasonably foreseeable actions of third parties such as contractors or trespassers.

Very similar to the Federal AAI rule, Michigan's BEA serves as a good model to address State liabilities at contaminated properties.  Such protection could further encourage re-use of industrial sites that remain idled or vacant.

Ohio Brownfield Tax Abatement Law Needs Improvement

I was interviewed for a story on the local NPR station in Cleveland about a Northeast Ohio company that nearly went bankrupt because of confusion over Ohio's brownfield tax abatement law.  The title of the story was "How a Poorly Worded Tax Rule Nearly Bankrupted Ohio's Oldest Company." Listen to the whole story by clicking here.

After reviewing the issue in preparation for the interview, it became readily apparent this was a law in serious need of a re-write.  A company's future shouldn't hinge on a vague tax exemption law.  I also learned that it was probably time to revisit some of the policy decisions made when writing the brownfield tax exemption law.

Background: Taylor Companies was debating whether to move out of Ohio.  It decided to remain in Ohio, in part, due to incentives it would receive for building on a brownfield site.  The principle incentive being a 10 year tax exemption for the increase in value of the property post-clean up.  Here are some excerpts from the story on NPR: 

The abatement was 87% less than what he expected. See, Taylor’s lawyers interpreted the state statute to mean that the tax exemption would cover the increase in value from before they did any clean-up to the new value after the company built and moved into its nice new building on what had been a brownfield. But Shelley Wilson of the Ohio Department of Taxation says they were wrong...

Instead of comparing the value of the land from its polluted days to its clean state…which seems most logical, tax officials compare the value of the land from one year before the tax abatement to its value after the improvements were made. The problem is that cleaning up the land and constructing a building may take longer than that narrow one-year time-frame. In Taylor’s case, he had already made most of the improvements by the time the tax commissioner made his assessment of the change in the land’s value. Shelley Wilson of the office of taxation concedes Taylor’s reading of the statute was probably the intent of the law.

Basically, the Ohio Department of Taxation responded to the controversy by saying- it may be the intent of the law to compare value pre-clean up to post-clean up, but that is not how the Ohio Legislature wrote the law.

At issue is the statutory provision set forth in R.C. 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, 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 Ohio Department of Taxation looked at the bolded language and determined the valuation comes from when the tax exemption order was issued, rather than looking back at the value of prior to when clean up commenced.  Triggering the exemption based on when an order is issued by Taxation really puts the squeeze on businesses redeveloping brownfield properties. Unless they time everything perfectly, they can lose out on potentially millions in tax abatement. (see example below)

The Department states this interpretation is supported by a decision issued by the Ohio Supreme Court- Columbus City School District v. Wilkens.   Here is how Ohio EPA describes the process in its guidance document dealing with the brownfield tax exemption:

For example, if the covenant not to sue is issued by Ohio EPA in September, 2007, and the Tax Commissioner issues the tax exemption order in October, 2007, the property tax exemption granted will be for the increase in value of the land and buildings on the property from the value of the property as of January 1, 2006, the tax lien date for tax year 2006. Since real property taxes are collected a year in arrears (i.e., the 2006 taxes are based on a value as of January 1, 2006, but collected in 2007), the 2006 tax list would be the most current list available for the Tax Commissioner’s October 2007 exemption order. The tax exemption would begin for tax year 2007 which would affect taxes collected in 2008.

Even if businesses line up things in the right way, they are still dependent on two government agencies- Ohio EPA and the Ohio Department of Taxation- acting on a timely basis.  One Cincinnati company lost out on a potential tax exemption on a $4 million dollar increase in the value of its property simply because paperwork was not issued by the government agencies in a timely fashion.  See, Hamilton Brownfields Redevelopment LLC v. Zaino, Tax Commissioner of Ohio.  In that case the Board of Tax Appeals states: 

"The General Assembly has mandated the exemption period begin in the year in which the order is issued.  The statute provides no latitude to consider or alter the commencement of the exemption."

It is time to fix the language in the tax exemption statute.  The entire purpose of the tax abatement law is to provide an incentive to clean up brownfield sites.  If we want to encourage redevelopment of brownfields versus building on greenfield sites, incentives must be significant and effective to overcome the increased costs of building on brownfield sites. 

