The Role of Institutional Controls in Brownfield Redevelopment

(Edward F. McTiernan)
June 26, 2001
This paper examines the use of institutional controls in connection with the remediation of Brownfield sites and other industrial or commercial facilities. Special emphasis is given to private development interests and experiences at New Jersey sites.

Presented at
Brownfields 2000 Research & Regionalism: Revitalizing the American Community,
October 11-13, a conference sponsored by USEPA, the National Conference of Mayors, the Engineer's Society of Western PA, NJDEP and NYDEC.

This paper examines the use of institutional controls in connection with the remediation of Brownfield sites and other industrial or commercial facilities. Special emphasis is given to private development interests and experiences at New Jersey sites. Institutional controls are administrative and legal mechanisms that are intended to reduce exposure to residual contamination at former industrial facilities or waste disposal sites by controlling behavior. The most common form of institutional control in the New York/New Jersey region is the recorded deed notice or restriction. Deed notices are used to allow residual soil contamination to be left in place. Less common institutional controls include well-head restriction zones, zoning restrictions and public education programs. Institutional controls are generally used in conjunction with engineering controls such as capping. A brief background regarding the development of non-permanent remedies such as deed notices and an overview of transactional considerations is presented. Finally, this paper presents some proposals regarding policies to further encourage redevelopment of underutilized industrial and commercial properties.

I. BACKGROUND

A. Why Are Institutional Controls Necessary?

Environmental liabilities arising from contamination generally run with the land. New owners inherit existing liabilities. The fall out from this simple policy became obvious in the 1980s. Because of its national scope and scheme of strict, joint and several liability, the Comprehensive Environmental Response Compensation and Liability Act, 33 U.S.C. 9601 et seq. ("CERCLA") radically changed real estate transactions. CERCLA forced lenders and purchasers to recognize that their entire investment was at risk if property they invested in proved to be contaminated.

CERCLA and its state law counterparts had a chilling effect on the redevelopment of existing industrial and commercial facilities. The strict liability provisions in these laws created serious disincentives for lenders and prospective purchasers. Institutional controls are one response to the adverse impact which remediation liabilities can have on Brownfield redevelopment. By allowing some residual contamination to remain in place (even at potentially hazardous levels), institutional controls permit regulators to approve less costly cleanup strategies.

Institutional controls are also a response to practical realties. There are many situations which render a complete cleanup cost prohibitive for a private developer. For example, it may not be practical to excavate soil contamination which extends beneath existing structures. In other cases wide spread, but low level, soil contamination can only be dealt with in a cost-effective manner by capping or other in-situ strategies. In such circumstances institutional controls provide a mechanism for the applicable governmental agency to approve a clean-up that leaves behind residual contamination. Otherwise, the remediation expenses render such properties unusable for private investors.

B. How Institutional Controls Work

The term "institutional control" can be applied to a wide spectrum of legal and administrative measures. All of these mechanisms have one common feature; they are all intended to control exposure to residual contamination at sites which have undergone environmental remediation. For example, Section 18-7-201(24) of the Ariz. Admin. Code defines "institutional controls" as "a legal or administrative tool or action taken to reduce the potential for exposure." See also 40 C.F.R. 300.430(a)(1)(iii)(D)(EPA's definition of institutional controls from the National Contingency Plan). Most institutional controls are also designed to ensure that the post-remediation use of the property is compatible with the level of cleanup.

Decisions about environmental remediation are based upon risk assessments. The age old question "how clean is clean?" really means how much risk is acceptable? One major variable in evaluating environmental risk is the assessment of exposure pathways. The frequency and duration of exposure will strongly influence the outcome of the risk assessment. See EPA, Risk Assessment Guidance for Superfund, December 1999. The results of the risk assessment will, in turn, dictate the degree of remediation that is determined to be acceptable.

Institutional controls alter traditional assumptions regarding the types and frequency of exposures to residual contamination.

C. Institutional Controls Lead To Approvals That Make Deals Happen

In response to the redevelopment disincentives caused by CERCLA and similar State laws, policy makers have developed numerous programs which are intended to encourage Brownfield redevelopment. Some of these Federal policies are summarized in Table 1.

However, these policy initiatives tend to focus on the process of managing cleanups. What sellers, lenders and prospective purchasers require is predictability and finality. A No Further Action determination signals the end of the remedial process. These final approvals are far more valuable to commercial parties than process based initiatives. Institutional controls are valuable because they help expedite the process of obtaining approvals.

C. Legislative Support for Institutional Controls; The New Jersey Experience

Because institutional controls are legal means which are intended to influence future actions, the use of institutional controls varies from jurisdiction to jurisdiction.

