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, as 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.

 

Ohio EPA Proposed Voluntary Action Program (VAP) Rule Changes

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

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

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

Process Changes- Faster Turnaround but Greater Risk of Surprises

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

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

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

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

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

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

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

Revised Generic Cleanup Standards

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

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

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

Urban Setting Designations- Expanded Use 

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

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

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

Off-Property Cleanup Requirements

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

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

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

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

 

 

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

 

 

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

When a Property Must Meet VAP Standards

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

Post CNS Changes to Remedy

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

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

Sufficient Evidence- VAP Eligibility Post-Enforcement

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

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

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

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

Schedule

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

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

Difference between "Classic" VAP and VAP MOA

In Ohio, the primary brownfield cleanup program is known as the Voluntary Action Program (VAP).  Volunteers can cleanup their site to commercial/industrial or residential standards.  Upon completing the cleanup the volunteer can receive a legal release from the State of Ohio (called a "Covenant-Not-to-Sue" or CNS).

The CNS under the VAP does not include a release of liability from U.S. EPA.  In order to attempt to provide an option for volunteers who desired some protection from U.S. EPA enforcement, Ohio created the VAP Memorandum of Agreement (MOA) track.

I have had a few clients in the last couple months ask about the differences between the "Classic VAP" and the VAP MOA.  The main reason they ask is because they are interested in the heightened liability protection that is available under the VAP MOA process.  However, is the extra cost and longer time frames worth it?

"Classic" VAP

Under "Classic" VAP, the volunteer hires an environmental consultant who is recognized by Ohio EPA as a "certified professional" ("CP") under the VAP.  The CP performs the investigatory and cleanup work at the site to VAP regulatory standards.  Once the cleanup is complete, the CP prepares a "No Further Action Letter" (NFA) certifying that the property meets VAP standards.  

The volunteer then decides if they want the CP to submit the NFA to Ohio EPA for review.  If the NFA is submitted to Ohio EPA and the Agency concurs the property meets VAP regulatory standards, then the Agency issues a "Covenant Not to Sue" (CNS).  This is a formal legal release of liability from Ohio EPA.

As outlined above, the VAP process is a private cleanup.  There is no public involvement and no records are public until they are submitted to Ohio EPA for review.  

VAP MOA Track

MOA means Memorandum of Agreement.  The agreement is between U.S. EPA and Ohio EPA. (A copy is available here)  Under the agreement if a volunteer agrees to follow additional steps than necessary under the Classic VAP, it can receive "comfort" from the U.S. EPA that it won't pursue additional cleanup.  Those steps include:

  1. Notice of entry into the VAP MOA program;
  2. Publish notice in the local newspaper that the volunteer has entered the program;
  3. Create a document depository in the local library available to the public;
  4. Volunteer must publish the proposed work plan and allow for public comments (30 day comment period);
  5. Host a public meeting to discuss the work plan;
  6. All documents associated with the VAP cleanup must be placed into the library (includes the Phase I, Phase II, Risk Assessment Report, Remediation Work Plan, and the NFA letter); and
  7. Public can request additional public hearing during the cleanup process.

If a volunteer meets the various requirements outlined above, then U.S. EPA provides the following "comfort"

For sites or facilities that have completed the voluntary action in compliance with the MOA Track procedures...U.S. EPA Region 5 does not plan or anticipate taking action under CERCLA or RCRA while the facility remains in compliance with the MOA Track VAP requirements, except as provided in Section IV.B below.

The highlighted language makes clear that completion of the VAP MOA does not provide the volunteer a legal release from U.S. EPA.  Rather, the volunteer gets the assurance that EPA "does not plan or anticipate taking action."  Nothing prohibits such action.

In fact, the highlighted language at the end of the paragraph provides several instances when EPA can take action, including:

  • Newly discovered information after the CNS is issued indicates additional cleanup is needed;
  • Failure to comply with applicable VAP cleanup plans and Ohio EPA fails to take action to correct the situation;
  • The site presents an imminent and substantial endangerment to public health or welfare or the environment; and
  • Ohio EPA requests EPA help because the volunteer isn't make sufficient progress to complete the VAP MOA track

How Many Sites Have Gone Through the Classic VAP versus VAP MOA?

Currently, according to Ohio EPA tracking, 556 sites have submitted an NFA for review.  Not all of those sites have received a CNS.  29 NFAs were withdrawn before receiving a CNS.  

