United States: Next Round of Base Closures Offers New Brownfield Redevelopment Opportunities

By Christopher P. Davis and Elizabeth F. Mason

Originally published August 1, 2004

The United States Department of Defense ("DOD") is in the process of determining which now-active military facilities it intends to recommend for inclusion in the next base realignment and closure ("BRAC") round. The President and Congress are scheduled to approve or disapprove DOD’s recommendations at the end of 2005. Each of the previous rounds has created opportunities for developers and other real estate interests to invest in these properties and reap the financial and "good will" benefits of turning them back into performing assets.

The 2005 BRAC round promises to provide more robust redevelopment opportunities, for two reasons. First, the real estate development and environmental remediation industries will be more sophisticated and enterprising in the 2005 round than they have been in previous BRAC rounds, because they will be able to capitalize on the depth of experience they have gained through the past decade of redeveloping "brownfields." Closed military bases are essentially "brownfields"– defined in the latest amendments to CERCLA as "real property, the expansion, redevelopment, or reuse of which may be complicated by the presence or potential presence of a hazardous substance, pollutant, or contaminant" – on a large scale. Most military bases are the equivalent of a small town, potentially including, for example, residences with asbestos and lead-based paint, gasoline stations with leaking underground storage tanks, and unlined solid waste landfills, as well as typically industrial or uniquely military source areas such as hazardous waste landfills, chemical storage areas, fire fighter training areas and jet fuel storage areas.

Second, since the last BRAC round in 1995, certain innovative "tools" have become available for use in expediting and integrating base cleanup and redevelopment, and DOD has recently signaled that it intends to take full advantage of them. The most significant of these new tools is "privatization," by which third parties assume responsibility for environmental remediation activities at closed bases through the creative use of CERCLA Section 120 "early transfer" authority, supported by performance-based contracting and environmental insurance.

Enacted by Congress in 1997, CERCLA Section 120(h)(3)(C) allows a federal agency to transfer its contaminated property out of federal ownership before completing cleanup activities at the property. These transfers are known as "early transfers" because they constitute exceptions to the rule that the federal government cannot transfer contaminated property before cleaning it up in accordance with applicable standards and the local redevelopment authority’s reuse plan. Using performance-based contracting approaches, such as guaranteed fixed-price contracting, and environmental insurance to shift and balance the liability exposures that come with purchasing and assuming responsibility for remediating contaminated property, local redevelopment authorities and developers may secure closing base property before completing cleanup without substantial open-ended risk.

This article will first provide an overview of the legal framework for the disposition, environmental cleanup, and redevelopment of closing military bases. It then will compare the standard process for transferring contaminated property out of federal government ownership with the "early transfer" process under CERCLA Section 120(h)(3)(C). Finally, it will evaluate the opportunities for developers and other real estate interests in the "privatization" of closing base cleanup and redevelopment through the use of "early transfer" authority, performance-based contracting and environmental insurance. Legal Framework for Disposition and Redevelopment of Military Bases

The basic tasks that a developer must complete to accomplish a successful base closure and redevelopment are: (1) community reuse planning, (2) DOD property disposal (i.e., transfer) planning and implementation, (3) Environmental Baseline Survey program execution, (4) environmental impact analysis, (5) installation management, and (6) ongoing environmental cleanup and compliance. These tasks are interrelated and must be managed simultaneously. For example, the basewide Environmental Baseline Survey must be completed to provide a basis for the DOD service’s setting priorities for transferring real estate parcels.

A number of federal, state and local stakeholders are involved in these tasks, and their performance of their portion of each task is governed by a complicated grid of federal and state laws and regulations. The primary stakeholders are (1) the DOD service (e.g., Army, Navy, Air Force) (hereinafter "DOD") whose base has been designated for closure or realignment; (2) the BRAC Cleanup Team, which consists of DOD, EPA and the state environmental agency, and prepares the initial roadmap for base cleanup, the BRAC Cleanup Plan; (3) the local redevelopment authority ("LRA"), which consists of citizens and business interests from the community where the closing or realigning base is located, and which is responsible for the critical task of identifying local reuse needs and developing and implementing a comprehensive base reuse plan; and (4) the Restoration Advisory Board, which may consist of individual citizens and representatives from local government, community organizations and Native American tribes, as well as DOD, and which ensures public participation in the base cleanup process.