The best fix would be to simply take the tax valuation of the property that was issued immediately before the clean up was commenced (a date identified in the papers filed with Ohio EPA) and compare it to the valuation after clean up is completed. 

New Construction- In or out?

The commencement of the tax exemption is not the only flaw in this law.  There is also confusion regarding the extent of the tax exemption as it applies to new construction.  As noted in Ohio EPA's guidance document:

The Department of Taxation interprets the exemption granted under ORC 5709.87 as limited to the increase in value of the land and the existing buildings on the NFA property, and not of new structures constructed at the NFA property.

Taxation has made it even a bit more complicated than simply limiting it to existing buildings at the property.  Taxation has gone on to limit improvements to existing buildings that were not features of the building prior to the clean up.  For example,

  • If you replace an old swimming pool with a new swimming pool, the increased value attributable to the new pool is exempt.
  • However, if the building never had a swimming pool, it would be considered a new improvement and not exempt.

(See, Seven Seventeen HB Philadelphia v. Franklin County Board of Revision)

Unfortunately, Ohio is blessed with thousands of brownfield sites.  If we are going direct development towards these sites, we need strong incentives.  Costs of cleaning up a brownfield can run into the millions of dollars. 

Is it really good policy to restrict the tax exemption in such a fashion?

We also need the law to be clear on its face.  Lets hope the last part of the NPR story is correct and the Ohio Legislature takes up fixing the brownfield tax exemption law soon. 

 

Federal Tax Incentive For Environmental Clean Ups Provides Advantages Through End of 2009

Any business spending money on an environmental investigation or on clean up at property they own examine closely a federal tax incentive which is set to expire December 31, 2009.  The incentive allows environmental clean up costs to be fully deductible in the year they are incurred, rather than having to be capitalized and spread over a period of years. 

Some businesses may not look closely at that tax incentive because they don't think they own a "brownfield" property.  Many conjure images of falling down and abandoned manufacturing buildings when they think of a brownfield.  However, the incentive, known as the Federal Brownfields Tax Incentive, is very broad and inclusive as to what constitutes eligible properties.  Properties in full productive use with contamination can be eligible.

Until 2000, the Federal Brownfield Tax Incentive did include restrictions on which properties could be eligible.  The law included requirements on specific land use, geographic and contamination requirements for determining eligible properties.  However, most of these limitations were removed in 2000. 

Section 198 of the Internal Revenue Code contains the requirements for expensing environmental remediation costs.  Section 198 defines "qualified contaminated site" as the following:

The term "qualified contaminated site" means any area-

(A) which is held by the taxpayer for use in a trade or business or for the production of income, or which is property described in section 1221(a)(1) in the hands of the taxpayer, and

(B)  at or on which there has been a release (or threat of release) or disposal of any hazardous substance.

(Note: sites on the National Priorities List are excluded from eligibility)

The two requirements set forth in Section 198 are not very limiting, potentially allowing any property to be eligible that is held by a business upon which contamination is present.  Any business looking to qualify their property as eligible must obtain a statement from the designated state agency (typically the State EPA where the property is located) that there has been a release, threat of release, or disposal of a a hazardous substance at or on the property. 

Clean ups at former gas stations or  those involving underground storage tanks containing gasoline now also potentially qualify.  In 2006, the tax incentive was further expanded to include contamination from petroleum products (e.g., crude oil, crude oil condensates, and natural gasoline). 

What types of expenses are deductible? Generally speaking, any expenses incurred in connection with abatement or control of hazardous substances, including:

  • Site assessment and investigation;
  • Site monitoring;
  • Clean up costs;
  • Operation and maintenance costs;
  • State voluntary cleanup program oversight fees; and
  • Removal of demolition debris

While the incentive was extended at least three times since 1997, it is set to expire on December 31, 2009.  If the incentive provides advantages to your business it may make sense to consider managing your clean ups in the remaining months to maximize its benefits before it expires.  Also, note that it is possible previously filed tax returns can be amended to include deductions for past clean up expenditures.

U.S. EPA has a very useful fact sheet and answers to frequently asked questions on their website that provide further guidance on the incentive. 

