The discussion is being moderated by Dan Duggan, Deputy Managing Editor and blogger at Crain’s Detroit Business and our panelists include:

• Roger Gaudett, Ford Land, (owners’ perspective on redevelopment)
• Mike Deighan, O’Keefe & Associates (discussing making deals and liquidation);
• James Harless, SME (environmental issues)
• Dusty Duistermars, Michigan Economic Development Corporation (incentives)
• Dale Cira, AON Risk (insurance)
• Ken Bowen, Ashley Capital (developer’s perspective)

Yours truly will be fielding any questions on environmental law.

Tune in to our blog tomorrow at 8:30 am!

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McDowell & Associates you could say was a “startup” itself about 34 years ago, and it is now a mid-sized company with offices in Ferndale and Midland, Michigan. McDowell & Associates is a geotechnical and environmental engineering, geotechnical, and construction testing firm which serves developers, construction companies, and industrial clients. One of the company’s specialties is environmental and geotechnical due diligence. Doug McDowell, who oversees the company’s environmental assessment division, is an environmental engineer who has been with the company for about 20 years.

Q: Doug, as you know, there has been a move toward creating cheaper urban space for entrepreneurs who are starting companies and don’t have the financing for expensive rent. With all the vacant buildings around (especially in urban areas like Detroit), there is a huge supply of buildings and land that could serve that need. What has your experience been in Detroit with some of these older buildings?

A: Over the last 5 years or so, we have assisted clients who have purchased over 10 industrial buildings in SE Michigan with square footages between 150,000 and 750,000. Most of the buildings were historic manufacturing facilities. Environmental issues have included abandoned underground storage tanks, waste fill areas, residual PCB contamination, asbestos, lead paint, to name a few. In some cases, Brownfield funding sources were used to offset these environmental expenses. Geotechnical issues have included areas with failed foundations and areas where failure to maintain the sites resulted in building damage.

Q: Many entrepreneurs are eyeing these types of properties because they are so inexpensive. What is your number one recommendation to these perspective buyers/tenants when they look at a building?

A: Do not put significant faith in seller provided environmental information. As with any business deal, time and money are metrics that control the final calculation of success or failure. Establish a relationship of trust with an environmental due diligence team that blends scientific and legal resources. Start environmental due diligence early in the transaction timeline, and provide as much time in the purchase agreement as you can so that you do not get boxed into a corner.

Q: What can a good environmental/geotechnical consultant offer to these prospective tenants/buyers?

A: A good consultant will deliver practical opinions based on its reasoned inquiry and experience. Many consultants get lost in the research project and fail to connect the dots in a manner that allows clients to make well-informed decisions.

We provide environmental assessments ranging from the Phase I Environmental Site Assessment (or history report), the Phase II Environmental Site Assessment (sampling and testing of soil, groundwater, surface water, soil gas, building materials) through the Baseline Environmental Assessment (documents contamination on the property to the State of Michigan and limits liability after purchase.) We incorporate geotechnical investigations into our environmental assessment process in a way that provides cost savings to our clients.

We start every project with our client’s goals in mind. I mean this both in terms of how we endeavor to protect our clients from unforeseen circumstances as well as how we focus on the final development and ultimate site users at the outset of the project.

For example – we were retained to consult on a project where a “pure” environmental consultant had previously conducted significant evaluation of a property to demonstrate that contamination in shallow groundwater would not present a health threat to future users of the property once a building was constructed. What they had failed to consider was how to build a building on the property with a contaminated groundwater table that would have to be temporarily depressed in order to support footing construction. The high costs associated with disposal of dewatering fluids were such that the transaction fell apart, well after the completion of an involved indoor air study.

Q: Is hiring a consultant expensive for a prospective purchaser?

A: Costs vary significantly depending on site conditions, client objectives, future use, and historic uses. However, these costs are typically a very small fraction of the overall development or acquisition cost, even in the depressed real estate market we live in today. In situations where a client attempts to limit scope significantly during the due diligence process to reduce cost, then that client is taking on more risk due to uncertainty.