Only a total of 59 sites are identified as having entered the VAP MOA process.  Of those 59 sites, 22 sites actually submitted an NFA thus completing the VAP MOA process.  (Link to Ohio EPA list of VAP MOA sites)

What these numbers tell you is that very few volunteers have decided to spend the extra time and money to complete the VAP MOA process.  Some who even started, later left the MOA process.

Biggest Issue is Time

The biggest issue for many volunteers contemplating the VAP MOA process is the extra time involved.  Each plan is available for public comment.  A public hearing is required as well.  The extra time to complete the added upfront Ohio EPA review and public involvement can add many months on to a project. 

A review of the MOA track list shows that most projects took more than one year to complete once they formally entered the program.  Some took five or six years to complete.  It is unlikely Ohio EPA would allow a project to sit in process that long any more, but the track record clearly demonstrates the added steps will add significant time to the cleanup.

Risk Tolerance

As with many things environmental, whether to go Classic VAP or VAP MOA Track really depends upon your client's risk tolerance.  For some clients, the added comfort from U.S. EPA (even though its not a legal release) is enough.

[Photo courtesy Engineering at Cambridge]

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."  

Big Changes Proposed for Ohio Brownfield Funding

On Friday, the Clean Ohio Council met to discuss proposed changes to the Clean Ohio program. As discussed previously on this blog, the Kasich Administration has repeatedly discussed completely revamping brownfield funding in Ohio.  The Administration previously announced its intention to shift the program's administration to JobsOhio along with the liquor profits that were used to payoff the bonds that created Clean Ohio.  The Administration also has indicated it wants to shift from a grant based program to loans.

JobsOhio is currently caught up in a legal challenge to the constitutionality of the semi-public organization.  As a result of the legal challenge, the Administration has not provided any details as to what brownfield funding will look like under JobsOhio.

Back in May, it was announced that $15 million in new funding would be allocated to the Clean Ohio program as a stop gap measure until the dust settled on the JobsOhio litigation.  Clean Ohio funding has previously been at $37.5 million per year. Many believed that the $15 million would be allocated using the similar Clean Ohio process and procedures that have operated for nearly a decade.

On Friday, staff from the newly created Development Services Agency presented revised policies for new procedures to be utilized in awarding the $15 million in new funding. The proposal presented represents  a seismic shift in how funding decisions will be made.

Here is a quick synopsis of the major changes:

  1. Major Reduction in Funding Available Per Project- The maximum available in funding for assessment grants was reduced from $300,000 down to $200,000.   The maximum available in clean up funding was reduced from $3 million to  $1 million;
  2. Overhaul to the Grant Selection Process-  Previously, there were two grant rounds per year.  Grant applications received during a round competed against one another for funding.  The Clean Ohio Council utilized a scoring process to evaluate each grant application.  The scoring criteria was a mix of points based upon the proposed development, amount of clean up occurring and importance to the local community.  The new proposal would do away with grant rounds and the scoring process entirely.  Under the new system, the Director of Development Services would make awards on a rolling basis utilizing Agency discretion.
  3. Premium on Job Creation-  While the application process is still somewhat murky because the forms have not been released, it appears from documents released Friday that the intention is to evaluate applications based on jobs almost exclusively.  The old scoring system provided placed higher value on clean up of highly contaminated sites as well as their importance to the local community. 
  4. More Funding for Infrastructure-  The new proposal increases the percentage of the grant that can be spent on infrastructure versus environmental clean up from a maximum of 10% up to 25%.
  5. Loans- While the policy changes incorporate the concept of loans, as it stands the new policy would retain the limitation that no more than 15% of funding shall be used for loans. (See, Section 6.02).  Therefore, the Administration, at least for now, wants to see the vast majority of funding in the form of grants versus loans

Concerns were expressed during the Clean Ohio Council meeting on Friday that there had not been any opportunity for the public to comment on the major restructuring of the program. In response, it was decided to allow a thirty day (30) public comment period on the policy changes. 

Click here to access the proposed changes to the Clean Ohio Fund Policies.  Instructions for submitting comments are also available on the web page.

Implications of the Policy Changes

It is pretty easy to acknowledge the Clean Ohio as we know will no longer exist if the proposed changes are adopted following the public comment period. The old program had two grant processes:

a) Clean Ohio Assistance Fund (COAF)-  Allowed for up to $300,000 for assessment and $700,000 for clean up.  COAF applications could be submitted on a rolling basis and decisions were made exclusively by the Director of Development.

b) Clean Ohio Revitalization Fund (CORF)-  Allowed for up to $3 million in clean up funding.  There were typically two rounds per year.  Applications were submitted and competed against one another in each round.  The project applications were scored using a mix of points for development, environmental clean up and importance to the local community.