[Disclaimer: You should consult your environmental counsel, CPA and tax counsel to determine whether your specific circumstances would qualify for the Federal Brownfield Tax Incentive]

[Photo: everystockphoto.com/Here in Van Nuys]

Land Banks Offer Unique Strategy to Address Brownfields and Abandoned Residential Properties

There has been much discussion regarding the use of Land Banks to assist in addressing the aftermath of the foreclosure crisis.  Here is an excerpt from the Cleveland Plain Dealer discussing the County's recently launched non-profit corporate land bank:

Formally launched by the county in April, the new, nonprofit land bank is the first of its kind in Ohio.It could soon turn Cleveland into the nation's biggest urban laboratory on how a declining industrial city with a comatose real estate market can downsize gracefully -- and prepare to rebound in the future. The impact on the city as a whole could be far greater than individual projects such as the proposed medical mart and revamped convention center downtown.

Ohio recently passed Senate Bill 353 which allows a two year trial period for Counties to create a separate county land reutilization corporation for purposes of acquiring abandoned and tax delinquent properties.  By allowing creation of a separate corporation, the law addresses the issue of liability- a major short-coming of Ohio's existing land banking law set forth in Ohio Revised Code 5722.  The law also allows for an expedited foreclosure process. The Federal Reserve Bank of Cleveland released an good analysis of the new legislation titled "Understanding Ohio's Land Bank Legislation."

Why create a land bank?  Obviously, thousands of abandoned properties bring down property values across the board and create blight.  Abandoned properties also present other risks. Here is a quote from a University of Michigan study of its Land Bank program:

The U.S. Fire Administration reports that over 12,000 vacant structure fires are reported each year in the U.S., which results in $73 million in property damage annually.  In addition, abandoned properties tend to attract crime. A 1993 study of 59 abandoned properties in Austin, Texas, found that 34 percent were used for illegal activities and of the 41 percent that were unsecured, 83 percent were used for illegal activities.

While the focus of the recently enacted Land Bank Legislation has been as a tool for addressing abandoned residential properties, its utility should also be examined for application to brownfields. Land Banks can serve has effective means of addressing the complex legal and environmental issues that face brownfield properties. 

As an example, the Franklin County Land Bank was used successfully to address tax liens on the former Bedford Landfill which overcame a significant barrier to redevelopment.  The Bedford Landfill became a successful Clean Ohio project receiving a $3 million grant from the State of Ohio.

Today, I attended a presentation by members of the City of Cleveland's Economic Development Department on the City's Industrial Land Bank Program.  Nate Hoelzel and David Ebersole provided an interesting overview of this unique effort by the City to address large brownfield's for redevelopment.

The City of Cleveland's Industrial/Commercial Land Bank was launched in 2005.  The creation of the Cleveland Industrial Land Bank was preceded by an academic study by Cleveland State University.  The purpose of the bank is to try an assemble large tracks of abandoned property in areas identified by the City for priority commercial/industrial development.  Criteria include looking for properties of at least 20 acres in size and near key infrastructure.

In a relatively short time period (less than 4 years), the Land Bank has acquired 100 acres of brownfield property.  Thirty-seven (37) acres are currently on the market for industrial or commercial redevelopment.  The adjacent picture is from Economic Development Department's web page shows the location of 3 tracks currently held by the Land Bank.

The industrial/commercial land bank is designed to overcome the unique aspects of  contaminated urban property that prevents major development.  Representatives for the City of Cleveland estimated it cost approximately $300,000 per acre to address urban brownfield property.  Such a staggering costs often drives development to greenfields and promotes urban sprawl.  The factors that drive such staggering costs include:

  • liability for contamination
  • assessment costs for investigating the extent of contamination
  • demolition costs for vacant buildings
  • property title issues including tax liens

Land Bank's can overcome many of these barriers by providing public funds for costly environmental assessment, removing title issues and even potentially addressing liability through clean up of the property.  A property returned to the market may be free of tax liens and have received a full release from the State of Ohio for environmental contamination.

While successful for its relatively short existence, Cleveland's Industrial Land Bank could be improved if provided additional flexibility.  The Land Bank relies upon the traditional legal framework for its activities.  The legal authority for municipalities to purchase underutilized land exists at the State level in Ohio Revised Code 5722 and at authority for the Industrial Land Bank is located in Section 183.021 of the City of Cleveland Code. Under these authorities, no separate corporation can be created which means the City can face significant liability exposure under federal Superfund laws (CERCLA) for owning contaminated property. 

