Major CMBS Lender Requiring EPs to Perform Site Inspections

July 23rd, 2014

We have previously discussed discussed here and in other forums how the All Appropriate Inquiries (AAI) Rule issued by EPA in 2005 is deeply flawed and has directly contributed to a worsening in the quality of phase 1 reports. This is ironic outcome since the reason EPA was instructed in the  2002 amendments to CERCLA  to issue an AAI Rule was to  improve the level of due diligence. This is evidenced by the fact that  Congress added five criteria to the then existing statutory test that property owners needed to  evaluate to satisfy the  CERCLA liability protections.

As we have explained. the principal  weaknesses of the AAI rule was the watered-down definition of Environmental Professional (EP) and not requiring EPs to actually perform any of the AAI tasks. Instead, the AAI rule allows the work to be done by persons who do not even have to have a high school education so long as they under the “supervision” of an EP (who also does not have to have a high school education). Often times, the so-called EP supervision consists solely of the EP stamping its signature on a template  form that has been completed by a field inspector.        

When EPA published a proposed rule to add a reference to the new ASTM E1527-13 to the AAI Rule, several lawyers and environmental consultants urged EPA to use the rulemaking as an opportunity to  revisit the EP definition or at least require EPs perform some of the more important AAI task. However,  the agency declined these requests on the grounds that they were outside the scope of the proposed rulemaking.

Recently, one of the leading  CMBS lenders revised its scope of work to require that EPs must actually perform the site inspections for reports prepared for that bank ( Note that I do not represent that lender but have seen its revised scope of work). The SOW requires that all reports must be performed by EPs (as opposed to under supervision or direction of an EP). In addition, the inspector must have at least five years of experience with that particular property type.

It will be interesting to see if other lenders follow the lead of this major CMBS lender and revise their scopes of work as well. It will also be interesting to see what impact this change will have on the business model of firms that heavily rely on independent contractors (1099s) or part-time employees to perform their phase 1 reports and who do not qualify as EPs.  

OER Grants Available for Petroleum Assessments But Need to Move Quickly

July 18th, 2014

The NYC Office of Environmental Remediation just announced that it has a little over $100K to award for petroleum assessments this summer. The source  of the grant money is the brownfield revolving loan fund that was awarded by EPA to OER under section 104(k) of CERCLA. The federally-funded grant may be used for phase 1 or phase 2 investigations. There is no requirement that  the applicant enroll in the OER voluntary cleanup program (VCP) to receive  the federally funded assessment.

OER hopes the money will be used to fund assessments at former gas station sites or other sites impacted by petroleum USTs that will be redeveloped for affordable housing. However, the funding is no  specifically limited  to affordable housing projects.

Because the petroleum assessments will be  federally-funded, there are fairly stringent  eligibility requirements. First, the current owner of the property and immediate prior owner of parcel cannot have caused or be responsible for the petroleum contamination. However, if the immediate prior owner was responsible for the spill, the applicant could be still apply for the grant if the applicant can show that the immediate prior owner is insolvent at the time of the application. In addition, the property could not have been previously owned by the City.

Second, the applicant will also have to have performed an all appropriate inquiry at the eligible site.

Third, the  work (phase I or Phase II) must be performed by one of OER’s retainer contractors and not by a site owner’s or a developer’s environmental consultant.  

Finally, the work itself must be completed by Sept 30. What this means, given the time required for EPA approval of a Phase II workplan and QAAP, the work needs to be done very fast to have field work and lab analysis completed by Sept 30.


Environmental Restrictions Now Fully Enforceable by NYC DOB

July 3rd, 2014

In June, the NYC Department of Buildings (DOB) completed uploading into its Buildings Information System (BIS) approximately 200 Restrictive Declarations (RD) that can impose certain environmental obligations relating to hazardous materials. This action means that parties seeking building permits and certificates of occupancy for sites subject to RDs will have to demonstrate they have satisfied the conditions set forth in the RD using the same procedures of the (E) Designation Program.

As many readers may be aware, an (E) Designation may be assigned to property lots as part of a zoning action under the City Environmental Quality Review (CEQR) Act. If the CEQR review process indicates that development on a property may be adversely affected by noise, air emissions, or hazardous materials, then the Lead Agency may assign an (E) Designation on the property lot to ensure that the (E) Designation requirements are satisfied prior to or during a new development or new use of the property. An (E) Designation may be assigned for a variety of reasons including that the property:

  • Was used as or is in close proximity to a gas station or some other underground fuel oil tank;
  • Is located in or contiguous to a manufacturing district;
  • Has a history of manufacturing uses;
  • Is located next to a building with a history of manufacturing uses;
  • Is located on a heavily trafficked street or highway;
  • Is located next to a railroad; or
  • Has some other environmental condition on the property or nearby that is a cause for concern

DOB began including populating the (E) Designations in its BIS in 2002. If a BIS indicates that a property lot has an (E) Designation, the DOB examiner cannot issue a building permit for new development, changes of use, enlargements or certain other alternations to existing structures until DOB receives either a Notice to Proceed (NTP) or Notice of No Objection (NNO) from the NYC Office of Environmental Remediation (OER). To obtain an NTP from OER, the applicant has to submit an acceptable investigation and remedial plan to OER. OER may issue NNOs for actions that do not raise potential exposure to hazardous materials, or air quality or noise impacts. Indeed, approximately 50% of the (E) Designation projects OER reviews result in NNOs.