In New Jersey, there is explicit statutory authorization for using institutional controls. In 1993, the New Jersey Legislature stated that "it is the policy of this State . . . to promote efficient and timely cleanups and to eliminate any unnecessary financial burden of remediating contaminated sites . . ." N.J.S.A. 13:1K-7. The reforms contained in this legislative package included N.J.S.A. 58:10B-13, which controls the use of institutional controls during site remediation. N.J.S.A. 58:10B-13 states that:

When real property is remediated to a nonresidential soil remediation standard or engineering or institutional controls are used in lieu of remediating a site to meet an established remediation standard for soil, groundwater, or surface water, the department shall, as a condition of the use of that standard or control measure . . . require the establishment of any engineering or institutional controls the department determines are reasonably necessary to prevent exposure to the contaminants, require maintenance, as necessary, of those controls, and require the restriction of the use of the property in a manner that prevents exposure; and . . . require, with the consent of the owner of the real property, the recording with the office of the county recording officer, in the county in which the property is located, a notice to inform prospective holders of an interest in the property that contamination exists on the property at a level that may statutorily restrict certain uses of or access to all or part of that property . . .

The deed notice requirements in N.J.S.A. 58:10B-13 are potentially applicable to a staggering number of properties in New Jersey. N.J.S.A. 58:10B-12(e) applies to all remediation activities undertaken in New Jersey, including all Superfund clean-ups; Resource Conservation and Recovery Act corrective action sites; any industrial establishments which undergone Industrial Site Recovery Act review, all Spill Act sites and any voluntary cleanups. Thus, as a result of this legislation the requirement to provide record notice is triggered whenever soil remediation does not achieve the most stringent cleanup criteria, including all sites where engineering controls are used in lieu of soil removal.

D. What Have The Courts Said About Institutional Controls?

There are relatively few reported decisions involving recorded environmental restrictions used in connection with site remediation activities. The available case law includes:

U.S. v. Pitney-Bowes, Inc.

T&E Industries, Inc. v. Safety Light Corp.

, 123 N.J. 371, 402 (1991) which suggests that by recording notice of contractual arrangements, such as releases or indemnification agreements, even a party which would otherwise be subject to strict liability for abnormally dangerous activities can shift cleanup expenses to subsequent owners., 25 F.3d 66 (2d Cir. 1994), wherein the Federal Circuit Court rejected, largely on procedural grounds, a claim by a mortgagee that the use of a deed notice in connection with a CERCLA cleanup would impair the value of its collateral, and

II. BUSINESS CONSIDERATIONS WHEN USING INSTITUTIONAL CONTROLS

A. "Old" Deals Often Failed To Consider Non-Permanent Remedies

In the past, transactions were often completed without giving due consideration to the differences between permanent and non-permanent remedies. This lack of specificity can be the source of considerable friction between buyers and sellers; landlords and tenants and even lenders and borrowers. In these instances the party with the long-term view (i.e., the new owner; the landlord or the lender) is concerned that the non-permanent clean-up is incomplete. Whereas, the party completing the clean-up (i.e., the seller; tenant or borrower) believes that it is complying with the intent of the parties by securing an approval of the least expensive clean-up. When these issues cannot be resolved, litigation often follows.

B. Considerations For Buyers and Sellers

Property owners or prospective purchasers often take the position that their interest should be free and clear of all encumbrances and that any cleanup which does not satisfy the most stringent permanent criteria is unacceptable. These prospective owners are often dealing with lenders who believe that any adverse effect on potential future uses of the property is unacceptable. Conversely, responsible parties often believe that any cleanup beyond the least expensive, non-permanent remedy which the government will approve constitutes an undeserved windfall for the present owner. The party responsible for the remediation wants to walk away once an approval is issued (even if residual contamination remains in place). Faced with these competing concerns, institutional controls will only work in the context of a pending Brownfield transaction when the parties adopt a moderate position which takes into account the risks and benefits to both sides.

The compatibility of the proposed Brownfield redevelopment and the proposed remediation is the key consideration. If the parties can come to an agreement that the buyer's proposed use can accommodate the seller's proposed remediation, then the parties can think about allocating the costs and risks associated with using institutional controls. Thereafter, the parties will need to consider what Federal, State and local regulations and policies will impact their deal.

Parties involved in transactions for Brownfield sites which will involve the use institutional controls must consider:

the degree of clean-up which is required as a condition of accepting the institutional control;

the cost of post remedy inspection, maintenance and repair;

which party will be responsible for post-remedy reporting to regulators, and

what happens if cleanup standards change (and additional remedial action becomes necessary).