In addition to the Fiscal Year 2002 National Defense Authorization Act, which specifically authorized the 2005 BRAC round, the closure, cleanup and redevelopment of military bases is subject to a collection of laws and regulations relating to the identification and implementation of base closures and realignments, the identification and utilization of properties for homeless assistance, the utilization of excess federal property and disposal of surplus federal property, the assessment of the environmental impacts of DOD’s proposal for disposing of the base property, and, last but not least, the cleanup and management of releases of hazardous substances that historically occurred on the base property as the result of DOD’s activities there. This last category includes requirements relating to the inclusion of notifications about the presence and cleanup of such releases in deeds and leasing documents.

Most environmental cleanups at federal facilities occur under CERCLA. The President has delegated authority to EPA to undertake and order response actions under CERCLA at privately owned sites. By contrast, Executive Order 12580, entitled "Superfund Implementation," delegated authority to address hazardous substance releases at federal facilities to the federal agencies that have jurisdiction over them. As a result, it is DOD that exercises the cleanup authority at active and closing or realigning military bases. Remedies selected by DOD nonetheless must meet CERCLA cleanup standards, and, even at federal facilities, it is EPA that has ultimate authority to determine whether a remedy is sufficiently protective of human health and the environment.

CERCLA applies to federal facilities through CERCLA Section 120, which requires federal facilities to comply with the substantive and procedural requirements of CERCLA to the same extent as private parties. This means that in performing CERCLA cleanups at closing bases, DOD services are required to comply with the National Oil and Hazardous Substance Contingency Plan ("NCP"), 40 C.F.R. Part 300, which establishes the process for identifying, investigating and cleaning up hazardous substance releases.

Section 120 requires federal agencies to assess their facilities for inclusion on the National Priorities List ("NPL"), which is EPA’s list of priority sites requiring remedial action. Facilities that are listed on the NPL must enter into an interagency agreement with EPA, known as a "Federal Facility Agreement," for the timely investigation and cleanup of the site. Federal facilities that are not on the NPL must meet the requirements of both the NCP and state environmental cleanup laws, as long as those state laws are not more stringent for federal facilities than they are for private sites.

At closing military bases, the goal is to remediate any environmental contamination as expeditiously as possible to redevelop the site, and to return it to the stream of commerce. The process for transferring closing military base property from federal ownership includes requirements for evaluating and documenting the environmental condition of the property to ensure proper and safe reuse.

DOD must perform basewide and parcel-specific Environmental Baseline Surveys ("EBSs"), respectively, to assess the property’s overall availability for reuse and ascertain the potential environmental constraints that may be necessary for the reuse of specific parcels. It then must prepare a "Finding of Suitability to Transfer," or "FOST," for each uncontaminated or remediated parcel that it plans to transfer from federal ownership, and a "Finding of Suitability for Early Transfer," or "FOSET," for each contaminated parcel that it will transfer from federal ownership prior to its completing cleanup activity. (For parcels that it plans to lease, DOD must prepare a "Finding of Suitability to Lease," or "FOSL.")

For parcels designated "uncontaminated" as a result of the EBS process, DOD must prepare a FOST and then may transfer the parcel to an LRA without further consideration. For parcels designated as "contaminated," DOD has two choices: it may take the standard approach of completing cleanup activities at the parcel before transferring it to the LRA, or it may take a more innovative approach and seek to accomplish an "early transfer." The "early transfer" option has been available since 1997, but relatively few closing bases have taken advantage of it to date.

In a "standard" transfer, DOD transfers title to the parcel to the LRA after completing the cleanup (in accordance with applicable cleanup standards and the LRA’s reuse plan). For the transfer, DOD must prepare a FOST that documents the factual basis for its including in the parcel deed a covenant to the LRA and subsequent owners that "all necessary remedial action has been taken" to address hazardous substances released on the parcel as a result of DOD activities. DOD’s provision of this covenant is required under CERCLA Section 120(h)(3)(A), which also mandates that DOD include in every deed a covenant that "any additional remedial action found to be necessary" after the parcel’s transfer to the new owner "shall be conducted by the United States," and a clause granting access to the United States to perform such remedial action if necessary.

As originally enacted, CERCLA Section 120 had required DOD both to complete all necessary remedial action at a parcel before transferring it, and to provide the covenant to this effect. The rationale behind these requirements was plain: Congress did not want the federal government to offload the costs of addressing contamination for which it was responsible onto private parties that may not have the resources to undertake proper cleanup. In response to concerns that the slow pace of DOD cleanup was delaying the transfer and redevelopment of numerous closed bases, Congress amended Section 120 in 1997 to allow DOD to transfer property out of federal ownership before it had completed all necessary remedial action.