When the applicant wants to obtain a Certificate of Occupancy from DOB, it must obtain a Notice of Satisfaction (NOS) from OER demonstrating that the applicant has complied with OER requirements.  If an applicant wants to remove the E-designation from the property, it would have to implement a track 1 (unrestricted) cleanup. Parties can also comply or remove the (E) Designation by enrolling the site in the state Brownfield Cleanup Program (BCP) as well as the NYC voluntary cleanup program (f/k/a Local Brownfield Program). It is important to note that when lots with an (E) Designation are merged or subdivided, the (E) Designation will apply to all portions of the merged lot or to each subdivided lot. For more information on the (E) Designation program, click here.

An RD is a form of institutional control that is recorded against a property that is designed to ensure that environmental mitigation or requirements that were imposed as a condition of a land use approval are implemented.  The RD which runs with the land so that it binds current and future owners to comply with certain investigate and remedial requirements that may be required be OER.

Historically, RDs were used when private applicants who owned or controlled a property sought a rezoning or other action under section 11-15 of the Zoning Resolution of the City of New York. This proved to be a cumbersome process because all parties with a property interest in property including lenders had to execute an RD. Moreover, the NYC Department of Environmental Protection (DEP) and a city agency approving the discretionary action had to expend resources reviewing the RD. In 2012, the City Council adopted an amendments to the Zoning Resolution authorized lead agencies to assign E-Designations for any actions including those sought by private applicants such as rezoning, special permits or variances. Because of the zoning resolution amendments, RDs will no longer be used to impose environmental conditions on properties. However, owners and developers will have to comply with existing RDs.

DOB has implemented a number of changes to the BIS to reflect RDs. For example, BIS Property Profile label “Little ‘e’ Restricted” will now appear as “Environmental Restrictions.” The field will display the associated Hazmat, Air and/or Noise restriction. On the BIS Web Application Details page, the checkbox in section 9 has been changed from Little “e” Hazmat Site to Environmental Restrictions (Little “e” or RD). The eFiling, Data Entry and Research Unit (DEAR) and Post-Approval Amendments (PAA) screens which formerly asked “Is the site or building a “Little ‘e’ ” Hazmat site?” now inquire “Are there Environmental Restrictions (Little ‘e’ or RD) on this site or building?”. Likewise, on the auto-generated Plan / Work Application (PW1), the “Little ‘e’ Hazmat site” label will be changed to “Little ‘e’” or RD Site.

It should be noted that paper PW1 application will still refer to the little “e” Hazmat site. Changes to the paper PW1 will be implemented along with other PW1 changes later this year, coordinated with implementation of the 2014 Building Code.

The full list of adopted (E) Designations and RDs are searchable by Tax Block and Lot Number.(E) Designation sites are designated with an “E and are listed in Appendix C to the zoning resolution available hereRestrictive Declarations are designated with a “D” on the NYC zoning maps. A list of sites with restrictive declarations is available here:

NY Legislature Passes Brownfield Extender Bill But Will It Matter?

June 23rd, 2014

[Update: At a bill signing ceremony in Buffalo on June 24th, Governor Cuomo was quoted as saying he would sign the BCP extension]

On June 20th, the NY State Senate approved legislation that would extend the expiration of the Brownfield Cleanup Program (BCP) to March 31, 2017. The same bill had been passed by the Assembly earlier in the week. However, it is unclear if Governor Andrew Cuomo will sign the legislation.

As we have previously discussed, the BCP was slated to sunset on December 31, 2015. Governor Cuomo  proposed sweeping reforms to the BCP in his January budget in response to a perception that the program was too expensive  and  not sufficiently targeted. The key elements of the Governor’s proposal had been to limit the lucrative qualified tangible property (QTP) tax credits to certain categories of sites (informally known as “gates”) and to redefine what constituted site preparation costs (SPC) for purposes of calculating the QTP “soft” cap (i.e., 3x the SPCs).

The legislature and the Governor could not reach agreement on the  QTP gates since the proposal essentially pitted upstate against downstate and would have had a detrimental impact on  affordable housing and Brownfield Opportunity Areas (BOAs). Thus, the Governor eventually removed BCP reform from the budget  that was approved at the end of March. BCP reform appeared stalled until early June when the approaching end of the legislative session spurred last minute negotiations. It appeared that the parties were moving towards a compromise until the Governor agreed– in exchange for the endorsement of the Working Families Party– to campaign against a handful of Senate democrats who had formed a alliance with senate Republicans that allowed the Senate to remain in control of Republicans. This poisoned the well for further negotiations between the Senate and the Governor. As a result, the Legislature opted to pass a simple BCP extension.

It is unclear if the Governor will sign the extension. The Assembly is the legislative chamber that sends bills to the Executive for final action.  Under the state Constitution, the Governor has a limited time to sign or veto legislation. However, the Assembly tends to send bills to the Governor in batches over the summer (to achieve maximum media coverage) and it is unclear when the BCP legislation will be forwarded to the Governor. The last time a BCP extender was passed by the Legislature, the Governor did not sign it into law until August.

So what are developers to do? The good news is that the proposed July 1st deadline for changes in the BCP tax credits (BTCs) is no longer a concern. Thus, developers who recently submitted applications but had not received a decision can breathe a sigh of relief.

