Understanding (and Profiting From) “Brownfield” Business Development Opportunities

Trends in recent environmental regulation, public perception of contamination, and local government interest in redevelopment provide favorable market conditions for redevelopment of contaminated property.

There are more than 20,000 properties in Florida that have reported contamination to the Florida Department of Environmental Protection (FDEP). An additional, larger group of properties is potentially contaminated. There is no shortage of supply (high risk sites) for the environmental business opportunities discussed in this report.

The initial regulatory response to pollution problems was strict, and it created a public fear of contaminated properties. The economy was negatively impacted due to abandoned sites and reduced transaction activity. Reason and common sense have caused a change in many of the rules to promote a balance between environmental protection and economic growth.

State-funded cleanup programs minimize liability at eligible sites. Brownfield Redevelopment legislation provides other economic incentives for redevelopment. In summary, impediments to development of contaminated property have been reduced significantly, but the public perception remains.

These conditions enable investors to purchase environmentally-impaired sites at reduced rates. If eligible for funding, remediation may not be necessary based on the rules of the cleanup program. Resale or redevelopment can take place, and additional governmental incentives may be available. Environmental and investment groups are forming nationwide to purchase such properties. There is no shortage of demand for the properties described in this report.

Cleanup Programs

Environmental laws were created in Florida in the mid 1980s after environmental problems compromised the health and safety of the public.

Public perception of contaminated properties is fearful with good reason. Lenders, realtors, attorneys, and other parties to commercial and industrial real estate transactions have learned hard lessons. The government has observed the negative impact on the economy. These and other conditions have influenced a more lenient regulatory position in the state of Florida. New and revised rules have evolved since the mid 1990s to create a current market opportunity, which is the subject of this report.

The Florida Legislature has enacted several new rules and programs designed to achieve a better balance between environmental protection and economic progress. There are two state cleanup programs:

• Petroleum Restoration Program
• Dry-Cleaning Solvent Contamination Cleanup Program

These programs are funded by industry taxes. Based on the rules of the programs, eligible sites receive funding for remediation costs. Each site is scored based on perceived health risks. The sites are priority ranked based on the score. FDEP` requires assessment and remediation services at certain priority sites only (determined annually by the allocated budget).

There are generally two types of liability associated with contamination.

• Government imposed cleanup
• Third-party liability

Third-party risks include exposure concerns and adjacent landowner disputes. The contaminants are typically subsurface, which limits exposure. Adjacent landowner disputes occur when contamination crosses property boundaries. This issue represents a significant impediment to contaminated property acquisition. Adjacent landowners generally have a case in contamination encroachment situations.

These are the primary issues that need to be researched via a risk assessment during pre-acquisition due diligence investigations. If these risks can be managed or minimized, purchasing contaminated property can be a relatively safe proposition.

Brownfield Legislation

The Brownfields Redevelopment Act was passed in 1997 with subsequent amendments. The purpose of the legislation is to promote redevelopment of Brownfield sites through economic and regulatory incentives.

EPA Region 5 defines Brownfields as “abandoned, idled and under-used industrial and commercial sites where expansion or redevelopment is complicated by real or perceived environmental contamination that can add costs, time or uncertainty to a redevelopment project.”

The following outlines some of the key sections of the rule as it was originally framed:

376.78, F.S. Legislative Intent

• Economic Development
• Environmental Protection
• Community Revitalization
• Incentives for Voluntary Cleanup
• Environmental Justice
• Federal, State, and Local Government Cooperation with Owners and Investors

376.79 (4), F.S. Definition of Brownfield Area

• (4) “Brownfield area” means a contiguous area of one or more brownfield sites, some of which may not be contaminated, and which has been designated by a local government by resolution

Stimulation of Economy

• According to a survey by the U.S. Conference of Mayors, 33 cities with Brownfield sites estimate their cumulative annual loss of tax revenues at $386 million
• Increased utilization of existing infrastructure (i.e., water and sewer lines)
• Prevent premature development of farmland and other “Greenfields”

376.80, F.S. Brownfield Administration

• Local government designates a Brownfield area by resolution
• Public hearing(s) required for public input
• Negotiation of Brownfield Site Rehabilitation Agreement (BSRA) with the FDEP
• Establish an Advisory Committee for the purpose of improving public participation

Brownfield Site Rehabilitation Agreement (BSRA)

• Terms for the redevelopment of the brownfield
• Schedule for contractors and FDEP
• Commitment to conduct site rehabilitation activities under licensed • Professional Engineers or Geologists, and in accordance with an approved Comprehensive Quality Assurance Plan

376.82, F.S. Eligibility Criteria

• (1) Any person who has not caused or contributed to the contamination of a Brownfield site after July 1, 1997 is eligible
• – Federal enforcement sites are not eligible unless exemptions are secured from EPA
• – State enforcement sites are eligible if goals of the Brownfield Redevelopment Act can be achieved
• – Petroleum and dry cleaning contamination sites shall not receive both restoration funding assistance from the respective FDEP cleanup programs under Chapter 376, F.S. and any state assistance available under Section 288.107, F.S.

376.82, F.S. Liability Protection

• (2)(a) Any person who executes and implements to successful completion a BSRA shall be relieved of further liability for remediation of the contaminated site
• (2)(b) This section shall not be construed as a limitation on the right of a third party to pursue an action for damages

376.82, F.S. Reopeners

(3) Upon successful completion of site rehabilitation, no further action will be required unless:

• fraud was committed
• discovery of previously unknown contamination
• new release of contamination
• change in land use (e., to residential)

376.82(4), F.S. Liability Protection for Lenders

(a) The Legislature declares that in order to achieve the goals of this act, it is imperative to encourage financing of Brownfields

• lenders are entitled to liability protection established in subsection (2)
• lenders are not liable, even in the event of foreclosure, provided they attempt to divest and do not get involved in management

376.84, F.S. Economic Incentives

• Different standards than those in place for new development should be used to the fullest extent to encourage the redevelopment of a Brownfield. State and local governments are encouraged to offer redevelopment incentives as an ongoing public investment in an effort to achieve the goals of this act.

376.84(l), F.S. Financial Incentives

Financial incentives and local incentives for redevelopment may include but not be limited to the 15 incentives provided in s. 376.84(t)(a) through s. 376.84(l)(o)

• (These incentives, generally, consist of tax breaks, exemptions, grants, revenue to secure bonds, and low interest loans.)

376 84(2), F.S. Regulatory Incentives

Regulatory incentives may include but not be limited to the 12 incentives provided in s. 376.84(2)(a) through s. 376.84(2)(1)

• (These incentives, generally, consist of development rule exemptions, reduced review requirements, fee waivers, zoning incentives, and streamlined permitting.)

288.095, F.S., Economic Development Trust Fund

• Contingent upon annual appropriations, up to approximately $ 10 million in tax refunds may be approved
• Brownfield Redevelopment Bonus Refund of $2,500 to any qualified target industry business for each new Florida job created in a Brownfield which is claimed on the qualified target businesses annual refund claim authorized in s. 288.106(6), F.S.

Conclusions

Through the use of government programs, there are several environmental business opportunities available to investors. It takes good timing, wise use of risk management tools, and long-term planning to profit from impacted property transactions.

Lender liability protection under the 1996 Asset Conservation Act, the development of environmental insurance tools, and developments in the remediation industry (reduced cleanup costs) have helped to create opportunities for investors. If you find an impacted site, you can evaluate the risks more precisely using these tools. Impacted property redevelopment can be a unique opportunity, and it can be quite profitable if the environmental risks are appropriately managed.