In such an "early transfer," DOD does not provide the covenant that "all necessary remedial action has been taken." Instead, in accordance with CERCLA Section 120(h)(3)(C), it asks EPA (at NPL sites) or the state (at non-NPL sites) to make certain findings supporting the conclusion that the property is suitable for transfer, and to defer the covenant requirement on the basis of those findings.

To defer the covenant, EPA or the state must find that (1) the parcel is suitable for the would-be new owner’s intended use, and that intended use is consistent with the protection of human health and the environment; (2) the deed contains certain "response action assurances"; (3) DOD has provided for appropriate public notice of and comment on the proposed early transfer; and (4) "the deferral and the transfer of the property will not substantially delay any necessary response action at the property."

The "response action assurances" that DOD must include in the deed are required to provide that (1) any use restrictions needed to ensure the protection of human health and the environment and prevent disruption of investigation, remediation and oversight activities at the parcel will be put in place; (2) "all necessary response action shall be taken," on a schedule approved by EPA or the state; and (3) DOD will submit a budget request each year that adequately addresses schedules for completing the site cleanup, subject to Congressional authorizations and appropriations. DOD presents all of this information to the public, and to EPA or the state, in a FOSET.

On its face, CERCLA Section 120(h)(3)(C) allows DOD to pass title to contaminated base property to an LRA before DOD’s cleanup at the property is complete. The benefit of this approach for such an LRA is that DOD retains all responsibility for cleanup in accordance with CERCLA Section 120(h)(3)(C). There is often little opportunity, however, for the LRA to adjust or expand its own development priorities, because the cleanup necessarily occurs in accordance with DOD’s schedule and appropriations. Activities undertaken by federal agencies are subject to the availability of appropriated funds, and federal agencies cannot enter into agreements that require any obligation or payment of funds in violation of the Anti-Deficiency Act, 31 U.S.C. Section 1341. As a result, neither the LRA nor any developer or other entity who is planning to purchase base property from the LRA has much control over the nature or pace of the cleanup, and cannot predict when they can start redevelopment or how their development plans may be adversely impacted by land use restrictions that DOD implements to meet cleanup standards.

In the past few years, DOD (primarily the Navy) and discerning LRAs, developers, and environmental remediation contractors have read CERCLA Section 120(h)(3)(C) more broadly, interpreting it to allow DOD to transfer not just the title to contaminated base property to an LRA prior to the completion of DOD cleanup, but the cleanup responsibility itself. In fact, DOD has made a commitment to accomplishing such transfers, and has begun to work closely with LRAs that are willing to accept title and CERCLA cleanup responsibility and, with DOD support, transfer both to a developer. Such a developer is then able to work with its own remediation contractor to clean up the property in accordance with its own priorities, schedule and financial ability. Most significantly, EPA and state environmental agencies have indicated their willingness to accept this reading of CERCLA Section 120(h)(3)(C) and work with DOD, LRAs, developers and contractors to enable "enhanced" early transfers.

At the former Mare Island Naval Shipyard in Vallejo, California, for example, the Navy transferred to the LRA a portion of the former shipyard and the responsibility for cleaning it up in accordance with agreed-upon cleanup goals (obtaining "regulatory closure" with respect to specifically defined "known conditions" within identified investigation areas on the transferred property, and remediating certain pre-defined "unknown conditions"). The LRA in turn transferred the property to a developer under a set of agreements by which the developer agreed to achieve the same agreed-upon cleanup goals as part of the redevelopment. The developer has capped its risk by entering into a guaranteed fixed price contract with its remediation contractor, and by obtaining environmental insurance to cover the costs of cleanup (via a cost cap policy) and of addressing any unknown contamination at the property (via a pollution legal liability policy). The State of California agreed to this "privatization" of the Mare Island cleanup and redevelopment by signing a consent decree with the developer and the LRA for the cleanup of the transferred property.