The combination of a potential July 1st effective date and the 12/31/15 expiration had essentially brought the BCP to a halt for new applications. This was because even if developers were willing to live with the proposed BTC reforms, only the simplest and smaller projects could be assured of completing cleanups and receiving a Certificate of Completion (COC) by the end of 2015.  Indeed, even applicants who had been recently accepted into the BCP were under the gun to complete their cleanups by the end of 2015. In reality  the cleanup completion is earlier than 12/31/15 because of DEC documentation requirements. Most sites will probably have had to complete physical cleanup (i.e., soil excavation, foundation and installation of any required groundwater treatment system) by September 2015 to obtain DEC approval of all of the required submittals especially given the sheer volume of projects that DEC is going to have to review in 2014 and 2015. Thus, the extension of the BTCs to  March 31, 2017 would take the pressure off many existing applicants.

So what are developers with potential new BCP projects  to do until the Governor acts? The conventional wisdom (CW) would seem to be that they should proceed with their applications. If the Governor signs the extension bill, they will have until 3/31/17 to complete their projects.Moreover, they will be presumably be grandfathered into the existing BTC structure.

The CW would also seem to weigh in favor of proceeding with a BCP application even if the governor vetoes the legislation (under the political calculus that he will have a democratic senate in 2015).  A veto would mean that the 2015 BTC expiration remains in effect so the sooner an applicant gets accepted into the BCP, the faster it can start working towards achieving a 2015 cleanup .

Even if the applicant believes it cannot complete its cleanup by the end of 2015, it still probably makes sense to apply now to the BCP. Assuming the proposes a new BCP reform package in January,  the legislation would presumably grandfather projects that have been accepted into the BCP by at least 12/31/14, possibly 12/31/15 (coincidentally the original BTC expiration) or possibly as late as 7/1/15. Of course, it is possible that the Governor may decide to completely reinvent the wheel and allow the BTCs to expire. While Albany often resembles Game of Thrones, this would seem to be an extreme even for Albany. It is hard to believe that NY State would allow its BCP to lapse and become one of only two states without a brownfield program.

Kiddie Kollege Ruling Highlights Importance of Performing PAs in NJ Transactions

June 18th, 2014

Nearly eight years after a New Jersey day care was forced to close down because of mercury contamination, the legal fallout continues.  In the latest legal salvo involving the infamous Kiddie Kollege Daycare & Preschool, Inc, (Kiddie Kollege), a New Jersey trial court ordered the current property owner who leased the contaminated building to the daycare center to reimburse the New Jersey Department of Environmental Protection (NJDEP) $2.05MM. Perhaps more significant, the court also awarded treble damages of $6.1MM against the former owner of the thermometer manufacturer.

Following is a summary of the key facts and legal proceedings involving the Kiddie Kollege case. Readers who want a more detailed discussion of the tortured history of this site can click Here.

The property had been owned by Accutherm, Inc. (Accutherm) from 1984 to 1992 and used to manufacturer mercury thermometers. When Accutherm ceased operating, it failed to comply with the Site Industrial Recovery Act (ISRA) which requires certain industrial establishments that are transferred or closed to undergo environmental investigation and remediation if required. After Accutherm ceased paying its property taxes, Franklin Township sold two tax certificates to the bank then held a mortgage on the property. Eventually, the current property owner, a real estate broker, purchased a third tax certificate from the township and acquired the prior two tax lien certificates that had been sold to the bank. The current owner then acquired title by foreclosure judgment, renovated the building and leased it to Kiddie Kollege. The daycare was shut down in July 2006 after it was learned that the building that the building that housed the daycare had previously to manufacturer mercury thermometers and had mercury vapor levels at least 27 times the regulatory limit. Approximately one-third of the children and staff members were found to have elevated levels of mercury.  

The controversy spawned the filing of class action lawsuits on behalf of children who attended Kiddie Kollege as well as employees of the daycare center, an insurance declaratory judgment action and several individual personal injury actions. In Baughman v. United States Liab. Ins. Co., 662 F. Supp. 2d 386 (D.N.J., 2009), a federal district court granted summary judgment in favor of the second set of operators of the day care center that their insurer was obligated to defend and indemnity them under the comprehensive general liability (“CGL”) policy. The insurer had argued that claims for medical monitoring were not legal damages as defined under the policy and that the pollution exclusion barred coverage. The court said that since the underlying suits all allege harm due to exposure to mercury contamination inside the Kiddie Kollege building and, the contamination did fall within the scope of “pollution”. The court went on to say the fact that some toxins might have spread beyond Kiddie Kollege did not change that fact that the underlying suits sought damages for bodily injury arising from their exposure to mercury inside Kiddie Kollege.  The court subsequently awarded attorney fees as well. Baughman v. United States Liab. Ins. Co., 723 F. Supp. 2d 741 (D.N.J. 2010)

In 2010, the property owner and daycare operators settled a class action lawsuit brought by parents for $1MM. Following a bench trial, a judge ordered that a $1.5MM trust fund be established to pay for long-term medical monitoring with the property owner and Franklin Township each required to contribute $525K, Gloucester County pay $300K and the State of New Jersey $150K. Just before the judge announced his verdict, the County had agreed to settle the lawsuit $950K. Another judge subsequently awarded $1.6MM in attorneys’ fees to plaintiffs’ lawyers. Meanwhile, the building was demolished in 2010 with the debris hauled away to an Indiana hazardous waste site.

