Brownfields and Urban Development Practicalities & Pitfalls from Drawing Board to Boardwalk: Prospective Purchaser Agreements

Kenneth Patterson
Environmental Protection Agency

The United States Environmental Protection Agency ("EPA") continues to pursue its mission of protecting human health and the environment, and in the brownfields context, this goal is achieved by encouraging responsible development. Cleanup of contamination and clarification of federal cleanup liability are building blocks for sustainably recycling previously-used property. In examining brownfields’ liability, it is important to balance the risks borne by the parties involved. The business or developer involved bears the risks of incurring federal liability and EPA enforcement or inspection, while for EPA, the major risk is being unable to protect human health and the environment.

In 1998, the General Accounting Office ("GAO") estimated the number of potential brownfields at 450,000 sites. However, approximately 10% of brownfields are considered for the National Priorities List, with less than 1% actually placed. Therefore, most brownfields will not require federal Superfund action. Because all Superfund sites are unique, there is a varying level of comfort that is given and needed for a particular site. Under current law, there is a continuum beginning with no comfort needed from EPA to a prospective purchaser agreement ("PPA"), which is the most comfort given, with comfort letters and memoranda of agreement ("MOA") filling in the comfort spectrum.

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Compared to PPAs, comfort letters are less time and work intensive, for both prospective purchasers and the EPA.

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Prospective purchaser agreements ("PPAs") help to remove liability barriers associated with Superfund sites, but a PPA is just one of multiple approaches to dealing with the liability risks associated with these sites. Statutory and regulatory provisions can help reduce or eliminate liability in limited circumstances, for instance, the innocent landowner defense, the secured creditor exemption, and de minimis settlements. EPA policy and guidance documents are very useful in managing CERCLA liability risks and removing redevelopment barriers because they define how EPA will exercise its enforcement authority. When a site, circumstance, or party falls into the criteria embodied in an EPA guidance document, individuals should find satisfaction in the fact that EPA will act in accordance with the policy. Hopefully, EPA’s statement of policy not to pursue a certain type of party will provide adequate protection and comfort to an eligible party who will not need to seek additional documentation from EPA.

To reduce uncertainties associated with the environmental status of certain sites, the EPA is willing to provide a comfort letter, when appropriate, to potential property owners, developers, and lenders. Comfort letters are intended to clarify the likelihood of EPA involvement at a site, or identify whether a party is protected by a statutory provision or discretionary enforcement policy, and they address a particular set of circumstances along with providing any other information contained within EPA’s databases. Comfort letters have been a great success, as the survey results of 54 private party recipients of comfort letters demonstrates. Out of the 54 recipients, 56% stated that property reuse would not have occurred without the comfort letter. Also, the redevelopment projects that had comfort letters resulted in the creation of at least 1,010 permanent jobs, and at least 444 short-term jobs. Compared to PPAs, comfort letters are less time and work intensive, for both prospective purchasers and the EPA. For instance, it takes an average of 7.4 weeks to receive a comfort letter at a cost of $2,650 for the recipient, while the average time of a PPA takes 9 months at an average cost of $167,726.

Based on the 1995 Guidance, the EPA may enter into a PPA in situations where all of the following criteria can be met: 1) EPA has undertaken, is undertaking, or plans to undertake a response action; 2) the agreement will result in either a substantial direct benefit to EPA in terms of cleanup or funds for cleanup or a lesser direct benefit to EPA coupled with a substantial indirect benefit to the community (for example, the creation of jobs, infrastructure development, and the protection or creation of green space); 3) with the exercise of due care, the continued operation of the facility or new site development will not aggravate or contribute to the existing contamination or interfere with EPA=s response action; 4) the continued operation or new development of the property will not pose health risks to the community and those persons likely to be present at the site; and 5) the prospective purchaser is financially viable.