During the presentation, the presenters mentioned the City's effort to amend federal law during the effort in 2006 to reauthorize U.S. EPA's brownfield program.  While amendment of federal law to allow municipalities or counties to acquire property without fear of CERCLA liability makes sense, it may be an uphill climb.  It may be more practical to allow for expansion of Ohio's new Land Banking Legislation to specifically allow for political subdivisions to acquire brownfield properties through a separate corporation.  This would provide City's a layer of liability protection for being active in purchasing these complex properties.

Clean Ohio: New Conflict of Interest Prohibitions Shape Parties Involvement at Brownfield Redevelopment Projects

On May 18, 2009 the Clean Ohio Council finalized new policies that will govern future rounds of the Clean Ohio Revitalization Fund (CORF).  A major change has been incorporated into the policies that will impact developers, consultants and contractors who work on Clean Ohio projects.  For the first time the Council has included conflict of interest prohibitions. 

The conflict of interest prohibitions are directed primarily at consultants who have previously acted as both developer and environmental consultant on a project.  Contractors are also prohibited from taking any interest in the development if they want to received Clean Ohio funds to perform work on the project. 

Another important prohibition applies to consultants and prohibits participation as both consultant for the developer and a company who caused or contributed contamination at the property.  This has occurred at projects because it appeared to create continuity on the project.   Some public entities saw it as a positive to continue to involve the consultant who has the most knowledge about the challenges presented by contamination at the property.

If you are involved in Clean Ohio projects, this new provision carries important implications that could shape future involvement at brownfield redevelopment projects.  It will also be important to monitor your partners in a project because a conflict of interest could hold up the whole project. 

Here are the new provisions:

10.02 Entities paid for with Clean Ohio Revitalization Fund grant dollars on a funded property must avoid conflicts of interest. A conflict of interest occurs when an individual or organization involved in the cleanup project has an interest that might compromise their ability to execute the project in a manner consistent with the intentions of the Clean Ohio Revitalization Fund program. A conflict of interest may exist even if no proven illegal act results from it, and will include an appearance of impropriety that undermines confidence in the individuals or organizations involved in the project. To avoid a conflict of interest and ensure that proper checks and balances exist, the following restrictions are placed on funded properties:
    • The Certified Professional may not act as the developer or an investor in  the development on the funded project.
     • The selected environmental consulting firm or their employees may not act as the developer or an investor in the development on the funded project.
     • The selected contractor or subcontractors may not act as the developer or an investor in the development on the funded project.
      • The selected environmental consulting firm and the contractor or subcontractor for the funded project may not be the same firm or related firms.
     • The selected environmental consulting firm may not be engaged in concurrent service agreements for the grantee and the party that caused and contributed to the contamination on the funded project.

(Photo: Patriarca12/everystockphoto.com)

Ohio looks for "Shovel Ready" Brownfield Sites for State Share of Stimulus Money

Hurry up and get your site in line by Monday March 30th with the State of Ohio for possible additional federal brownfield money to support your project.  The State is only looking for "shovel ready" sites.  This means the types of brownfield sites that may be able to secure the $200,000 federal brownfield stimulus money are limited. 

Check out the Ohio Department of Development's fact sheet to see if your brownfield site may be eligible.  If it is then you need only fill out a simple form to get your site in line. 

The State has been sending out the following notifications:

Dear Brownfield Stakeholder:

The American Recovery and Reinvestment Act was signed into law by President Obama on February 17, 2009. The Recovery Act purpose and goal is to “to jumpstart our economy, create or save millions of jobs, and put a down payment on addressing long-neglected challenges so our country can thrive in the 21st century.” (www.Recovery.gov)

The American Recovery and Reinvestment Act allocated $100 million in additional funds to the United States Environmental Protection Agency (EPA) for the Brownfields program. This is a nationally competitive program for the assessment and cleanup of brownfield properties. Government entities and non-profit organizations may apply directly to EPA for these funds. It is anticipated the EPA will release a notice into the Federal Register detailing guidelines regarding application submittals this week. The timeline for distribution and administration of these dollars is very short. Additional information is available on EPA’s brownfield website: http://www.epa.gov/brownfields/eparecovery/index.htm

