EPA Modifies RLF Policy To Facilitate Affordable Housing Protects on Brownfields

When Mathy Stanislaus departed New York to take the helm of EPA’s Office of Solid Waste and Emergency Response (OSWER), he told the New York brownfield community that one his primary goals was to reform the EPA Revolving Loan Fund (RLF) program so it could better support affordable housing on brownfield sites. Changing long-standing agency policy was not easy but after a lot of hard work by Mathy and the director of EPA’s Office of Brownfields and Land Revitalization, David Lloyd, EPA will soon be announcing modification to its RLF Subgrant Policy that will the RLF brownfield program to better support affordable housing projects on brownfields.

The RLF program is authorized by 42 U.S.C. 9601(k) and provides funding for a grant recipient to capitalize a revolving loan fund and to provide subgrants to carry out cleanup activities at brownfield sites. Eligible subgrant recipients include state and local governments, redevelopment agencies, land clearance authorities, other quasi-governmental entities created by state or local governments and not-for-profit organizations.  A borrower or subgrantee must not be a responsible party under CERCLA and the site must be an eligible brownfield site. The maximum subgrant is $200K per site.

Not-for-profit entities applying for RLF subgrants must own the property at the time they submit their application.  In its CERCLA enforcement and cost recovery litigation, EPA has adopted a broad definition of CERCLA owner and has swept in parties who held less than full title such as easement holders, licensees, long-term ground lessees and others who exercise owner-like control over a site. Yet under a  interpretation that dates back to the Clinton Administration and that appears to have been inspired by the Seinfeld “Bizzaro World” episode, EPA paradoxically adopted a narrow definition of CERCLA owner for purposes of RLF eligibility. Under this long-standing interpretation, EPA’s Office of General Counsel (OGC) concluded parties had to hold full “fee simple” title  to qualify as a CERCLA owner.

Law school students are taught that property ownership can be viewed as a bundle of ten sticks with each stick representing a right or benefit. These sticks can be separated so that a property might have multiple property interest holders but can also be reassembled. These rights include right to occupy or use the land, convey or lease the land, grant a mortgage, subdivide the land, create easements or covenants, etc. A party that owns all ten sticks enjoys all the rights that run with property ownership. This complete set of rights is known as a fee simple interest.

The OGC interpretation did not pose any complications for non-profits using traditional or conventional real estate financing. However, this narrow view of ownership operated to preclude affordable housing developers using certain low-income housing tax credit (LIHTC) financing from qualifying for RLF subgrants. Under the standard low-income tax credit structure used in New York, the affordable housing developer enters into a “nominee” agreement where the not-for-profit entity known as a Housing Development Finance Corporation (HDFC) retains bare title to the property to be remediated and a for-profit entity holds beneficial owner of the property and the project (The tax credit investors hold membership interests in the for-profit entity). After reviewing the standard nominee agreement used for LIHTC structures, EPA concluded that the not-for-profit entity held such limited rights that it was not the sole owner in fee simple of the real property and was therefore not an eligible entity to receive an RLF grant. Apparently, EPA OGC was concerned that the not-for-profit lacked the authority to possess or take any action with respect to the cleanup project which would be funded by the subgrant and that the funds intended for cleanup could be disbursed to the for-profit for its own engineering costs contrary to national RLF policy.

This interpretation was particularly frustrating for affordable housing developers in New York City because the Mayor’s Office of Environmental Remediation (OER) was awarded a $600K RLF grant. Affordable housing projects that enrolled in the NYC voluntary cleanup program could apply for an $80K subgrant to supplement in addition to the Brownfield Incentive Grant program. However, OER was unable to award subgrants to affordable housing developers since they were not eligible recipients by EPA.

In modifying its long-standing policy, EPA recognized that if the not-for-profit had sole ownership of title (both legal and beneficial), the project would not be eligible for LIHTC and would not be financeable. EPA also acknowledged the HDFC arguably owns the property in fee simple through its membership in the manager of the managing member of the owner so there is no question that the HDFC will use the funds to develop the project. Accordingly, EPA agreed to view the not-for-profit along with the partners that are necessary to develop affordable housing using LIHTC as having have fee simple.

Under the modified RLF policy, OGC has opined that a nominee agreement may be used as part of demonstrating ownership where the nominee agreement provides that the nominee/subgrantee (not-for-profit) retains title during the subgrant period and has the right to perform the cleanup actions. Under these circumstances, EPA will consider the recipient of the subgrant as the “owner” of the site throughout the cleanup, as required by by the statute. If the not-for-profit and its for-profit entity partner on an affordable housing project want to use an RLF subgrant instead of a loan but do not wish to vest absolute fee simple title in the non-profit entity, OGC has also agreed that the subgrant can be approved if the subgrantee can demonstrate ownership and sufficient control of the property during the pendency of the subgrant and cleanup activity.

Eligible entities must demonstrate record title, and other documents, such as a governing management or nominee agreement, e.g., that demonstrates that the non-profit entity has control of the property, and will maintain ownership and control of the property throughout the term of the grant.  Record title for a nominee/trustee should be the recorded deed, which conveys title to the nominee, and contains a reference to the recorded nominee agreement. EPA would rely on those documents to evidence the status of title to the property.  Any change should be recorded in the land records. If ownership changes at any point while the cleanup is underway during the term of the RLF subgrant, the EPA could declare a default and the proceeds would have to be refunded to EPA.

EPA will be making a formal announcement of this RLF policy modification in the coming weeks. In the meantime, affordable housing developers may now apply for the OER RLF subgrants.

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