With the advent of Brownfield funding mechanisms to offset due diligence expenses, we have found that our costs become even less of an issue to a deal if Brownfield funding is being considered. The most important part of a transaction is to kick that process off very early and to allow time for everything to be approved by the appropriate government agency prior to spending significant funds.

Q: How long does it take to perform the type of site assessments that you’re talking about?

A: We can complete a site assessment (Phase I through BEA) as quickly as 30 days, but 60 – 90 is comfortable. If Brownfield funding is a consideration, the timeline is driven by local and state agencies that can easily exceed those time periods. We can sprint, but when we do, our client takes some risk of encountering a surprise at the last minute due to the amount of time required to get government agencies to respond to information requests. As a result of our extensive experience in the Southeast Michigan, we have an in-house library of historical resources, copies of MDEQ files, USEPA files, and thousands of boring logs. The information helps us cut down the timeline and uncertainty

Q: Once the site assessments have been performed, is that it or is there more work you would recommend?

A: If a site is contaminated, the purchaser takes on some obligations even with the BEA process. CERCLA has continuing obligations of which an owner of contaminated land must be aware. In Michigan, the purchaser has due care obligations toward future site users and innocent third parties.

We have several clients for whom we complete annual due care compliance visits to help make sure they are on top of the requirements. Though they are in the minority, we have found situations where these follow-up visits are of value.

Q: Can you describe a few of the most common environmental issues that are encountered in these former industrial sites?

A: There are relative easy issues to deal with – asbestos, underground storage tanks, historic fill, surface contamination from historic spills, etc., basically issues that can be handled under the Rules developed to implement Parts 201 and 213 of Act 451.

The more complex issues are those that cross into other regulations such as PCBs (regulated by TSCA), waste fills (where hazardous waste and landfill regulations can be brought into play), clean-ups where materials that might be considered hazardous waste are generated like lead paint or fugitive dust.

Q: Many of these entrepreneurs and startup companies are on tight budgets and may view environmental due diligence as a deal killer so they are tempted to skip the due diligence step. Are environmental issues deal killers? Also, what’s the downside if they don’t perform due diligence?

A: Every purchaser of property, particularly historic industrial property with complex environmental issues, needs to go into the transaction with a due diligence team that he or she trusts. The environmental consultant, environmental legal counsel, and transactional attorney need to be working hand in hand so that the timing and stipulations of the transaction match the issues at hand. In my experience, the deal killers happen when those items are not well orchestrated and a “surprise” during environmental due diligence disrupts things.

Purchasers of suspect land/buildings that view the due diligence process as a box to check, miss an opportunity to identify environmental issues before they get into trouble during development, construction, or refinancing. We view our role in the process as problem solver, not problem identifier. Virtually every environmental problem has a solution. The key is creating a scenario where time is available to solve the problem. While Michigan has a very useful law with the BEA process, there are a few environmental issues that can kill a deal. These typicaly involve extraordinary levels of contamination for which there are no funds available in the deal, or environmental issues are present and the purchaser cannot use the BEA for protection.

Q: What about geotechnical issues?

A: For properties with historical industrial buildings located on them, geotechnical issues that affect foundation support are not normally the driver of the due diligence process. In fact the historical building allows us to look at how the building has performed over its lifetime and get an idea of how the structure will behave in the future. However, in situations where building additions are required to support plans for future use, there can be significant geotechnical issues. Matching an addition to a building that has sat and settled for 50 years or so can be a bit complicated if soil conditions are not ideal.

Q: Last, but not least, you’re a West Point graduate. Does that background help when you are at these sites?