The proposal presented Friday essentially does away with CORF and moves exclusively to a COAF like approach.  The advantage of the new approach is the speed as to which funding decisions will be made.  However, the disadvantages to this approach are as follows:

  • $1 Million Dollar Cap on Clean Up Grant Funding will mean Only Smaller Clean Up Projects will Get Funded-  The vast majority of the larger development projects involved $2 to $3 million in funding under the old CORF program.  By capping the available cap at $1 million, the larger brownfield redevelopment projects are far less likely to occur.  What could happen is that the only projects getting funded in future will be for asbestos abatement & demolition.  There simply won't be enough funds to deal with sites that have significant soil or groundwater contamination.
  • No Competition Makes it More Difficult to Ensure the Limited Funds Go to the Best Projects-  Because all grant awards will be made on a rolling basis it will be much more difficult to compare and contrast projects.  No objective scoring criteria will be implemented and the public involvement in selecting projects will be greatly reduced.

 

Indoor Air is in the EPA Spotlight for 2012

With regard to industrial properties and brownfields clean ups, perhaps no issue clean up standard has garnered more attention and increased scrutiny than indoor air.  It looks like 2012 could be the year when EPA finally updates its decade old draft guidance. 

EPA never finalized its 2002 draft guidance on assessing indoor air risks ("OSWER Draft Guidance for Evaluating the Vapor Intrusion to Indoor Air Pathway from Groundwater and Soils"). The lack of official guidance has left a regulatory void regarding clean up standards.  In 2009, the Inspector General sharply criticized EPA for failing to develop final guidance (IG Report).   EPA responded to the IG report by promising to finalize new vapor intrusion guidance by the fall of 2012.

What is vapor intrusion?

Chemicals in soil and groundwater can volatilize into the air and come up through basements and slabs into buildings.  For well over a decade, EPA has required clean up plans to include an assessment and evaluation of the risks posed by vapor intrusion into buildings.

The typical process for evaluating risk had been to plug soil and groundwater sampling data into a model ("Johnson & Ettinger Model") to predict indoor concentrations within existing and future structures at a site. If concentrations were too high in an existing building, EPA would require either additional clean up or a mitigation system (similar to a radon mitigation system) to reduce concentrations.  If concentrations were too high in soil and groundwater even where no current building existed, EPA could force deed restrictions to prevent future construction in those areas of the site.

Virtually all industrial and brownfield properties have the potential to present vapor intrusion risks including current and former manufacturing and chemical processing plants, warehouses, landfills, dry cleaners, and gas stations.

Why is new guidance on vapor intrusion such a big deal? 

When EPA guidance is updated, it will likely lead to more conservative assumptions.  More than likely, EPA will require more data gathering beyond just simple modeling.  For example, EPA already has moved toward requiring more subslab sampling to evaluate concentrations of chemicals directly beneath buildings.

Updated guidance could possibly lead EPA to re-open sites that had previously had their clean ups blessed by state or federal regulators. for example, Superfund (CERCLA) requires EPA to review site clean ups every five years.  Would updated guidance require re-evaluation of these sites?

New guidance could also lead to more toxic tort litigation if plaintiffs claim prior investigations were not adequate or assumptions become more conservative.  Or, it could impact development plans or financing. 

EPA Release First New Guidance

In February 2012, U.S. EPA's Superfund division released a new document titled Superfund Vapor Intrusion FAQs.  The new document isn't the final guidance EPA promised in response to the IG report.  However, it does provide some insights into what the new guidance will look like once its released.

Using the answers to questions in the new FAQ, one can gain insights into the direction EPA likely to head with new final guidance on evaluating vapor intrusion, including the following:

  • Evidence from sites since 2002 show that concentrations of pollutants in indoor air are difficult to predict by extrapolating from samples to modeling;
  • EPA recommends modeling only as a way to potentially screen out a site and will be more appropriate for evaluating future buildings on-site;
  • EPA will move to requiring more soil gas sampling and sub-slab sampling to determine vapor intrusion concentrations;
  • More conservative assumptions are going to be built into the model which will make it much more likely a site will fail screening values (for example, EPA will incorporate an assumption that it is about 10 times more likely vapors will move into buildings from deep soil-gas;
  • New screening values will be developed; and
  • At CERCLA and other regulatory sites, EPA is more likely to require community involvement in sites where vapor intrusion is being studied.