2014 Trial Opinion

In New Jersey Department of Environmental Protection v Navillus Group, et al, No. L-1260-12 ((Super. Ct-Law. Div. – Gloucester County May 14, 2014), the court finally got around to addressing the Spill Act liability of the defendants. The court made important rulings on the Spill Act innocent purchaser defense and divisibility of liability under the Spill Act.

Like many other states, New Jersey has enacted its own an innocent purchaser defense that requires a property owner demonstrate that it did not know and had no reason to know of discharges of hazardous  substance by performing an “all appropriate inquiry”.  However, contrary to most states, New Jersey has not adopted the federal All Appropriate Inquiries rule but instead has its own unique definition for satisfying “all appropriate inquiry.” Under N.J.S.A.  58: I 0-23.11g(d)(2), an “all  appropriate  inquiry” is defined as  “the performance of a preliminary assessment, and site investigations, if the preliminary assessment indicated that a site investigation is necessary.” 

A Preliminary Assessment, in turn, is defined at N.S.S.A. § 58:10B-1 as “the first phase in the process of identifying areas of concern and determining whether contaminants are or were present at a site or have migrated or are migrating from a site, and shall include the initial search for and evaluation of, existing site specific operational and environmental information, both current and historic, to determine if further investigation concerning the documented, alleged, suspected or latent discharge of any contaminant is required. The evaluation of historic information shall be conducted from 1932 to the present, except that the department may require the search for and evaluation of additional information relating to ownership and use of the site prior to 1932 if such information is available through diligent inquiry of the public records

In the Navillus decision, the trial court found that the Sullivan defendants could have learned of the discharge of mercury contamination by researching the historical records or if they followed their attorney’s advice and engaged an environmental professional to perform a preliminary assessment before proceeding to foreclose the tax sale certificates.  Instead, the court said the Sullivan relied on the 1996 EPA report. Though the Sullivan defendants misunderstood the report, the court said the EPA report could have been properly interpreted by an environmental lawyer and put into better context by an environmental consultant. Since the EPA report confirmed the presence of mercury at the site, the Sullivan defendants should have known about the mercury contamination and thus did not qualify for the innocent purchaser defense.

The court also found there was a basis to pierce the corporate veil of Jim Sullivan Inc because the Sullivan defendants disregarded corporate formalities and commingled corporate assets. Moreover, the individual sibling Sullivan defendants were liable as general partners of Navillus.

The court also found that the president of Accutherm was personally liable under the state Water Pollution Control Act pursuant to the responsible corporate officer doctrine. In addition, the court found that as the sole shareholder, CEO and corporate officer had sufficient control over the Accutherm operations to be personally liable as a “person in any responsible” under the Spill Act.  

We cannot conclude a discussion on the Spill Act innocent purchaser defense without reminding lenders, their borrowers, real estate lawyers and out-of-state environmental lawyers that the Spill Act innocent purchaser’s defense requires performing a pre-acquisition Preliminary Assessment and possibly a Site Investigation. The NJDEP PA technical guidance specifically states that the ASTM Phase I “is NOT an acceptable replacement for a preliminary assessment in New Jersey” Unfortunately, many lenders and borrowers are unaware that there are many differences between a PA and an ASTM E1527 phase 1 ASTM. Thus, purchasers of New Jersey properties who are concerned about potential Spill Act liability should not simply rely on a lender’s ASTM Phase 1 but either supplement the phase 1 with a PA or ordered a combined PA/ASTM Phase 1.

The purpose of the PA is to identify all current and historical potential areas of concern.  The NJDEP Preliminary Assessment Technical Guidance contains a Data Gathering Checklist that is intended to serve as a tool to ensure that all the required data gathering/diligent inquiry had been completed. Unlike AAI, for example, a PA specifically  REQUIRES review of tax records, deeds,  historical chain of title. and business directories  (such as McRae’s Industrial Directory, New Jersey Industrial Directory). The consultant is also required to assess protectiveness of prior remedial actions in contrast to the ASTM CREC which does not require EP to determine if controls are actually enforceable and if human exposure is under control. Other differences include that a PA does not have a “Reasonably Ascertainable” limitation that  allows a consultant to abandon a search for information based solely on time constraints. Instead,  the NJDEP PA technical guidance specifically states that “All efforts to contact a source of information or obtain documents/records should be fully pursued before the inspector completes the data gathering portion of the preliminary assessment.”   

Click here for a more detailed list of the significant differences between a PA and AAI/ASTM phase 1 report. We welcome input on this chart from LSRPs and others familiar with PA process. 

Glimmer of Hope Emerges for BCP Reform

June 9th, 2014

Since Governor Andrew Cuomo and the Legislature reached an agreement on the 2014 budget, there has been frustrating little progress on extending the Brownfield Cleanup Program (BCP). In the absence of any forward movement, developers have been rushing to submit applications to the BCP so they could obtain a certificate of completion (COC)   before the BCP tax credits (BTCs) expire at the end of 2015 or to become grandfathered ahead of any changes to the BTCs.

Now, though, with less than two weeks before the New York State Legislature adjourns, there is growing optimism that a deal may be within reach to extend the BCP.  The pace of negotiations  among representatives of the Legislative, Executive  and key stakeholder groups appeared to heat up after the NPCR brownfield summit last week brought many of key participants together in one room. While it appears that the parties have been narrowing their differences, some significant hurdles remain.