Privatizing the cleanup of a closing military base and integrating that cleanup with redevelopment activities involves a series of complicated real estate, financial and insurance transactions, and the negotiation of a cleanup agreement between EPA or the state environmental agency and the developer assuming title and cleanup responsibility, all within the context of a CERCLA Section 120(h)(3)(C) early transfer. These transfers are thus "enhanced" versions of the simpler early transfers in which DOD merely transfers the property to the LRA and retains environmental cleanup responsibility. In an enhanced early transfer:

• FOSET. DOD transfers title to the property to the LRA by deed in an EPA-or state-approved early transfer. There are several steps involved in a successful early transfer, whether "enhanced" or not. DOD must prepare a FOSET for the portion of the closing base property that is being transferred. This document and the draft deed for the parcel proposed for early transfer, as well as any other information that DOD submits to support the transfer, must provide sufficient information for EPA or the state to make all the findings required by CERCLA Section 120(h)(3)(C) and defer the requirement that DOD covenant that "all necessary remedial action has been taken."

• Environmental Services Cooperative Agreement ("ESCA"). DOD transfers responsibility for cleaning up the property by entering into an ESCA with the LRA. In the ESCA, the LRA agrees to perform all response actions necessary to achieve applicable EPA or state cleanup standards with regard to specifically defined, known environmental conditions at the property, and DOD agrees to provide the LRA with grant funds, on a reimbursable basis, to pay for these response actions. (10 U.S.C. 2701(d)(1) allows the federal government to enter into a cooperative agreement with a state or local government entity whereby both parties will benefit.) Through the ESCA, the LRA and the developer gain three of the significant benefits that an enhanced early transfer can provide in the base redevelopment process: (1) the contractual guarantee of a certain source and amount of funding that is specifically earmarked for the cleanup of the transferred property, (2) greatly increased control over the nature, location and timing of cleanup and redevelopment on the property, and (3) as a result, the ability to integrate cleanup and redevelopment activities and thereby to save money by "only moving the dirt once," and to speed reuse.

• Remediation Agreement. The LRA transfers title to the property to the developer by deed and responsibility for cleaning up the property in a Remediation Agreement. Like the ESCA, the Remediation Agreement identifies specific, known environmental conditions at the property and requires the achievement of regulatory closure with regard to these conditions.

• Regulatory Cleanup Agreement. The developer, and possibly the LRA, enter into a cleanup agreement with EPA or the state environmental agency for the cleanup of the transferred property. The enhanced early transfers that have occurred to date have involved property at closing military bases that are not on the NPL. This means that at such sites, the developer has entered into a cleanup agreement with the state environmental agency. The negotiation of a cleanup agreement to govern post-early transfer cleanup activities is more complicated at NPL sites, where EPA typically has already entered into a Federal Facility Agreement with DOD to govern DOD’s cleanup of the property.

• Performance-Based Contract. The developer enters into a performance-based contract with an environmental remediation contractor. The purpose of such a contract is to cap cleanup costs and transfer the contractual responsibility and attendant risks of completing the cleanup. LRAs and developers are willing to assume responsibility for cleaning up transferred base property in large part because they are agreeing in the ESCA and Remediation Agreement, respectively, to perform cleanup activities that essentially have a defined scope and cost. Under a guaranteed fixed-price contract, the contractor takes on the responsibility for cleaning up known environmental conditions to agreed-upon applicable federal and state cleanup standards from the developer for a set price. The developer thereby passes much of the financial and regulatory uncertainty that is inherent in a typical brownfields redevelopment project to the contractor.

• Environmental Insurance Policies. In conjunction with the performance-based contract, the developer and the contractor obtain environmental insurance. Purchasing insurance allows the developer and the contractor to liquidate liability exposure at a fixed price, subject to the terms and limits of the policy purchased. "Pollution legal liability" coverage provides protection against costs associated with newly discovered contamination, and "cost cap" or "remediation stop loss" coverage offsets costs incurred in excess of those estimated to address known contamination.

The privatization of closing military bases through the use of enhanced early transfers provides benefits that can be significant for developers and other real estate interests:

• Cleanup and redevelopment integration: Shortening remediation and development schedules, and reaping the associated cost savings, by coordinating cleanup and construction requirements and activities.

• Reuse and remediation decision-making integration: Saving money and time by setting and achieving cleanup levels required to support the intended reuse(s) of the property.

• Increased opportunities for investment in property.

Perhaps the most important benefit of using this combination of CERCLA 120(h)(3)(C) early transfer authority, performance-based contracting and environmental insurance is that it gets DOD out of the cleanup and redevelopment process early. LRAs and developers then can realize their plans for closing base properties more quickly and with greater efficiency and cost savings.

The 2005 BRAC round likely will result in the closure of many currently active military bases, likely including a large number of bases on the East Coast. Developers that are prepared to negotiate the terms and conditions of complicated real estate, financial and insurance transactions will find that the rewards more than make up for the challenges.

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