 

Ohio EPA Reform Bill Introduced

Last week Senator Schaffer introduced Senate Bill 294- dubbed the EPA reform bill.  According to testimony from Senator Schaffer and OEPA Director Scott Nally, the two had been working on the legislation for months.

This bill is the probably the first since Ohio EPA creation that touches on so many different areas of EPA regulatory authority, including:

  • Infectious waste- eliminate duplicate regulation
  • Wetland mitigation- change the hierarchy of mitigation (see below)
  • Underground storage tank clean up at brownfields- streamlines brownfield clean up (see below)
  • Compliance assistance to small businesses- expands confidentiality for inquiries for assistance by small businesses
  • Construction & demolition debris fees- clarifies fees apply to asbestos containing material
  • Statute of limitations for environmental enforcement actions- applies statute of limitations to enforcement actions related to construction & demolition debris
  • Regulation of public water systems and public water system operators- establishes criminal penalties for falsification and vandalism related to public drinking water systems
  • Disposal of solid waste- bans disposal of certain aluminum production waste after issues with fires at Countywide landfill

While the bill is broad in scope, many of the changes are minor fixes to address out of date statutory language.  The biggest changes fall into the following areas:

Wetland Mitigation- 

Anytime a developer impacts wetlands, they must offset the impacts with mitigation.  Under current law, the hierarchy of mitigation required the developer to, first, try and perform mitigation on-site by creating new wetlands.  Then mitigate off-site, but in the same watershed.  If on-site and off-site mitigation weren't possible, the final option was purchasing credits at a wetland mitigation bank owned and operated by a third party. 

Years ago, Ohio EPA studied the effectiveness of on-site mitigation and found that most newly created wetland were failing.  This prompted a lengthy discussion about the merits of using wetland banks versus developer driven mitigation projects.

S.B. 294 flips the hierarchy on its head.  Now, the preferred option is purchasing credits at a mitigation bank.  Such a change may allow for better success in terms of survival of man-made wetlands.  Also, a preference towards banks should greatly accelerate the permitting process for developers who often get bogged down in trying to find mitigation sites.

S.B. 294 also provides Ohio EPA with the authority to start an in lieu fee program.  Under such a program, a developer could simply write a check paying for mitigation credits versus finding a mitigation project or bank.  Ohio EPA, ODNR or a private entity operating the in lieu fee program could then use the funds to start mitigation projects they select.  This option assist developers when they can't find sufficient credits at an acceptable mitigation bank.

Underground Storage Tanks at Brownfields-

This has long been an issue highlighted on this blog.  Under current Ohio law, any business or developer cleaning up a brownfield is forced to go through two separate clean up programs if their site has underground storage tanks regulated by the Bureau of Underground Storage Tank Regulation (BUSTR).

Under Ohio law, any areas of brownfield site with BUSTR tanks is ineligible for participation in the Voluntary Action Program (VAP) until it, first, clean up the BUSTR tanks in accordance with BUSTR regulations.  Never mind that the VAP clean up standards and BUSTR were equivalent in their protection of human health and the environment.

What resulted is lengthy delays at brownfield sites while the volunteer addressed all BUSTR tank issues prior to proceeding with the VAP.

S.B. 294 will allow any person cleaning up a brownfield to use the VAP to address BUSTR tanks as long as two conditions are met:

  1. The VAP clean up also addresses other hazardous substances or petroleum that is not BUSTR regulated; and
  2. The fire marshal has not issued an enforcement order requiring BUSTR closure.

This is a great reform that is a long time coming.  It should make brownfield as well as VAP clean ups at operating sites far less complicated.

Compliance Assistance for Small Businesses

Ohio EPA has the Office of Compliance Assistance and Pollution Prevention (OCAPP).  OCAPP allows small business to call EPA staff and ask for assistance with permitting or compliance issues without fear of enforcement. 

Under existing law, only inquiries regarding air permitting are confidential.  S.B. 294 would make inquiries into other permitting programs confidential.  This gives the business the comfort of knowing their noncompliance, by law, cannot be reported to other EPA divisions or offices. 

OCAPP can be a great tool for small businesses to cost effectively untangle complex EPA regulations and file for permits.  S.B. 294 will enhance OCAPP's capabilities.

Introduction Just Marks the Beginning of the Legislative Process

S.B. 294 will be very interesting to watch as it proceeds through the legislature.  Will Senator Schaffer and Ohio EPA be able to prevent it from becoming a "Christmas Tree", where every group and legislator tries to include their concepts or ideas for reforms to EPA?

Time will tell.

