United States: Prognostication, Carrots & Sticks, and Smiley Face Legislation

When the folks at Brownfield News asked me to write a column, my initial reaction—who can I bill this time to?—was swiftly followed by a strong desire to do this, provided that Brownfield News was interested in an idiosyncratic opinion piece, laced with some occasionally inflammatory suggestions. Well, those weren’t my exact words, but there were words to that effect. Brownfield News took up the idea, and here we are.

If the editor doesn’t pull the plug immediately, this column will address some of the major and minor developments in the business of brownfield development. Your ideas would be appreciated via e-mail at gillonp@gtlaw.com. (No, I don’t have any ideas about job opportunities, nor do I wish to assist any graduate students working on brownfield "success stories.")

Let’s start with predictions for the brownfield business in the year 2001. Most real estate experts are expecting a dip in the overall real estate market this year, despite the Federal Reserve’s reduction of interest rates. As a result, the underlying value of environmentally impaired property will inevitably decline, making it more difficult to justify private redevelopment absent public incentives or subsidies, or subsidies by the property owner or other responsible party.

With a reduced demand for industrial, commercial and residential product, one might logically project a slowdown in the pace of brownfield redevelopment. On the other hand, brownfield sites offer the possibility of reduced land costs, making them more attractive to vertical developers. As such, brownfield sites may prove to be a good hedge in a difficult market. One other take is that this economic situation will mean that more impaired assets are available for sale, at a better price. The result may well be a stable market for brownfield redevelopment this year.

If anyone is concerned with the U.S., they need only look at the market emerging in Japan. In Japan, industry is finally coming to grips with the problem of soil and groundwater contamination. Japanese lawmakers are working on the first legislation to address an estimated $122 billion in cleanup costs. The law is being modeled on the U.S. Superfund scheme with added civil penalties for polluters of soil. Several major Japanese companies, such as Nissan Motors, Mitsubushi Materials, and Nomura Real Estate, have been embarrassed this year by the discovery of chemical waste disposal sites on their property. More than mere embarrassment, they have begun to incur very costly cleanups. In the case of Nomura, last February it was forced to tear down a nearly completed condo project near Osaka when a waste disposal area was discovered on the property.

According to a report in Business Week (Jan. 8, 2001), real estate investors, including U.S. companies like Goldman Sachs and Colony Capital, are beginning to recognize the risks of contamination and to approach contaminated properties in Japan the same way they approach brownfield sites in the U.S.

Don’t expect much help from Washington. President Bush’s nomination of New Jersey Governor Christine Todd Whitman as Administrator of the EPA presents both pluses and minuses for the brownfield industry. Certainly Governor Whitman’s nomination suggested the possible importance of the EPA to this administration, and paved the way for President Bush to elevate the EPA to a Cabinet position. Governor Whitman’s active role in New Jersey’s brownfield programs and the emphasis she placed on those programs during her first weeks in office suggest that brownfield redevelopment will take a high priority in her administration. In fact, President Bush made brownfield cleanup one of the planks of his campaign platform. On the other hand, Governor Whitman has said repeatedly that her approach will involve more "carrot" than "stick." As everyone knows, the one sure way to stimulate brownfield development is to compel site owners and responsible parties to investigate and remediate their sites. Without the threat of the enforcement "stick," property owners will naturally hold on to underutilized or vacant property and will have no incentive to place that property in the stream of commerce.

Nor should we expect any major environmental legislation from the nearly equally divided House and Senate. Democrats will continue to paint Republicans and President Bush as anti-environmental and will use any proposals for major legislative reform of Superfund or any of the other major environmental laws as whipping posts. Bush’s reversal of his campaign position on carbon dioxide emissions is giving Democrats ample ammunition. Nor will Republicans want to risk tarnishing their environmental records with the crucial 2002 elections just around the corner.

So will it be gridlock? Yes, with one exception. The one exception may be the widely supported (and unambitious) brownfield bill, S. 350, introduced February 15 by a bipartisan group of sponsors that includes Sen. Robert Smith (R-N.H.), chairman of the Environmental and Public Works Committee, and Sen. Harry Reid (D.-Nev.), ranking Democrat on the committee. Other sponsors include Sen. Lincoln Chafee (R-R.I.), chairman of the Environment and Public Works Subcommittee on Superfund, and Sen. Barbara Boxer (D-Calif.), ranking Democrat on the subcommittee. Identical to S.2700, the bill that stalled last year, this measure would clarify that where a brownfield site is being cleaned up under a qualified state program, the EPA may not order additional cleanup or seek recovery of response costs absent an imminent hazard, and may not add the site to the National Priorities List. That’s a great idea, except that I’m not aware of a single case where EPA has overfiled a CERCLA order at a site undergoing cleanup under a state voluntary cleanup program. Still, it is encouraging that the proponents of this legislation have recognized that the hard work of brownfield redevelopment is well under way at the state and local level and that the best federal policy is to limit the EPA’s involvement in the remedial process.

The most vocal supporters of S.350, the conventional real estate and lending community, will derive some comfort from the measure. S.350 would create a safe harbor for "bona fide prospective purchasers," parties who did not discover a release after completing a commercially reasonable and customary due diligence review, such as an ASTM compliant Phase I. Once a release is discovered, the innocent purchaser would have to report it to the EPA, take steps to stop the spread of contamination and comply with institutional controls and deed restrictions. If the owner waited until the EPA decided to act, the EPA’s costs would create a lien on the property.

The bill would also modestly increase federal brownfields funding, from $90 million to $150 million annually, and would for the first time allow the funds to be used by local governments for cleanup in addition to assessment. That is a start, but there is a clear need to increase that funding level to address hard-core brownfields whose real estate value is overwhelmed by the cost of cleanup.

Keep your eye on Congress. Even an innocuous proposal like S.350 may spawn rancor and opposition from some quarters as the bitter residue of the 2000 election lingers over every issue in Washington.

Peter Gillon is Principal Shareholder with Greenberg Traurig, LLP in Washington, D.C., where he represents national brownfield developers and is Co-Chair of the Environmental Department. His column will appear regularly in Brownfield News.