By way of review, the impetus for BCP reform was the looming expiration of the BCP tax credits but the Executive Branch was also concerned about the costs of the BCP.  As a result, the Governor’s bill would have limited that the Tangible Property Tax Credit (TPC) to certain categories of brownfield projects and proposed to restrict the kinds of costs that would be eligible for the Site Preparation Tax Credit (SPC) so that so-called “soft costs” could not be included. It was unclear from the Governor’s bill if the definitional changes to the costs eligible for the SPC would apply only to BCP applications accepted after the proposed July 1st effective date or would extend to costs incurred by existing applicants after the effective date. Another significant feature of the Governor’s bill was automatic termination for BCP projects that did not receive Certificates of Completion (COCs) by 12/31/15 if they were accepted into the BCP prior to 6/23/08, or by 12/31/17 for sites accepted after that date but before 7/1/14.

The Senate proposed its own reform legislation that would have retained the current “as of right” tax credit structure. To accommodate the Governor’s concerns about the costs, the Senate proposed to refine the definition of brownfield site to incorporate more precise concepts of under-utilization, functionally obsolescence, affordable housing or qualify as a priority economic development site. The Senate also declined to narrow the scope of the costs eligible for the SPC, contained a broader exemption for applications for Class 2 submitted volunteers and omitted the automatic termination dates.

The Assembly’s bill largely mirrored the approach proposed by the Governor that BCP sites would have to satisfy a second test to  qualify for the TPC but largely adopted the test advanced by the Senate. The changes would have taken effect on January 1, 2016. The Assembly did not attempt to change the SPC definition, did not include any automatic termination dates, did not exempt applications for Class 2 sites submitted by volunteers and did not provide for an exemption from the hazardous waste fee for projects enrolled in the NYC VCP or under a federal cleanup order.

Click here  for a prior post summarizing the key changes proposed by the Governor’s original bill.

Recognizing the political handwriting on the wall, representatives of the real estate appear to be resigned that a separate test for qualifying for the TPC. The negotiations will center on the nature of the qualifying test.

There has also been progress on some of the ambiguities in the SPC definition. It appears any changes to the SPC definition will only apply to new applications accepted after July 1st. The parties are still negotiating the details of the SPC definition but it appears that the Executive branch has backed away from the more extreme changes that could have conflicted with federal tax law.

It also appears that the negotiators may be moving away from the automatic termination provisions of 12/31/15 for sites accepted into the BCP prior to the 2008 amendments or 12/31/17 for sites accepted into the BCP prior to July 1, 2014. The problem with the automatic termination was that it would have exposed applicants to potential liability since they have owned or controlled the site for an extended period of time. Instead, it is likely that a final bill will have a single date for all sites accepted prior to July 1, 2014. Applicants who fail to obtain a COC by that dated would simply forfeit their right to receive the TPC but could remain in the COC and obtain the liability release upon completion of the cleanup.

The key to any BCP bill may be the Assembly’s insistence on re-authorizing the state superfund program bonding for ten years. The Executive does not want to add $1B to the state’s debt. But it is Albany so anything is possible. So keep the light on and stay close to the phone until the Legislature adjourns on June 19th..



Problems Emerge with New CREC Definition

June 4th, 2014

After a little more than six months after ASTM issued its new E1527-13 Phase 1 standard practice, problems are emerging over the new definition Controlled Recognized Environmental Condition (CREC) definition. The difficulties are related to the definition itself and differences among state environmental programs.

Before discussing the CREC problems, a little background might be helpful for readers. Prior to 2000, there were only two types of conditions that had to be evaluated in an ASTM Phase 1 report by an environmental consultant: a Recognized Environmental Condition (REC) or a de minimis condition. The term REC does not appear in CERCLA but was developed by ASTM to help consultants distinguish minor spills from those conditions that would be required to be investigated or remediated. If a consultant identified minor spills or releases that did not pose a risk to human health or the environment, and that would not result in enforcement actions if brought to the attention of regulators could be classified as a de minimis condition.

The 2000 revisions to E1527 added the term Historical Recognized Environmental Conditions (HREC) which was intended to be used for sites where contamination was remediated to applicable standards. Instead of labeling the former contamination as a REC, consultants could now identify the former spill as an HREC, confirming that it has been remediated and no longer poses a risk to human health of the environment. The HREC concept was a useful tool since it prevents property from continuing to be stigmatized by the existence of a former release in state or federal databases.

Unfortunately, consultants did not consistently apply the HREC term so that similar situations were classified as HRECs, RECs or de minimis conditions. Some made HREC determinations without verifying the cleanup standard used in the past was still valid and that the remedy (i.e., engineering or institutional controls) was still protective and functioning as designed.  Other consultants identified the continuing presence of residual contamination a REC notwithstanding regulatory approval. This was a significant concern since most cleanups now employ risk-based approaches where some remnant of contamination is allowed to remain so long as institutional or engineering controls are used to prevent unreasonable exposure to the residual contamination.

To promote more consistency in how these remediated RECs were described and presented in phase 1 reports, the ASTM E1527 task group revised the HREC definition and added the new CREC designation. The HREC term was intended to apply to cleanups that had achieved unrestricted residential cleanup standard while the CREC term for cleanups where residual contamination remained and the site was subject to institutional or engineering controls (known as Activity and Use Limitations or “AULs” in ASTM parlance).  As a result, there are now four types of conditions that may be identified in an ASTM E1527 phase 1 report: REC, HREC, CREC, and de minimis conditions.

The task group hoped that creating the CREC term would help alert purchasers if there were controls on future use of the property as well as develop plans for complying with the controls that are in place so that they can satisfy their post-acquisition “continuing obligations” and maintain their liability protections. A CREC will not require further action so long as the “controlled” conditions remain in effect.

As originally drafted, the CREC term would have been limited to circumstances where ECs/ICs were actually created or recorded against the property and the environmental professional would be required to verify that the EC/ICs were properly maintained/recorded. However, the environmental consultant representatives on the task force pushed back on these requirements, arguing they should not be put in the position to determine if a particular control was “enforceable.”  As a result, the final CREC definition selected by the task force group did not require consultants to actually verify that the controls are in place or are properly working. The final definition adopted by ASTM provides that a CREC is:

 “ a recognized environmental condition resulting from a past release of  hazardous substances or petroleum products that has been addressed to the satisfaction of the applicable regulatory authority (for example, as evidenced by the issuance of a no further action letter or equivalent, or meeting risk-based criteria established by regulatory authority), with hazardous substances or petroleum products allowed to remain in place subject to the implementation of required controls (for example, property use restrictions, activity and use limitations, institutional controls, or engineering controls).”  

Many of the lawyers on the legal subcommittee were opposed to the CREC definition. Several well-known and respected lawyers submitted negative comments during the balloting process, asserting that the CREC term added a needless level of complexity and was unnecessary because conditions that had been addressed to the satisfaction of regulators should be considered a “de minimis condition.”  One particularly prescient negative comment stated that the CREC term was inconsistent with the common understanding of the word “control” or “controlled” and was misleading because it implied that residual contamination was under “control” when it fact consultants were not required confirm that controls were actually in place and effective. The task group was also cautioned that term would be problematic in a number of states because of their approach to cleanups.  Despite these warnings, the ASTM task force found these negative comments “non-persuasive.”  

Because ASTM did not limit CRECs to those conditions where formal AULS have been implemented and did not require the consultant to verify if the “control” has been properly implemented and remains effective, the usefulness of CREC and the extent that an owner, lender or their counsel can rely on the designation will depend on the type of CRECs that exists for the property. At one end of the CREC continuum are those sites where enforceable AULs have been recorded against the property such as a deed restriction and the specific cleanup standards has been memorialized in the NFA letter. In such circumstances, then owner, its lender and counsel will be able to determine if “control” has in fact been implemented, can assess if it remains protective and if it continues to be in compliance with current cleanup standards.

At the other end of the spectrum are cleanups that were done without any oversight by the regulator (commonly known as “self-directed” or “at-risk” cleanups) where the developer or property owner implemented a cleanup on its own to avoid regulatory delays. Because the cleanup would not have been completed “the satisfaction of the applicable Regulatory Authority”, this cleanup would not qualify as a CREC and probably have to be identified as a REC subject to post-remedial confirmatory sampling. An exception would be if the cleanup was supervised by a licensed environmental professional in a state with a licensed environmental professional program such as Massachusetts, Connecticut or New Jersey and the licensed professional opines that the cleanup met “risk-based criteria established by regulatory authority”  

The more challenging CRECs will be those within the murky middle of the continuum where a regulator may have signed off on a cleanup without referencing a formal control. Many state regulators have signed off on risk-based cleanups without referencing any AULs, particularly with petroleum-contaminated sites where many state programs rely on natural degradation of petroleum and only require removal of grossly contaminated soils/source materials. There is still petroleum contamination in the ground but no actual “control” in place.  The contamination has been addressed to the satisfaction of the regulator but often times the records are archived or destroyed so the consultant cannot verify the actual levels that were left in the ground.  In such an instance, the note to the CREC definition advises consultants that they can look to the data and infer an implied a control!

In other words, the consultant can assume that if the site was a gas station or a commercial property with a UST, the cleanup was approved by the state on the condition that the property would continue to be used only for commercial purposes. Indeed, ASTM trainers are emphasizing to consultants that AULs are just one indication of a past of a past or present release but not the only evidence that a property may not be used for unrestricted use.  Consultants are also being instructed that if there are no formal AULs, they should look at the data and ask if the “dirt is eatable and the water drinkable”.  How this assumption is helpful to property owners and their lenders remains unclear.

Then there are the situations where regulatory controls may be implemented but human exposures remain because of the potential for vapor intrusion. Some states allow local governments to adopt groundwater ordinances that prohibit the use of groundwater to facilitate cleanups. The groundwater ordinance serves as a “control” that could qualify as a CREC. However, many states do not take into account potential human exposures from vapor intrusion. In such a situation, while the groundwater “control” is in place but human exposure is not controlled. This is particular so in states with dry cleaner trust funds. Most state programs rank sites for funding based solely on impacts to drinking water. If the groundwater is not used, the site will receive a low priority ranking for cleanup. While the property owner waits years for the dry cleaner fund to get around to funding the cleanup, the groundwater plume could be migrating off-site and posing a risk of vapor intrusion to nearby residences.  