 

JobsOhio $1.4 Billion Dollar Deal Includes Sketchy Details on the Future of Clean Ohio

Details were released this week by the Kasich Administration on the establishment of its privatized economic development agency known as JobsOhio.  Many of the traditional job creation duties that fell to the Ohio Department of Development will be shifted to JobsOhio. 

Along with the restructuring of development duties, the Administration is shifting the State's liquor profits to help fund the Agency.  Last year the liquor profits took in around $700 million in revenue to the State.  In return for a 25 year agreement to fund JobsOhio with liquor profits, JobsOhio will make a one-time $1.4 billion dollar payment back to the State.  Details of how those funds would be utilized were discussed in the Plain Dealer:

The $1.4 billion agreement calls for Ohio to collect $500 million for its general revenue fund, money already factored into the current state biennial budget, $750 million to pay off existing liquor revenue backed bonds, and $150 million to continue "Clean Ohio" environmental programs for the next three years.

The reference in the Plain Dealer Article regarding Clean Ohio is a bit confusing.  Based upon an article in Columbus Business First, the $150 million is set aside to pay for the grants that were awarded or will be awarded by July 1, 2012.  In the future, funding will be set at $43 million per year.

The agreement, which will be reviewed and possibly voted on Jan. 30 by the state Controlling Board, includes a provision for the $43 million for economic revitalization projects as well as $150 million to cover Clean Ohio Fund projects approved by the state before July 1, 2012.

Impact on Clean Ohio

The transformation of the Ohio Department of Development and creation of JobsOhio has resulted in tremendous uncertainty regarding  the State's $50 million dollar per year brownfield redevelopment program. 

This fall, when the Administration made the announcement that liquor profits would be shifted, the Administration said it would look for a new revenue source to support Clean Ohio.  It now appears that the same revenue-a portion of liquor profits- will be used to support the program for the next three years. 

What remains uncertain is when that money will be available.  Currently, the Ohio Department of Development announced the end of funding for the Clean Ohio Assistance Fund (COAF) which pays for Phase II environmental assessment on brownfields.  Also, the Department announced the current round of the Clean Ohio Revitalization Fund (CORF) would be its last. Now that the funding source has been announced, the question is when will the State start accepting grant applications again?

Due to the fact the $150 million is being allocated pay for COAF and CORF grants in the pipeline and the last round of CORF, it appears no new funding will be available for Phase II work prior to July 1st.


Who Will Administer Clean Ohio in the Future?

What also remains uncertain is whether the current process for grant selection and administration will remain.  During yesterday's announcement, the Administration indicated that the current process will remain in place through the summer.  However, the Kasich Administration also suggested that legislation could be introduced this Spring to modify the program. 

What the Administration did make clear is that they want to see more direct economic development benefits for use of Clean Ohio funds in the future.  This means it is unlikely grants such as the Redevelopment Ready track of the Clean Ohio program will continue. 

The Redevelopment Ready track provided grants up to $2 million to clean brownfields that were primed for development based on their location but lacked a specific end use (i.e. development project).  Some argued that the Redevelopment Ready Track allowed areas outside Cleveland, Columbus and Cincinnati to better compete for the grant money. 

While this week's announcement seemed to answer the question as to whether funding will remain in place for Clean Ohio in the near future, there remains three major questions:

  1. When will the grant process open up again:
  2. Who will administer the program- the newly created Ohio Development Services Agency or JobsOhio; and
  3. What will the grant application and selection process look like in the future?


 

Kasich Administration Looking to Replace Brownfield Funding

The Clean Ohio Council awarded half the available funds for brownfield redevelopment for fiscal year 2012 two weeks ago.  As discussed in prior posts, available funding is running out in the next few months.

The future of State brownfield funding became uncertain when the Kasich Administration shifted funding from the state's liquor profits to JobsOhio.  I was interviewed for an article appearing in Gongwer last week discussing the future of the program.   It is clear from the article that the Administration is trying to replace the liquor profits with different funding to continue brownfield grants beyond fiscal year 2012. 

Ms. Sabatino said the administration has indicated the program will continue, although it has yet to identify an alternative source of funding. "I know they're actively working on it as we speak," she said.

Kasich spokesman Rob Nichols added, "Helping put brownfields back to work to create jobs is valuable and something Ohio will continue to do. As we transition from state-run job growth efforts to efforts run by the private-sector experts at JobsOhio, we're evaluating these programs to make sure we have the right
tools to serve job creators and to make sure taxpayers are getting a good return on their investment."...