The Ohio Department of Development will be applying to the EPA to support brownfield cleanup and redevelopment statewide. Our Urban Development Division has successfully received grants of this type in the past and is well positioned to request significant cleanup dollars and to work in partnership with the communities to have an impact around the state. In preparation, the Department needs to create a pipeline of potential projects given the criteria listed on the enclosed fact sheet. The Department, if awarded, will administer and target the funds for these particular categories of brownfield projects: asbestos abatement, hazardous substance projects in the Ohio Voluntary Action Program and petroleum projects regulated by the Bureau of Underground Storage Tank Regulations.

If you have a viable project in one of these categories, please read the enclosed fact sheet then fill out the web form available at http://development.ohio.gov/recovery/recoveryform/ so we may include your project in our list of projects by Monday, March 30, 2009 at 12 p.m. EDT.

Important Note: Although you may have already submitted a request on recovery.ohio.gov, it is necessary to provide your project information on the web form for the Department’s funding request to US EPA. Submitting information to either the receovery.ohio.gov site or on the web form does not indicate application submittal or funding approval. If the Department receives funding, projects will be prioritized for their readiness to proceed and creation/retention of jobs.

Thank you,

Urban Development Division

Green New Deal? Green Trinkets and Empty Packages in the Stimulus Bill

I have been following discussion regarding the green elements of the Presidents Stimulus Package, known as the American Recovery and Reinvestment Act of 2009.  There is certainly a lot directed toward environmentally related projects, especially renewable energy development.  Leading some to call these provisions the "Green New Deal." 

What is the real story behind some of the spending that has been reported?  You certainly can find information all across the web and on government sites that simply lists the amount of money in the bill and which program it has been directed.  However, detail about what the money will really be used for can be hard to find.

Bottom line, some provisions are better than others.  For instance, much of the money directed toward U.S. EPA will pay for existing projects.  This includes prior grant applications, clean ups already under contract or projects previously selected for funding.  So, for many of you expecting great new opportunities for EPA related projects, I don't think the bill offers you that much. (with the exception of diesel engine related grants- see below).

The renewable energy side of the equation is a totally different story.  There are continued and new tax incentives as well as new grant opportunities.  There is a lot in the bill and it will literally pay to stay on top of what is available. 

I.  EPA Side- the American Recovery and Reinvestment Act of 2009 specifically includes $7.22 billion for projects and programs administered by EPA

Below is a description of the major areas of funding as well as an analysis of whether this funding presents new opportunities. EPA has established a web site page with helpful links that discuss the opportunities in the Stimulus Bill relative to the money designated for EPA.

Brownfields:  There is over $100 million directed to U.S. EPA's brownfield redevelopment program.  I was intrigued regarding this new slug of money for it could present another great opportunity for clients outside of the Clean Ohio program.  However, after asking for more details from U.S. EPA, I learned that this money is basically already spent.  The U.S. EPA intends to use it for projects that requested funding back in 2008 but were not funded due to an over abundance of proposals.  While its good news more projects are getting funded, I believe U.S. EPA could have even received better project proposals if they would have allowed for new applications. 

Diesel Emission Retrofits Act (DERA):  The Stimulus directed over $300 million in new money to fund the DERA program. DERA is the federal grant program that pays for diesel engine retrofits, repowers and replacements.  Last years allocation was only $50 million for the entire country.  So the Stimulus does provide real, new money for this program.  U.S. EPA intends to spend the money quickly so watch U.S. EPA's website and Recovery.gov to jump in with your project.

Underground Storage Tank (USTs) Cleanups: $200 million was provided to U.S. EPA's Leaking Underground Storage Tanks (LUST) Program, EPA provides resources to states and territories for the oversight, enforcement and cleanup of petroleum releases from underground storage tanks (USTs). EPA estimates that every year 7,570 new releases occur which just adds to the sites that have not yet been completed.  There could be as many as 116,000 sites requiring clean up actions in 2009. However, it appears the funding will be used to help pay for clean ups of abandoned tanks rather than create a new grant program.  Here is additional detail from the from the Convenience Store News regarding the Stimulus package:

Other measures relevant to c-stores include a final approval of $200 million for the Leaking Underground Storage Tank (LUST) Trust Fund, which assists in the cleanup of abandoned gas stations, but will not pay for inspections or to assist state reimbursements programs.

