NJDEP Stops Processing LNA Applications for Certain Property Types

(The Real Properties Group)
April 28, 2004

It's official -- the New Jersey Department of Environmental Protection ("NJDEP") has announced that it will stop processing applications for ISRA Letters of Nonapplicability ("LNAs") for a number of transactions and properties. Citing to the fact that NJDEP receives over 5,000 applications for LNAs each year, NJDEP has decided to stop processing LNA applications for a number of transactions and property types that it has determined are "clearly not subject to ISRA." As of April 2004, NJDEP will issue form letters to LNA applicants stating that the Department will no longer process applications for LNAs for the following transactions:

  1. The refinance of a loan or obtaining a construction loan;

  2. The sale, purchase, or corporate transaction involving the following property types:
    • residences including apartment buildings and nursing homes;
    • agricultural land;
    • restaurant/bars;
    • medical offices;
    • retail gasoline stations;
    • automobile repair shops, body shops and dealerships;
    • dry cleaning operations;
    • undeveloped land not located adjacent to an industrial establishment;
    • garden centers/home improvement centers/lumber yards/hardware stores;
    • hair or beauty salons;
    • motels, hotels or rooming houses;
    • retail stores, excluding print shops.

Should you submit an application for a LNA for one of these types of properties, you will receive the application and review fee back from NJDEP unprocessed.

The reason for the change in policy is clear: since the Environmental Cleanup Responsibility Act (now the Industrial Site Recovery Act), N.J.S.A. 13:1K-6 et seq. ("ISRA") was first enacted at the end of 1983, NJDEP has been inundated with LNA requests. The problem worsened as lenders, landlords and other parties with an interest in real property started to institutionalize the requirement to obtain an LNA either prior to closing a transaction or immediately preceding a lease termination, no matter what the property was used for. As the number of applications grew, NJDEP realized that it simply does not have the staff to process them. Currently, NJDEP has two full time staff members processing applications. Earlier this year, NJDEP personnel met with a number of banks to persuade them to voluntarily stop the practice. Apparently, this effort did not yield the desired results and NJDEP began issuing its refusal to process letters in early April.

The new policy brings to light a number of misconceptions about the Department's issuance of an LNA. First, parties are not required to obtain a LNA as a matter of law for any given transaction. A LNA merely states that, pursuant to the ISRA statute, the property and/or transaction is not subject to ISRA. Most of the LNAs issued by NJDEP are for properties that do not have Standard Industrial Classification ("SIC") codes that are covered under the ISRA statute. Under ISRA, only properties that have major SIC codes ranging from 22-39, 46-49, 51 or 76, are covered. For the most part, these SIC codes correspond to manufacturing facilities. Therefore, if one knows the SIC code for a particular facility, the applicability of ISRA becomes self-evident and there is no need to apply to NJDEP for an LNA. Second, LNAs do not indicate whether the site is contaminated or not. A LNA merely states whether ISRA is applicable to the site or the transaction. But ISRA is only one of a number of State programs that addresses the clean up of contaminated sites. The other State cleanup programs are broader than ISRA as they apply to all sites, even residential properties, where ISRA only addresses "industrial establishments". Yet, because ISRA offered its LNA program, where lenders and property owners could get a letter from the NJDEP stating that ISRA was not applicable for a mere $200.00 review fee, the LNA gave lenders and other entities a sense of security, albeit a false sense, that the property was not contaminated. As such, LNAs became an integral part of doing business in New Jersey.

In spite of the popularity of LNAs, the only sure fire way to have the State acknowledge that a Site is not contaminated is by applying for a No Further Action letter ("NFA"). This process, however, is a much more lengthy and expensive process than obtaining a LNA. Yet, the NFA yields the information that is truly desired by real property owners and lenders - that the site is not contaminated or has been cleaned-up to NJDEP standards.

Because the practice of obtaining an LNA has become so engrained into the real estate business in New Jersey, the new policy will have far reaching impacts on the way banks, landlords and others with real property interests do business. Purchase and sale agreements, loan documents, mortgages, and leases that made obtaining a LNA a requirement of the transaction will need to be modified. Provisions that previously required a LNA will now need to be reviewed on a case by case basis and the ISRA clauses modified based on the type of property involved. Leases may present the most difficult challenge as they often require a tenant to obtain an LNA at the end of the lease term which may not occur for a number of years into the future. Additionally, purchase, sale and lending documents that required parties to produce a LNA at closing will need to be modified based on the use of the property involved in the transaction. Lenders and purchasers may have no choice but to require parties to provide an opinion on the applicability of ISRA, something the legal community has long frowned upon given the ever-changing nature of the environmental field. Of course, if lenders and others in the real estate business are concerned about whether the property is contaminated, they should require a Phase I/Preliminary Assessment be performed at the outset of the transaction and enter into Memorandum of Agreement ("MOA") with the NJDEP under the State's Voluntary Cleanup Program ("VCP"). This work may lead to additional testing and cleanup, and greatly increase transactional costs, but it is the only recognized way for parties not engaged in ISRA or another cleanup program to secure a NFA stating that the property has been cleaned up to NJDEP standards or was never contaminated in the first place.

Initially, NJDEP's new policy will present a number of problems for those involved in the real estate business in New Jersey. It is likely that parties will need to make policy changes and that professionals may need to review matters on a case by case basis to make certain that LNAs are required only for the properties other than those that are "clearly not subject to ISRA." One cannot help wonder if the impact this drastic change in LNA policy will have on the real estate business could have been avoided by NJDEP simply hiring a few more employees to process the volume of LNA applications it receives each year or to increase the review fee. With the tight budget constraints placed on NJDEP, hiring more employees was not an option and like so many other NJDEP programs, the burden of dealing with this sudden change in policy will be shifted to the private sector.