The revitalization program provides reimbursements to communities working to clean up brownfield sites, and interest in the program has been high, DOD Community Services Division Chief William Murdock said. "There's more demand than there is supply, and that's a really good sign," he said.

Mr. Koncelik said, however, the few projects that were denied funding in this round could multiply should the future financial source be smaller than the previous one.
"A new revenue source may dramatically cut down the available funding, and won't have as robust a program, not as many projects will happen," he said, adding it could be half a dozen or more projects that are rejected in future rounds.

I am glad to see the future of the program is starting to get coverage in various publications.  It is an important public policy issue that deserves such coverage.

(Gongwer article provided with permission of publisher)

Loans Versus Grants to Spur Brownfield Redevelopment

Current Debate Regarding the Future of the Clean Ohio Program

The Kasich Administration has announced that it is re-evaluating the Clean Ohio program.  The next round of the Clean Ohio Revitalization Program (Round 12) will be the last.  Also, funding under the Clean Ohio Assistance Fund, which pays for sampling on brownfield properties, is likely to run out as soon as February 2012.

It appears the Administration is discussing other funding sources that may allow the program to continue.  (See Clean Ohio Funding End 2012....What Next?)  Last week, an article in Crain's Cleveland discussed the potential end of the program:

Ohio Department of Development spokeswoman Katie Sabatino said the state considers these successful programs, but is evaluating its options for assisting with the redevelopment of brownfield sites. Of the Clean Ohio Fund in particular, she said, “The Ohio Department of Development is working with the (Kasich) administration to chart a path to assist with brownfield issues....."

“It was supposed to end June 2014, but word out of Columbus is it will end sooner,” said one observer who asked not to be identified because he's shepherding brownfield projects still under review. “I'm very concerned about them pulling the rug out from under us.”

 In the article, it states that the Administration may be interested in moving towards loans instead of grants. 

In addition, Mark Kvamme, chief investment officer of JobsOhio, is said to prefer loans over grants, according to a half-dozen economic development professionals who work with the state's programs. He was not available last week for comment.

A similar change is under way at the Third Frontier Commission, which runs loan and grant programs for technology companies. Crain's reported in June that Mr. Kvamme was behind recommendations the commission is adopting to move to loans from grants.

Advocates of the change say loans not only stretch the reach of public funds, but also cause applicants to be more discerning about what they propose when they're on the hook to pay the money back.

Loans versus Grants

The problem with loans is that the require the developer or company considering a brownfield to pay for the entire cost of investigation or clean up.  Total clean up costs can range from $500,000 to $5 million or more.  This is the cost just to clean up the land, not the overall development costs. 

If developers and companies are required to utilize their own funding to pay for all the clean up and investigation costs, most will look to greenfield sites instead of re-utilizing urban properties that have pre-existing contamination.  Heavy industrial properties will simply sit idle unless the value of their location is so great it outweighs the clean up costs.  This is an unlikely scenario for the vast majority of brownfield sites.

Ohio already has a brownfield loan program that almost no one is currently utilizing- Ohio Water Development Authority's Brownfield Loan Program.  Under the OWDA program you can obtain a low interest loan for sampling (up to $500,000) or clean up ($5 million).  Despite the fact more sites are eligible for OWDA's program than Clean Ohio, OWDA has had trouble attracting interest in the program.

Under the grant program, applicants still have "skin in the game."  Under the Clean Ohio program, applicants are required to provide a 25% match.  Paying 1/4 of the clean up costs makes many for brownfield sites attractive to development. 

Future of Clean Ohio

Funding had been available for Clean Ohio to continue until July 2013.  However, as discussed in the Crain's Article funding has been shifted to other priorities. 

Word is the Kasich Administration is looking for a funding source to continue a brownfield redevelopment program.  The Administration may also be overhauling the program. Let's hope that what ever emerges provides a real opportunity for our urban core to attract development.

Miceli Dairy Project Highlights the Benefits of the Clean Ohio Program

Last Friday, I attended the Clean Ohio Council meeting with my client Miceli Dairy Products, Inc. (Miceli Dairy).  I had worked with Miceli Dairy over the last couple years on evaluating five parcels of property adjacent to their current facility on which the Dairy would like to expand its operations. 

The Dairy submitted an application to receive approximately $3 million in grant funds to assist with demolition, clean up and installation of infrastructure on the brownfield parcels.  The Dairy's application was competing with fourteen (14) other brownfield redevelopment projects from around the State. 