Superfund Cleanups: $600 million was provided to U.S. EPA's superfund program.  However, these funds will be obligated mostly through existing contracts and Interagency Agreements.  In 2009 there could be as many as 20 Superfund sites ready for construction, but not funded due to budget shortfalls. The Recovery funds will begin to address those sites, plus accelerate construction at many of 600 sites where work has been limited in the past by funding constraints.

Clean Water State Revolving Fund and Drinking Water State Revolving Fund: $4 billion for assistance to help communities with water quality and wastewater infrastructure needs and $2 billion for drinking water infrastructure needs. A portion of the funding will be targeted toward green infrastructure, water and energy efficiency and environmentally innovative projects. (guidance on the green infrastructure component)

Ohio EPA has begun soliciting projects for its Drinking Water and Wastewater Revolving Loan Programs.  However, projects must already have been planned and reviewed by Ohio EPA for inclusion on project planning lists.  For instance, drinking water projects must be on the Drinking Water Project Priority List (PPL).

II.  Renewable Energy- the American Recovery and Reinvestment Act of 2009 bill is anticipated to provide around $43 billion for renewable energy in the form of tax breaks and other incentives

The extended entry includes a summary of the renewable energy incentives and investment as assembled by the American Council on Renewable Energy (ACORE). (the link provides you a hard copy of the ACORE document- which does a great job of assembling the relevant information for renewable energy incentives- or see the extended entry for a summary).

Tax Incentives
Three-Year Extension of Production Tax Credit (PTC): The bill provides a three-year extension of the Production Tax Credit (PTC) for electricity derived from wind facilities placed in service by December 31, 2012. The tax credit extends to other renewable energy sources such as geothermal, biomass, hydropower, landfill gas, waste-to-energy and marine facilities placed in service by December 31, 2013.

Investment Tax Credit (ITC) Accessible to All Renewable Energy: The bill provides project
developers of wind, geothermal, biomass and other technologies eligible for the PTC, the option
of instead utilizing the 30% ITC that previously only applied to solar and other clean technology
projects.

Repeals Subsidized Energy Financing Limitation on ITC: The bill would allow businesses
and individuals to qualify for the full amount of the ITC, even if their property is financed with
industrial development bonds or other subsidized energy financing.

Grant Program in Lieu of Tax Credits: The bill allows project developers to apply for a grant
from the Treasury Department in lieu of the ITC. The grant will be equal to 30% of the cost of
eligible projects that start construction in 2009 or 2010. It will be issued within sixty days of the
facility being placed in service or, if later, within sixty days of receiving a grant application.

Increases Credit for Alternative Fuel Pumps: The bill increases the size of credits for
installing alternative fuel pumps at gas stations from 30 to 50% ($30,000 to $50,000) for taxable
years 2009-2010.

Advanced Energy Manufacturing Credits: The bill provides $2 billion worth of energyrelated
manufacturing investment credits at a 30% rate.vi These credits apply to projects creating
or retooling manufacturing facilities to make components used to generate renewable energy,
storage systems for use in electric or hybrid-electric cars, power grid components supporting
addition of renewable sources, and equipment for carbon capture and storage (CCS).

Plug-in Electric Drive Vehicle Credit: The bill increases the tax credit for qualified plug-in
electric drive vehicles for the first 200,000 placed in service. The base amount of the credit is
$2500. Batteries with at least 5 kilowatt hours of capacity have a credit of $2917. The credit is
further increased by $417 for every kilowatt hour in excess of 5 kilowatt hours, but cannot
exceed $5000.viii The credit is allowed to be taken against the alternative minimum tax (AMT).ix
Five Year Carry-Back Provision for Operating Losses of Small Businesses: The bill would
extend the carry-back period for net operating losses (NOL) from two to five years for tax years
2008 and 2009. An eligible NOL includes the NOL for any taxable year ending in 2008 or if the
taxpayer chooses, any taxable year beginning in 2008. An election under this provision may only
be taken for one taxable year.