A: West Point was founded by Thomas Jefferson in 1802 to produce critically thinking engineers and leaders at a time when our nation was just beginning to grow and develop. The educational and leadership training was founded on the honor code. That foundation of integrity affects my practice every day. Clients learn very quickly that while they may not like what they hear from McDowell & Associates about their property, they are not going to be sold a bill of goods. We strive to help our clients understand the costs they are going to incur on a development project related to real environmental problems at the outset so that they are not surprised at the end. We bracket our cost estimates with a low estimate (relatively optimistic) and high estimate (relatively pessimistic). Our clients are rarely surprised by the outcome.

We thank Doug McDowell of McDowell & Associates for taking the time to provide his insight on due diligence associated with industrial property reuse.

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Tax increment financing (“TIF”) is used by many owners of property to finance previously incurred eligible environmental costs. In essence, TIF uses increased tax revenue to reimburse owners for eligible costs. Developments of obsolete or contaminated property often result in an increase in the taxable value of real property which, in turn, cause additional tax revenue to be generated. Under a Brownfield TIF arrangement, instead of a source of additional funding for governments, the incremental increase in the tax revenue is used to pay eligible costs incurred by a developer through a reimbursement agreement with the local community.

Now that the City of Detroit has an EFM, those involved in Brownfield Plans should be aware of potential consequences. The new EFM, Kevyn Orr, has yet to use his incredibly broad legal powers to invalidate Brownfield plans or reimbursement agreements or portions of them in Detroit, but he has started to use these powers to assert control over union contracts (see Detroit News, 4/23/13). A unilateral termination of the entire agreement or portions of it are clearly within his powers. This means that developers counting on reimbursement through a TIF arrangement may be disappointed when a EFM terminates such arrangements.

A strategy that might be employed by an EFM, based on our sources, is to request a status report from each person benefitting from a Brownfield plan or reimbursement agreement. If the audit shows little or no economic benefit to the local community, the agreements could be terminated and TIF would no longer be available and, as a result, the governmental entity would not be obligated to reimburse those owners for such costs.

It might be wise for Brownfield plan beneficiaries to consider how to respond when such questions are asked. Further, it may be important for one to proactively communicate directly with the EFM to stave off any potential for such documents to be terminated or rejected. We will continue to monitor not only Detroit’s situation but others as EFMs are appointed for governments throughout Michigan.

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reinvent government
create more and better jobs
restore our cities
enhance our national and international image
protect our environment
solve problems through relentless, positive action
In support of the Governor’s goals, the MDEQ has partnered with stakeholders to formulate a plan for improvements in Michigan’s environmental programs. This effort is referred to as the Collaborative Stakeholders Initiative (“CSI”). CSI grows out of a series of recommendations prepared by the Office of Regulatory Reinvention and that was submitted to the Governor’s office.

Participants in CSI are taking a closer look at seven key issues facing Michigan’s cleanup and redevelopment programs. They include:

(1) Groundwater and Surfacewater Interface (GSI) pathway;

(2) Cleanup criteria;

(3) Vapor intrusion;

(4) Free product, source removal and Csat;

(5) Brownfield redevelopment;

(6) Part 201 Rules/Operational Memorandum Guidance; and

(7) Due care obligations.

As a backdrop to reviewing these issues and developing recommendations, participants also hope to derive the benefits of an opportunity for exchange and cooperation between the MDEQ, the regulated community and other public stakeholders. Each issue subgroup is in the process of refining their recommendations and developing action plans after having completed several intensive sessions both in Lansing and during a three-day working program at the Kellogg Biological Station on Gull Lake. There will be a public session to present these recommendations on March 15, 2012.

The action plans will include recommendations with respect to Part 201 and Part 213, Part 201 Rules, applicable Operational Memorandums, Guidance Documents, and other policies affecting the implementation of these programs. There will be an opportunity learn more about these recommendations and action plans during a webcast scheduled for March 15, 2012. More details on connecting to the webcast to follow.

As someone involved in the CSI process, it is my belief that the process and this initiative has the potential for being extremely beneficial, and may lead to many changes within Michigan’s cleanup and redevelopment program that will facilitate expedited cleanups and redevelopment while protecting the environment.

The post Reinventing Michigan’s Cleanup and Redevelopment Programs appeared first on Dawda PLC.

Governor Rick Snyder was adamant during the 2010 election campaign that Michigan would have to stop picking ‘winners and losers’ when it came to doling out governmental incentives for private businesses. Once in office, he eliminated many programs, including tax credits for historic and Brownfield developments and substantially reduced the film industry tax breaks.

The idea behind this policy was that it was unfair to favor a certain industries or developments. Also, it was felt that tax credits were not the best way to entice employers to invest and create jobs and, instead, front loading developments with grants or loans was preferred. Already, the MSF has provided cash grants to facilitate developments. As an example, $2.5 million dollars was recently given by the MSF for the construction of a new DTE substation at Hyundai’s plant in Superior Township.

In December, the Governor signed a bill package which created the Michigan Business Development Program (“MBDP”) and the Michigan Community Revitalization Program (“MCRP”). These programs replace the tax credit programs previously administered by the Michigan Economic Growth Authority (“MEGA”) which distributed tax credits, including historic preservation and Brownfield credits.

New Programs

The MBDP provides up to $100 million in grants, loans or other economic assistance for highly competitive projects in Michigan. The applicant must be a “qualified business” that makes investments or create jobs in Michigan and the MBDP is principally designed to compete for projects that may otherwise go to other States. A qualified business will be limited to receiving $10 million a year and must be a business that is located in or operating in Michigan or that will locate and operate in Michigan. The business must create at least 50 jobs, but can also qualify if only 25 jobs are created in a rural area or are high tech jobs. Retail projects and “job retention” projects are not eligible. The elements MBDP review process similar to the old programs administered by MEGA in that there will be a qualified investment review and a written agreement between the developer and the MSF.

The MCRP can grant up to $1 million per project. Loans are available up to $10 million dollars. This program replaces the Brownfield and historic tax credit programs previously provided by MEGA. To be considered an MRCP eligible property, the Property must be one of the following:

• a “facility”, i.e., a place where contamination exists above residential criteria;
• a historic resource;
• blighted;
• functionally obsolete; or
• adjacent to or contiguous to a property meeting any of the above characteristics.

These criteria are very similar to the prior programs administered by MEGA. In fact, the same language is being used in the statutes as previously used in prior legislation. Perhaps the biggest hurdle for an applicant under the MCRP is that there must be a more rigorous demonstration of financial need through a proforma review. Therefore, the applicant will need to show that the project would not be viable without the proposed incentive; and it is felt that this is getting closer to the “but for” test. Also, local community support in the form of other tax abatements or incentives. It is also important to note that the terms of the loan documents appear to be fully negotiable as there are not specific guidelines identifying interest rates, recourse, term, etc.

Recently, program guidelines were published and here are the links to them:

MCRP – http://www.michiganadvantage.org/Michigan-Community-Revitalization-Program-Projects/

MBDP – http://www.michiganadvantage.org/Michigan-Business-Development-Program-Projects/

Overall View

Michigan’s new incentive programs are a venture into new territory. They are not modeled after other States with higher employment and who arguably have had more success than Michigan in retaining and attracting business. The funding for the programs pales in comparison to the previous administration’s budget for incentives. Our concern is that other States may still be perceived as being exceedingly competitive and attractive to employers because of the quick turnaround and lack of “red tape”.

It remains to be seen whether the new programs are really a change or whether Michigan will continue to pick ‘winners or losers’ through a discretionary application and vetting processes. For instance, there are a variety of uses which are not allowed to receive such incentives such as sports stadiums, casinos, retail projects or other projects which may “induce businesses” to leave Michigan. How much of the process is subjective? Will the same rules apply to large and small developments? Will the time frame involved be a non-starter for businesses looking to move quickly?

Businesses need certainty in order to operate effectively. Michigan needs to be competitive with other States who have large amounts of funds to throw at prospective employers. Although Michigan is taking a positive step by revamping some of the rules and regulations previously used to hand out economic benefits, there continues to be a bit of a uncertainty surrounding how the new programs will be implemented.