The fourteen projects were in competition for the available funding.  Each project is scored using various factors such as how much contamination is being cleaned up, number of jobs, etc.  In the end, the Miceli application was the number one project in the State and the Council voted to fund the application.  (Click here for press release from the Clean Ohio Council)

Miceli Dairy's expansion is a great story. Did you know that Miceli is the largest ricotta cheese manufacturer in the U.S.?  The Company has a wonderful Cleveland history that is best described in the Plain Dealer story profiling the Dairy's expansion plans. 

However, without the Clean Ohio program the expansion may never happened in the City of Cleveland.

Why the Project Wouldn't Have Worked without Clean Ohio

During the Clean Ohio Council meeting several comments were made the the Miceli project was one of the most complicated to every go through the program.  Here were some of the issues that complicated use of the brownfield parcels for expansion:

  • Two businesses operated on the parcels- a drum reclamation facility and plating operation;
  • Both businesses were the subject of environmental enforcement actions by the Ohio Attorney General's Office;
  • No environmental sampling has been performed prior to the project so it was impossible to know the levels of contamination present;
  • Liens were on the properties that exceeded $1 million dollars;
  • Hazardous waste units and drums were located on the parcels that needed to be cleaned and that work is ineligible for Clean Ohio funding;
  • Buildings in poor condition were located on site that made it difficult to obtain samples; and
  • Large debris piles were across the site.

All of these issues had to be addressed for the project to move forward.  It is clear that without funding through Clean Ohio the costs of sampling and clean up alone would have prevented expansion onto these parcels.  Without funding it was quite possible Miceli may have been forced to look outside Cleveland to expand its operations.

(Map:  From Cleveland Plain Dealer Article cited above)

New Ohio EPA Guidance Spotlights Challenges in Brownfield Redevelopment

In Ohio, the clean up program of choice for brownfields and industrial sites currently used is the Voluntary Action Program (VAP).  The program is designed to give a tremendous amount of flexibility to property owners and companies in terms of the nature and extent of clean up performed on their property. 

Instead of the traditional "dig and haul" method of cleaning up soil contamination or "pump and treat" contaminated groundwater, the VAP allows the use of both engineering controls and use restrictions.  Both can dramatically lower clean up costs. 

Engineering controls are barriers that prevent exposure to humans or the environment such as parking lots or buildings.  Use restrictions are deed restrictions (i.e. Environmental Covenants) that may prevent development in areas of high soil contamination, prohibit use of groundwater or restrict development to industrial/commercial use.

As long as the owner demonstrates the property meets VAP standards, Ohio EPA will issue a legal release ("covenant not to sue") which states no further clean up is needed. This legal release benefits both the current owner and is transferable to future owners of the property.

Clean Up for Anticipated Future Development

In planning a clean up, it is critical to understand up-front program requirements to obtain you legal release.  Under the VAP, a critical requirement is that the owner must implement some form of remedy for all exposure pathways which exceed VAP standards.  An "exposure pathway" can be any way a human may be exposed to unacceptable levels of contamination. 

Example of Exposure Pathway (Vapor Intrusion)- The most problematic exposure pathway is often vapor intrusion into buildings.  Vapors from soil or groundwater contamination can pass through building floors and expose the inhabitants to, what is deemed, unacceptable human health risks. 

Under the VAP rules, current and "reasonably anticipated" exposure pathways must be addressed through a remedy.  The remedy can be clean up of soil contamination, groundwater treatment, engineering controls or use restrictions. 

While the VAP program has been in existence for nearly 17 years, Ohio EPA continues to struggle with how to address anticipated development under the program.  The VAP requires the future use of the property must continue to be in compliance with VAP standards. 

How do you make that demonstration with regards to future development?

VAP calls future development "reasonably anticipated pathways."  Such a pathway would exist if a developer knows a building will be constructed on the site in the future in an area of the property that has contamination. 

The VAP rules requires that property owners to demonstrate inhabitants of that future building would not be exposed to unacceptable levels of contaminants.  If the area of construction will result in potential exposure above VAP standards, the owner must implement some type of remedy to address that exposure.

Ohio EPA released this week a VAP guidance document designed to assist in evaluating potential exposure pathways- "Reasonably Anticipated Complete Exposure Pathways"

Included in the guidance document is the following statement:

Because development plans are not always known in detail, the identification of a reasonably anticipated exposure pathway for potential development is not always easily done.

That is a gross understatement...even following the EPA guidance.  The VAP rules force the developer or property owner to make judgment regarding the potential size, location and configuration of future buildings.  These crucial development decisions can have dramatic implications for the amount of clean up needed at the site.

What Happens if Development Plans are Uncertain?