Prior to the 1995 revision of the PPA guidance, only 20 PPAs were issued. Since 1995, approximately 100 more PPAs have been completed, with close to a dozen more in the process of being finalized. Seventeen hundred permanent and 1,700 short-term jobs have been created from PPAs. Redevelopment projects associated with PPAs have an average value of $6,091,000, and at least $184,400,000 has been invested, excluding cleanup costs, in them. PPAs are very resource intensive, and the process generally takes several months. It is important to note that PPAs are not appropriate at sites where there are other means available to address CERCLA liability concerns, for example, private mechanisms such as insurance and indemnification agreements. Nor are PPAs appropriate where a site is already undergoing cleanup through a state program.

Along with the revisions to the PPA guidance, EPA has recently developed a number of new products to clarify the PPA process. The "dear requester" letter is a model letter that acknowledges a PPA request. It has a checklist of information attached to it, detailing what EPA will generally require in evaluating PPA requests. By providing requesters with a model acknowledgment letter and document checklist, the process is standardized, allowing for a quicker review of PPA requests. In addition, those considering requesting a PPA, as well as other interested parties, will have access to a description of the information that EPA generally requires. Also, minor revisions have been made to the model PPA. For example, a clarification has been made to the definition of "existing contamination" which allows the regions the option of limiting "existing contamination" that is present on the property being purchased rather than the entire site. This helps a prospective purchaser in managing its liability risks in a situation where the property being purchased is a small portion of a larger site. Lastly, a PPA internal tracking system has been created to expedite the entire process. Using the CERCLIS database, the EPA can track individual requests, evaluate the timeliness of EPA’s response, and identify where in the PPA process delays are occurring. EPA and the Department of Justice have both designated "expediters" as points of contact who will quickly resolve issues concerning a PPA’s progress.

EPA is continuing to seek ways to improve and clarify the PPA process. One example is the concept of extension of covenants. This concept of extending the United States= covenant and contribution protection to future purchasers of site property is being explored by EPA as a way to further our goals of reducing barriers to the productive reuse of contaminated property, and also the goal of reducing the time and costs spent in negotiating PPAs on an individual basis. The EPA is trying to be smarter about settlements with current site owners by maximizing our cost recovery potential. Extension of covenants works with site owners who have limited ability to pay. The concept is that EPA will get a percentage of the fair market value of the property when the current owner sells the property in the future. In exchange, the future purchaser, which may not yet be identified, will be afforded the protection of a covenant not to sue and contribution protection given to a settling site owner, if the future purchaser meets certain minimum criteria. For instance, the purchaser must not already be a PRP at the site, and the future owner must agree to be bound by the access, the exercise of due care, and institutional control provisions of the settlement with the site owner. The mechanism for providing an extension of covenants would be an agreement that is attached to the settlement agreement with the current site owner. This appended agreement would be very similar to a PPA, but could incorporate certain provisions of the original agreement by making reference to them. Hopefully, such a process will enhance the marketability of the property by offering the future purchaser the covenant not to sue and the contribution protection up front, as long as it meets the minimum criteria. The appended agreement will obviate the need for negotiating a new PPA with each future purchaser of the site property.

While PPAs are not generally used at brownfields sites, a bill recently introduced in the Senate, S2700, entitled "The Brownfields Revitalization and Economic Restoration Act of 2000," provides for the use of PPAs at brownfields sites. Assistant Administrator Tim Fields testified on behalf of this bill in June 2000, and the bill also has significant bi-partisan support. Currently, it is still in the sub-committee phase. This bill would allow prospective purchasers that had nothing to do with the property or persons responsible for the cleanup, to have a legal defense to any claim by EPA, or any other entity, that they are liable for cleanup under Superfund because they are the owners of contaminated property. Like PPAs now, such a prospective purchaser must meet certain requirements, like access, cooperation with activities related to cleanup, and exercise of appropriate care. However, this bill would expand the current uses of PPAs because the purchaser would not have to provide direct contributions to the cleanup or indirect public benefits, individual agreements would not need to be negotiated, and protections would be afforded to the purchaser without any EPA action at the site. Overall, these promising legislative changes help to clarify federal cleanup liability, allow parties to more accurately assess their risks, and facilitate the proper development of contaminated sites like brownfields.