Extends Bonus Depreciation: The bill extends, through 2009, the temporary increase of bonus
depreciation to 50% that Congress enacted last year. These write offs can be applied to capital
expenditures ranging from $250,000 to a newly increased threshold of $800,000.
 

Direct Spending
Total Direct Spending for Renewable Energy and Energy Efficiency: The bill provides $16.8
billion in direct spending for renewable energy and energy efficiency programs over the next ten
years.

Grid Development: The bill provides $11 billion to modernize the nation's electricity grid with
smart grid technology.xiii This includes $4.5 billion for the DOE Office of Electricity Delivery
and Energy Reliability for activities to modernize the nation's electrical grid, integrate demand response equipment and implement smart grid technologies.xiv In addition, $6.5 billion is
provided for two federal power marketing administrations to assist with financing the
construction, acquisition, and replacement of their transmission systems.xv The bill also
increases federal matching grants for the Smart Grid Investment Program from 20% to 50%.

R&D, Demonstration Projects: The bill provides $2.5 billion for renewable energy and energy
efficiency R&D, demonstration and deployment activities.

Advanced Battery Grants: The bill provides $2 billion for grants for the manufacturing of
advanced batteries and components. This includes the manufacturing of advanced lithium ion
batteries, hybrid electrical systems, component manufacturers, and soft-ware designers.xviii
Defense Energy and Efficiency Programs: The bill provides $300 million to the DOD for the
purpose of research, testing and evaluation of projects to energy generation, transmission and
efficiency.xix The bill provides an additional $100 million for Navy and Marine Corps facilities
to fund energy efficiency and alternative energy projects.

Study of Electric Transmission Congestion: The bill requires the Secretary of Energy to
include a study of the transmission issues facing renewable energy in the pending study of
electric transmission congestion that is due to be issued in August 2009.xxi
Bond and Loan Programs

Clean Energy Renewable Bonds (CREBs): The bill provides $1.6 billion of new clean energy
renewable bonds to finance wind, closed-loop biomass, open-loop biomass, geothermal, small
irrigation, hydropower, landfill gas, marine renewable, and trash combustion facilities.xxii Onethird
of the authorized funding will be available for qualifying projects of state/local/tribal
governments, one-third for public power providers and one-third for electric cooperatives.

Renewable Energy Loan Guarantee Program: The bill provides $6 billion for a temporary
loan guarantee program for renewable energy power generation and transmission projectsxxiv
that begin construction by September 30, 2011.xxv Up to $500 million of the overall $6 billion
can be used for the development of leading edge biofuels that have been demonstrated and have
commercial promise to substantially reduce greenhouse gas emissions.xxvi

Between the Lines of the EPA Administrator Memo

Today, EPA Administrator-designate Lisa P. Jackson distributed a memo to all employees of EPA.  The memo outlines her and President Obama's philosophy of environmental protection.  The memo is an interesting demarcation of the major changes that are coming in the realm of environmental protection. 

Some priorities Ms. Jackson is very upfront about, such as addressing Climate Change (which notably was identified as the number 1 priority in her memo).  Other policy perspectives are a little less straightforward, but inferences can be made.  Here are my take aways from the memo.

  1. Climate Change is a major priority-  The President made reference to it in his inaugural speech.  It is no mistake that its the first bullet on EPA-designate Jackson's list of priorities.  Notably, she includes the following statement:  "As Congress does its work, we will move ahead to comply with the Supreme Court's decision recognizing Pea's obligation to address climate change under the Clean Air Act"  STAY TUNED ON THIS ONE>>>
  2. Science will be at the forefront-  Many environmental groups felt that the Bush Administration put science secondary to their end regulatory goals.  The memo is a clear statement that this will change.  What could be the impact?  For one, look for even stronger federal air quality standards (NAAQS) for ozone and fine particles. 
  3. Resurgence in Environmental Justice- A very thorny issue and one difficult to address through regulation.  However, the memo mentions making  "people disproportionately impacted by pollution" a priority.  Perhaps they will try to tackle this more aggressively.
  4. CAIR-  I may be out on a limb on this one.  In the "improving air quality" priority, Jackson states "we will plug the gaps in our regulatory system as science and the law demand."  I think this is a vague reference to a much stronger CAIR program.
  5. Brownfield Redevelopment-  U.S. EPA may put even more emphasis on brownfield programs as a means to accelerate clean up of contaminated sites.  Jackson was criticized in New Jersey for the slow clean ups.  I think the statement -"turning these blighted properties into productive parcels and reducing threats to human health and the environment means jobs and investment in our land" -can't be anything other than a reference to a strong brownfield program.
  6. Money for the Great Lakes?-  In the memo, Jackson says the "Agency will make robust use of our authority to restore threatened treasures such as the Great Lakes and the Chesapeake Bay."  I am intrigued at the term "robust use of our authority" in connection with the Great Lakes.  Is this a reference to enforcement rather than the Great Lakes Restoration Plan?
  7. Don't underestimate the amount of change coming-  President Obama's buzz word was change.  I don't think there is any area that is about to see more change than environmental regulation in the next four years.  Fasten your seat belts...