For example, there was recent loan transaction involving a shopping center where a plume from a dry cleaner had migrated off-site and was within proximity to single-family residences.  Because the local government had passed a groundwater ordinance, the state issued an NFA letter. However, the soil gas near the residential community was 20 times the EPA residential screening level. In a different state where vapor intrusion is evaluated as part of a cleanup, closure would not have been granted, the dry cleaner plume would have been identified as a REC and the owner additional investigation would have been required to assess the extent of the REC. However, in this state which allowed for pathway elimination by ordinance, closure was granted and the dry cleaner contamination was identified as a CREC with no further investigation recommended even though there was a strong likelihood that human exposures were not “controlled”. In other words, the same condition in a different state would have a different designation even though in both situations human exposures were not controlled. 

In essence, because of the regulatory program of this state, what might have been a REC in another state was transformed into a Business Environmental Risk in the form of a potential toxic tort claim. Fortunately, counsel for both the lender and property owner recognized the potential liability and a pollution legal liability policy was obtained to protect against potential third party claims for bodily injury or property damage. 

Since the  ASTM Task Group declined to follow the prescient warnings of several seasoned environmental transactional attorneys and approved a flawed CREC definition, what are property owners, lenders or counsel to do? E1527-13 does require that CRECs be listed in the findings and conclusions section of a phase 1 report, and consultants are also required to explain their reasoning related to the impact of the CREC on the property. So users of phase 1 reports, particularly purchasers who will need to take comply with their continuing obligations to maintain liability protections (i.e., take reasonable steps to stop continuing releases and prevent exposure to existing releases), should carefully review the discussion of any CREC and be prepared to ask the consultants the following questions:

  • did they review the NFA letter or decision document by the licensed professional concluding that the cleanup met state standards;
  • identify what the cleanup standard was and if it remains in effect or has been changed since the NFA letter or its equivalent was issued;
  • identify the “controls” that it has identified as the basis for concluding the condition is a CREC;
  • have the consultant verify if the “control” has in fact been properly implemented (e.g., recorded in the land records, sub-slab depressurization is properly working, engineering control is properly maintained, etc) and remains protective of human health;
  • if the consultant is inferring a control, provide justification for concluding the control is applicable to the site; and
  • ask the consultant to determine if human exposures such as vapor intrusion are under “control”

If the environmental consultant cannot verify what cleanup standard was used or that it remains the correct standard, this could be viewed as a significant data gap that would have to be verified to be in compliance with AAI. If the consultant believes in its professional judgment that the condition is continuing to pose a risk of human exposure, the condition should be a REC and not a CREC even if regulatory closure has been granted-especially where the consultant is representing a purchaser. Appropriately identifying the condition as a REC early enough in the transaction will enable the parties to further evaluate the issue or negotiate some risk allocation mechanism for the condition.   

Until ASTM takes another look at the definition, owners and possessors of property should be prepared to ask hard questions of the environmental professionals to make sure that they are not lulled into a false sense of comfort only to inadvertently forfeit their liability protections because they failed to comply with “controls” they did not anticipate after they taking title or possession of the property.  

As we discussed in an article, lenders are positioned differently than property owners from a liability standpoint and therefore may have risk tolerances that are different from those who take title to potentially contaminated property.  Since understanding a CREC will likely be vital to maintaining liability protections, purchasers should not simply rely on consultants retained by their lenders but be prepared to retain their own professionals to independently verify the CRECs and their underlying controls.

Finally, do not forget that a CREC only applies to regulatory “controls” (i.e., institutional and engineering controls) and not human exposures. Purchasers should not assume that a CREC means human exposures are safely controlled. The purchaser who fails to have their consultant verify that if human exposures are under control may later learn that they have bought themselves into a toxic tort lawsuit.   

EPA Issues Administrative Order for Gowanus Remedy Design

March 31st, 2014

EPA issued a unilateral administrative order (UAO) under section 106 of CERCLA to implement a remedial design (RD) for the Gowanus Canal. EPA took this action after negotiations with responsible parties bogged down. The agency wants the RD fieldwork to commence this spring.

Back in September 2013, EPA issued a Notice for the Commencement of Remedial Design Negotiations and Demand for Past Costs (“Notice and Demand”) to a group of responsible parties. The Notice and Demand sought $5 million in partial past costs and execution of an RD consent order by the responsible parties.  EPA then convened a meeting of the PRPs November 2013 with the intent that a consent order be executed in December. The agency subsequently extended the deadline to January 31, 2014 and then later to February 14, 2014.

In the meantime, National Grid and EPA entered into a settlement agreement where National Grid developed and submitted for EPA for approval Pre-RD and RD Work Plans. National Grid also paid EPA $1 million in partial reimbursement of EPA’s outstanding past response costs.

According to the UAO, EPA is currently conducting separate consent order negotiations with New York City for the portion of the RD that involves the siting and design of Combined Sewer Overflow (CSO) retention tanks and the design for the cleanup and restoration of the former 1st  Street turning basin. EPA is also negotiating an administrative order for a removal action with a number of other responsible parties which would require implementation of bulkhead upgrades as well as the coordination and cooperation with the responsible parties implementing the RD.

A copy of the UAO is available here.


BCP Reform Not Part of Budget Deal

March 27th, 2014

[updated March 31st]

In January, Governor Cuomo proposed sweeping reforms to the Brownfield Cleanup Program (BCP). The proposed changes rattled the real estate industry and caused a surge of BCP applications filed by developers who wanted to enroll in the BCP before the proposed tax changes too effect.