Advice
For developer’s seeking economic and tax incentives from the State of Michigan, it is important to establish an early relationship with the various governmental authorities (e.g. local community, MEDC, and MSF) through pre-application meetings and consultation. Further, a developer will need to be cognizant of the challenges associated with proving the financial soundness of the project as well as the access to other capital to make the project viable. We are told that the process in both programs will take at least 30 days, but it is likely to take a lot longer to bring all parties to the table to get the desired benefit. Stay tuned for more developments.

The post Incentives – Still Picking “winners and Losers”? (Updated 2/10/12) appeared first on Dawda PLC.

]]> https://www.dawdalaw.com/brownfield-redevelopers-beware/ Thu, 19 Jan 2012 19:24:40 +0000 https://dawdamann.com/?p=5185 Due Care and Indemnification Agreements and the CERCLA BFPP Defense The last year has seen its share of unique decisions relating to CERCLA liability. Recently I blogged about one case with ramifications for brownfield developers: Saline River Properties LLC v. Johnson Controls (USDC, ED Mich 2:10-cv-1057-SFC-MKM). Another case similar to Saline River Properties that came [...]

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Due Care and Indemnification Agreements and the CERCLA BFPP Defense
The last year has seen its share of unique decisions relating to CERCLA liability. Recently I blogged about one case with ramifications for brownfield developers: Saline River Properties LLC v. Johnson Controls (USDC, ED Mich 2:10-cv-1057-SFC-MKM). Another case similar to Saline River Properties that came out in late 2010 is Ashley II of Charleston, LLC v. PCS Nitrogen, Inc. (USDC, Dist. S.C., 2:05-cv-2782-mbs).

Ashley II originated in South Carolina and was heralded as one of the first cases to examine CERCLA’s Bona Fide Perspective Purchaser (“BFPP”) defense (which provides a liability defense to purchasers). You would think that this would be a good thing. In this case, it wasn’t.

Background

The background of Ashley II is a lot like the Saline case; a developer being held liable for contamination on a brownfield redevelopment. The property that Ashley intended to redevelop into a sustainable/mixed use redevelopment was contaminated with arsenic, lead and other substances as a result of historical fertilizer plant operations.

As part of its acquisition, Ashley indemnified the sellers of both parcels. Ashley also had Phase I Environmental Site Assessments performed for each of the parcels prior to purchase, and hired an environmental engineer to oversee the environmental aspects of the development. The site was gated and patrolled and during the development, Ashley’s environmental engineer would inspect the property. On one of these occasions, the engineer noted areas of staining, neglected trash piles and, on the smaller parcel, some cement pads, sumps, trenches and pipes. Because Ashley left these structures in place during development, they collected water that caused a release of contaminants into the soil.

During the development, Ashley brought a CERCLA §107 cost recovery action against the prior owners, PCS, and the PCS filed a claim for contribution from Ashley and others under CERCLA §113. Because Ashley performed a Phase I before acquiring the property, Ashley tried to rely on the BFPP defense of CERCLA §107(r), however, the trial court didn’t buy it.

Elements of BFPP Defense

In ruling against Ashley, the district court noted that Ashley had to prove the following eight elements by preponderance of the evidence to rely on the BFPP defense:

1. The hazardous substances in question were disposed at the facility prior to the buyer’s purchase;
2. The buyer conducted All Appropriate Inquiry into the prior history of the site;
3. The buyer provided all legally required notices regarding the contamination;
4. The buyer exercised due care with respect to hazardous substances found at the facility;
5. The buyer cooperated with persons authorized to respond to the contamination;
6. The buyer complied with land use restrictions;
7. The buyer complied with any requests for information; and
8. The buyer did not have any affiliation with a liable party.