 

Future Grant Rounds and Improvements to Ohio's Brownfield Redevelopment Program

After reauthorization of the Clean Ohio program this November by Ohio Voters, the State has announced their intention to maintain two grant funding rounds per year going forward.  Hopefully this will allow the program to operate more consisentely.  In the past, project developers were often forced to try and rush projects because future funding rounds were uncertain. 

Round 5 was completed in December, with seven projects recieving around $12.7 million in funding.  This was less than the $17 million the state had available in that round.  This marks the first time less then the full amount of funding available was awarded. 

The State has already announced the schedule for the next two funding rounds:

Round 6- Unless your project is already been listed on Ohio's Brownfield Inventory, you are too late to qualify for this round.  The deadline for filing the form to be listed in the inventory was December 5th.

- Grant applications are due January 9th

- Awards will be announced in May of 2009

Round 7

- No deadline for listing a property with the brownfield inventory has been announced to date.  Typcially, the deadline is 30 days prior to the deadline for filing a grant application.

-Grant applications are due July 25th

-Award will be announced in November of 2009

The Ohio Department of Development (ODOD) who administers the program also announced other enhancements to improve the program.  These include:

  • Clean Ohio Assistance Fund applications will be processed in 10 days instead of 30 days
  • Disbursement requests can be made every 30 days instead of 60 days
  • Information regarding public bidding of work associated with Clean Ohio projects will be made available to small and minority owned businesses

The announcement to make the program more consistent should be great news for everyone who works with the program.  This will allow project developers and governments to tee up projects when they are truly ready versus trying to rush the project to meet the funding deadline. 

With the overall lack of development occurring in Ohio right now due to the poor economy, this is a great time to develop Clean Ohio projects because the next few rounds will likely be less competitive.  This was certainly true for Round 5 in which the State did not even award all the money that was avaiable.

Ohio Brownfield Redevelopment Program Leaves Grant Money On the Table

To quote a consultant I work with..."Times must be tough in Ohio when there is free money left on the table" for redevelopment. 

Today, the Clean Ohio Council met to evaluate the project proposals for Round 5 of the Clean Ohio Revitalization Fund.  There was $17 million in grant funding available.  In the previous 4 rounds, CORF was so competitive many projects were left without funding.  As perhaps an indication of the economy, Round 5 was the first time ever all of the money available was not awarded. 

Here is the typical process at the meetings where the Clean Ohio Council makes its decisions about which projects to fund- There is a brief presentation made to the Council about each project. The Council can asked questions to better understand the project or raise concerns.  After the presentations, the members of the Council vote on the project and each project receives an overall score.  The Council breaks for lunch and afterward the Staff of the Ohio Department of Development reveal which projects will get funded.

I used to sit on the Clean Ohio Council and experienced very competitive grant rounds where a number of projects did not get funded.  Due to the time and effort to put a application together, you could hear the audible sighs in the audience from those left out of the money.  No such sighs were heard today....

At today's meeting, Council broke with tradition and did not even bother scoring all the projects.  The total request for all eligible projects was only $12 million of the $17 million available.  Therefore, the Council simply passed a resolution to award all eligible projects the funding they requested. 

I worked on one of the projects that was selected for award.  The project is a great story of a closed manufacturing site getting cleaned up and returned to productive use.  The Clean Ohio program has had many success stories like this in the years it has been operating.  I hope the next round of funding sees renewed interest, it would be a shame to leave "free" redevelopment money on the table that could be put to good use.