A. Public Involvement

Community awareness, acceptance and compliance are essential if institutional controls are to be successful. Recent studies suggest that the long-term effectiveness of institutional controls is dependent upon increased public participation. See Environmental Law Institute, Protecting Public Health at Superfund Sites: Can Institutional Controls Meet the Challenge? (2000).

B. Measuring the Effectiveness of Institutional Controls

Determining whether institutional controls are effective has proved to be difficult. Recent experience suggests that many state regulators are concerned that property which has previously been cleaned up to industrial standards pursuant to some type of Deed Restriction has been converted to inappropriate (i.e., residential) use. See John S. Applegate and Stephen Dycus, Institutional Controls or Emperor's Clothes? Long-term Stewardship of Nuclear Weapons Complex, 28 ELR 10631 (1998) In response to these concerns, parties can expect increased inspection and reporting requirements at the Federal, State and local level. The New Jersey Department of Environmental Protection is already requiring biennial certifications to help ensure the continued effectiveness of recorded Deed Notices.

IV. RECOMMENDATIONS

A.

Greater Recognition of Zoning As a Form of Institutional Control

Site specific institutional controls, especially Deed Notices, can needlessly hinder redevelopment efforts. These recorded instruments tend to get reviewed over and over by third parties with no particular environmental expertise such as local planning agencies, banks and title companies. This process slows redevelopment. Therefore, in order to encourage Brownfield redevelopment, regulators should reduce the number of situations where institutional controls are required.

States, like New Jersey, need to consider future land use scenarios during the risk assessment process not just during remedy selection. As discussed in EPA's OSWER Directive No. 9355.7-04 Land Use in the CERCLA Remedy Selection Process : "[f]uture land use assumptions allow the baseline risk assessment and the feasibility study to focus on the development of practicable and cost-effective remedial alternatives, leading to site activities which are consistent with the reasonably anticipated future land use." By using unduly conservative assumptions during the risk assessment process, local programs unnecessarily hamper Brownfield redevelopment efforts by increasing the need for institutional controls. Greater recognition of traditional zoning's ability to reduce exposure would reduce the increasing reliance on recorded Deed Notices.

B. Remove Blanket "Use" Limitations From Deed Notices

Blanket prohibitions on residential "use" are common in Deed Notices. This practice is required in New Jersey where the language of Deed Notices is the subject of a mandatory rule. See N.J.A.C. 7:26E, Appendix A. However, Deed Notices should, at most, impose conditions upon certain high risk activities, such as excavation or soil disturbance. These types of activities should be regulated regardless of the ultimate "use" of the real estate. New Jersey's attempt to incorporate land use restrictions into the Deed Notices during the site remediation process causes needless confusion, undermines public support for institutional controls and further stigmatizes many Brownfield sites. Deed Notices should not contain a blanket prohibition on "residential" use. Rather, the scope of any use restriction should be determined on a case-by-case basis.

C. Define Public Participation Requirements

There is an increasing emphasis on public participation during the site remediation process. However, except for the NPL's requirements applicable to Superfund sites, the procedures for obtaining public input are not well defined. Because institutional controls generally involve residual contamination which will be left in place, they often become the flash point for community interest. Brownfield redevelopment can be encouraged by establishing well defined public participation requirements at the earliest possible phase of the project.

Table 1

SUMMARY OF SELECT FEDERAL PROGRAMS INTENDED TO ENCOURAGE BROWNFIELD REDEVELOPMENT

Name	Citation/Reference	Comments
EPA's Prospective Purchaser Policy	60 Fed. Reg. 34790 (July 3, 1995)	Provides guidance for EPA Regions to enter into agreements with covenants not to sue as an incentive to make contaminated property available for reuse; in exchange purchaser must provide benefits to the community such as habitat restoration or infrastructure improvements. Unfortunately, the process of negotiating a Prospective Purchase Agreement is cumbersome. As a result, between 1995 and 1999, EPA reported that it had entered into only 105 agreements.
EPA's Comfort Letter Policy	November 12, 1996 Memorandum	"Comfort letters" are intended to provide prospective purchasers with a preliminary assessment of the likelihood that EPA will take CERCLA action regarding a particular property. These letters are not final agency action.
Brownfield Tax Incentive	Portion of the Taxpayer Relief Act (HR 2014/PL 105-34) (August 5, 1997)	Allows purchasers to fully deduct environmental cleanup costs in targeted areas.
EPA Policy on Deferral of NPL Listing While States Oversee Response Actions	OSWER Directive No. 9375.6-11 (May 3, 1995)	EPA recognizes that NPL listing can have an adverse impact on redevelopment. This policy statement provides a procedure for certain parties to address response actions under state programs and avoid NPL listing.

III. EMERGING ISSUES

 

Abstract: