Ohio Environmental Law Blog : Ohio Environmental Lawyer & Attorney : Joseph Koncelik : Frantz Ward Law Firm : Environmental Regulation, Land Use, Compliance : Cleveland, Ohio

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.

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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? 

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.

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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.

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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?

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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)

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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.

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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)

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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.

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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)

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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.

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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. 

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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.

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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. 

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