Site conditions at brownfields and other industrial properties can vary dramatically.  At some sites the issues of contamination remaining on-site in conjunction with future development can be  balanced.  At other sites, developers can be forced to make decisions regarding the extent of clean up prematurely.

In its second guidance document EPA tries to provide an administrative remedy to balancing the need for completing the VAP and avoiding expensive clean up before development plans are certain.  Ohio EPA suggests carefully crafted environmental covenants can be utilized to satisfy VAP rules, obtain your legal release and provide flexibility for future development.

The guidance is titled "Conducting Remedies in the VAP for Complete and Reasonably Anticipated to be Complete Pathways."

Conclusion

Both guidance documents are highly complex.  While the documents provide some level of flexibility to balance development with clean up, it is clearly a complex balancing act that developers must evaluate early in the process.

 

Underground Tanks and Hazardous Waste Units Can Be Big Impediments to Ohio Brownfield Redevelopment

In working on brownfield redevelopment projects, I find that addressing old underground storage tanks (USTs) or hazardous waste (RCRA) units can be one of the trickiest issues to address.

Why are these two issues tricky? Because they complicate the clean up process under Ohio's Voluntary Action Program (VAP)

Due to the flexibility under the VAP and the fact it provides for more cost effective clean up options than other regulatory  programs, the VAP program is a common way to address environmental liabilities at brownfield sites.  In addition, Ohio's premier brownfield grant program- Clean Ohio- requires the grantee to complete a VAP clean up as part of the grant agreement. 

How do USTs and RCRA issues complicate the VAP and Clean Ohio process?

  • Areas where USTs or RCRA units are located are ineligible for a VAP clean up until they are certified closed by the proper regulator
  • Clean Ohio grant programs will not pay for clean up of USTs regulated by the State Fire Marshal Bureau of Underground Storage Tank Regulation (BUSTR)
  • Clean Ohio grant programs significantly restrict the ability to uses funds to pay for hazardous waste unit (RCRA) closures

Understanding a Projects UST and RCRA Risks

Due to these limitations, property developers and companies need to front load in their analysis of a site's redevelopment potential the property's BUSTR and RCRA issues.  It is essential that a full blown examination of any outstanding UST and RCRA closure be performed as part of the Phase I/Phase II environmental assessment process. 

Key questions relatives to USTs include:

  1. Are there BUSTR regulated USTs remaining on site?
  2. Were BUSTR regulated USTs that were removed from the site properly closed in accordance with applicable regulations (i.e. did BUSTR issue a "No Further Action" letter)?
  3. If "No Further Action" (NFAs) letters do not exist for tanks removed, what does BUSTR consider is needed to properly issue such a certification?
  4. What will the costs be associated with receiving a NFA for each tank?
  5. How will the process to obtain an NFA impact the timing of your redevelopment project?

Key question for RCRA units on-site can include:

  1. What is the closure status of the RCRA unit?
  2. What is the size of the unit?
  3. What type of sampling is needed to determine the clean up requirements for the unit?
  4. What will Ohio EPA require in terms of clean up for that unit?

USTs and RCRA issue do not impose a total barrier to development.  However, it is absolutely essential that in industrial property transactions and brownfield redevelopment projects that you gain a thorough understanding of the outstanding RCRA and UST obligations.

(Photo: Missouri Department of Natural Resources)

New Funds Available in Clean Ohio Brownfield Grant Fund

As of July 1st, the Clean Ohio Assistance Fund (COAF) has been injected with new funding.  Below is the update recently sent out by the Ohio Department of Development.

I have heard that the 25% set aside for clean up projects has already been accounted for fifteen days into July.  Obviously, there must have been projects in the que that took up that funding immediately.

Remember, a key difference from the way the COAF has operated over nearly the last decade is that COAF will require 10% match on all clean up projects. 

Also, check out the revised Priority Investment Map to see if your project would qualify for COAF.

Clean Ohio Assistance Fund Update

Additional $10M for the COAF program is now available (effective July 1, 2011). The majority of funding, 75%, will be utilized for projects requesting $300,000 or less. This includes both assessment and cleanup projects. The remaining 25% of funding will be set aside for cleanup projects requesting more than $300,000. Additionally, all cleanup applications are required to provide 10% matching funds. Application documents have been revised and are available online. Be sure to download the new version – COAF Application.

The Priority Investment Area map has been updated for the July 2011 – December 2011 term. To be eligible for the COAF program, projects must be located within an area designated on the Priority Investment Area map.

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. 

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 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.