The court examined each one of these elements as they applied to Ashley and determined that it failed on the first, fourth and eight elements. With regard to the first, the court noted that it was likely that hazardous substances were disposed on the property when Ashley removed the water containing sumps and piping. Also, the court noted that Ashley failed to exercise due care because it did not clean out the sumps and left them exposed to the elements. Further, the court pointed to the debris pile as further evidence that Ashley did not use appropriate care.

Affiliation and Loss of BFPP Status

However, it was the court’s analysis of the “affiliation” element that was strange on a number of levels. In its opinion, the court explained that Ashley had to prove that it was not:

• A potentially responsible party;
• Affiliated with persons that are potentially liable for response costs at the site through: (a) any direct or indirect familial relationship; or (b) any contractual, corporate, or financial relationship; and
• The result of a business reorganization.

The court held that Ashley failed to meet the first and second elements. When you look at the actual language of the CERCLA affiliation requirement, though, it’s pretty clear that the court’s recitation of the CERCLA affiliation elements is incorrect. CERCLA §101(40)(H) actually requires the following showing:

The person is not –

(i) potentially liable, or affiliated with any other person that is potentially liable, for response costs at a facility through –
(I) any direct or indirect familial relationship; or
(II) any contractual, corporate, or financial relationship . . . . ; or
(ii) the result of reorganization of a business entity that was potentially liable.

Grammar and sentence structure are key here. If you look closely, subsection (i) actually requires a buyer to show the following: that it is not potentially liable for response costs at a facility:

• Through any direct or indirect familial relationship; or
• Through any contractual, corporate, or financial relationship.

A buyer must also show that it is not affiliated with any other person that is potentially liable for response costs at a facility:

• Through any direct or indirect familial relationship; or
• Through any contractual, corporate, or financial relationship.

Lastly, the buyer must show that it is not the result of a reorganization of a business entity that was potentially liable.

As you can see, there is a strong argument that the court misinterpreted §101(40)(H)(i) as imposing an additional requirement on buyers: to prove that they are not potentially responsible parties (PRPs). However, that is not the requirement. By reading this additional element into the statute, the court gutted the BFFP defense to PRP liability. All purchasers of contaminated property by definition fall within the large category of “PRPs.” Because of this broad definition, buyers who had no relation to the contamination were at risk for being held liable to clean it up. To correct this (and to encourage redevelopment of impaired sites) Congress created CERCLA’s BFPP defense to limit a buyer’s liability Following the court’s logic, however, all buyers of contaminated property would never qualify for the BFPP defense because it would always fail the court’s first element.

The second part of the court’s analysis that developers need to be aware of is how the court applied the “affiliation” requirement to Ashley’s conduct. Although the court found that Ashley did not have any familial relationship with any responsible party, the court ruled that Ashley was affiliated with one of the PRPs (the seller) because: (1) Ashley had indemnified and released the seller in the purchase agreement and (2) Ashley tried to discourage the EPA from taking enforcement action against the seller. The court noted: “In indemnifying [the seller], Ashley took the risk that [the seller] might be liable for response costs. Ashley’s efforts to discourage the EPA from recovering response costs covered by the indemnification reveals just the sort of affiliation Congress intended to discourage.” As a result, Ashley was not able to rely on the BFPP defense and was found liable for a portion of the site’s cleanup costs.

However, the ruling is unclear; was it just the indemnification and release, or was it Ashley’s attempts to affirmatively persuade the EPA not to take action against the seller that caused the court to characterize the relationship as an affiliation?

The Chill

Regardless, this holding is unsettling because of its potential chilling effect on buyers and sellers of contaminated property. Contractual indemnifications are quite common and can be a useful risk-shifting mechanism in the sale of contaminated property. If this ruling is upheld on the appellate level, it could impede the use of such arrangements where the buyer wants to take advantage of the BFPP defense.

Because Ashley has appealed this case to the Fourth Circuit Court of Appeals, the trial court’s analysis of the BFPP defense may just become a small footnote in the law governing the CERCLA BFPP defense. However, given its potential ramifications if it is upheld, this case should be watched closely. We will continue to monitor and provide an update in the future.

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