On Wednesday morning, though, stakeholders involved in the BCP reform negotiations began receiving messages from the Governor’s office that he had changed his mind and that BCP reform would not be part of the final budget agreement. One stakeholder was told that the brownfield tax credits (BTCs) and the refinancing of the Superfund refinancing were not viewed as issue for 2014/15 fiscal year and therefore it was not urgent to deal with BCP reform in the waning days of the budget negotiations.

This was an interesting statement since it seems to undercut the very rationale that was at the heart of the Governor’s BCP proposal-namely that the BCP was too expensive. If the BCP is not impacting the state budget, the logical conclusion would seem to be that the tax credits structure does not have to be overhauled and all that is required is a mere extension of the BTCs.

With the budget now finalized, BCP reform could be addressed before the Legislative adjourns in the middle of June. However, without the pressure of the budget deadline, many stakeholders are concerned that the Legislature will not be sufficiently motivated to address BCP reform because the BTCs will not expire until 12/31/15 and 18 months is an eternity in the life of a politician.

Such inaction would  essentially amount to a de facto freeze of the BCP because there are very few projects that could be accepted this year and obtain a COC by the end of 2015. This would also put many current projects in limbo if they cannot obtain a COC by the end 12/31/15. Under the Governor’s proposal, these projects would have had until 12/31/17 to complete their cleanups and obtain a COC.

If the Governor sticks with his position to punt BCP reform to the post-budget period, it is imperative that the Legislature and the Executive make BCP reform a priority….or simply extend the BTCs given their apparent lack of significant impact on the state budget.

Governor and Legislature Closing Gap on Brownfield Reform

March 24th, 2014

[NOTE: Updated to reflect Assembly bill ]

With only a week remaining for New York to adopt its 2014-15 budget, extension of the Brownfield Cleanup Program (BCP) remains on the table. It appears that a consensus is emerging on the shape of the brownfield amendments or at least the number of key outstanding issues has been narrowed.

As we have previously discussed, Governor Cuomo proposed sweeping reforms to the BCP in January. Click here and here for prior posts about the Governor’s bill. While the impetus for BCP reform was the looming expiration of the BCP tax credits, the Executive Branch was also concerned about the costs of the BCP.  As a result, the Governor’s bill proposed limiting that the Tangible Property Tax (TPC) to certain categories of brownfield projects and proposed to restrict the kinds of costs that would be eligible for the Site Preparation Tax Credit so that so-called “soft costs” could not be included. . It was unclear from the Governor’s bill if the definitional changes to the costs eligible for the Site Preparation Cost would apply only to BCP applications accepted after the proposed July 1st effective date or would extend to costs incurred by existing applicants after the effective date. Another significant feature of the Governor’s bill was automatic termination for BCP projects that did not receive Certificates of Completion (COCs) by 12/31/15 if they were accepted into the BCP prior to 6/23/08, or by 12/31/17 for sites accepted after that date but before 7/1/14.

The Senate proposed its own reform legislation that would have retain the current “as of right” tax credit structure. To accommodate the Governor’s concerns about the costs BCP costs by refining the definition of brownfield site to incorporate more refined concepts of underutilization, functionally obsolescence, affordable housing or qualify as a priority economic development site. The Senate also declined to narrow the scope of the costs eligible for the Site Preparation Tax Credit, contained a broader exemption for applications for Class 2 submitted volunteers and omitted the automatic termination dates.

The Assembly finally released its brownfield reform proposal on March 24th. The Assembly bill mirrors the approach proposed by the Governor that BCP sites would have to satisfy a second test to  qualify for the tangible property tax credit but largely adopts the test advanced by the Senate. The change would take effect on January 1, 2016. The Assembly does not attempt to change the site preparation definition, does not include any automatic termination dates, does not exempt applications for Class 2 sites submitted by volunteers and does not provide for an exemption from the hazardous waste fee for projects enrolled in the NYC VCP or under a federal cleanup order.

Based on legislative drafts exchanged between Legislative and Executive Branches, it appears that the parties are drawer closer on the following key issues:

  • The Governor may get his separate test for the tangible property tax credit but with the broader tests suggested by the Senate; 
  • Existing BCP applicants will be “grandfathered” so that changes to the Site Prep Eligible costs will not apply to costs incurred by those applicants after the effective date of the legislation;
  • Changes to the Tangible Property Tax Credit applicable percentages would become effective for applications accepted after July 1, 2014;
  • The Governor may be willing to include some “soft costs” into the Site Preparation Tax Credit calculation but that these costs would be limited to those incurred to qualify for a COC (so-called Bucket A site prep costs) but not those costs incurred to put the property into service (so-called Bucket B site prep costs);
  • The fate of eligibility for Class 2 sites and sites subject to an enforcement order remains unclear. The Governor proposed only Class 2 sites could be eligible where there was no viable responsible party and the applicant was a volunteer. Current proposed language would extend this exemption to sites under enforcement orders but would limit the site preparation costs “only the incremental costs exceeding those necessary to satisfy the closure requirements of the permit or order”;
  • The automatic termination provisions would be extended to 12/31/19 and 12/31/21.

Given the way business is conducted in Albany, it is often a fool’s errant to predict the outcome of legislation. It is usually easier to forecast the local weather than final legislative language. However, it does seem like progress is being made and that BCP reform remains possible as part of a budget agreement.