The following articles are excerpts from the newsletter:

The Absolute Need for Political Leadership in Brownfield Redevelopment, Musette H. Vogel, The Stolar Partnership

The Deal on Deed Restrictions, Bruce A. Keyes and Edward B. Witte, Foley & Lardner

Environmental Insurance, Robert F. Lawrence, Milbank, Tweed, Hadley & McCloy

 

THE ABSOLUTE NEED FOR POLITICAL LEADERSHIP IN BROWNFIELD REDEVELOPMENT

Musette H. Vogel

The Stolar Partnership

"The Most Important Thing... Is That He Has Brought a Sense of Optimism Back."

Every environmental and real estate lawyer has read or heard of the stunning urban renaissance taking place in America's once-great and now re-born again cities: Chicago, Detroit, Kansas City, Indianapolis, New Orleans, Philadelphia and Louisville. We are also all aware that some cities seem to be sitting on the sidelines watching the action and scratching their heads, wondering why wholesale redevelopment continues to evade them, jump over them and, figuratively speaking, cross the street to walk on the other side.

A few pioneers, like Illinois, first adopted many of the now well-known Brownfields tools such as voluntary cleanup programs, risk-based remediation, prospective purchaser agreements, "No Further Action" letters, proportionate share liability and various financial incentives. Most states followed this lead and quickly enacted many, if not all, of these same tools. So, if the playing field is seemingly level, and every city has relatively the same tools in its statutory toolbox, then what accounts for urban revitalization happening in some locales and not in others? Why do some cities, like Chicago, for example, call its Brownfields redevelopment agenda, a success story? While others, like St. Louis, call it an "urban legend" - out there looming in the mist, but never accounted for or witnessed?

Perhaps the answer lies within the profoundness of one young man's simple comment about Philadelphia and its Mayor, Edward G. Rendell, "the most important thing...is that he has brought a sense of optimism back." After more than a decade of redevelopment experience and experiments, there is one basic ingredient necessary to revive an urban core littered with Brownfields: A city needs leadership. Cities need bright visions of the future and charismatic leaders to translate vision into action. Brownfields must have a champion. Countless studies of America's redeveloping cities show us that there are essential differences separating the talkers and the planners from the doers and the movers. A city must have a clear, concise and bold action agenda. But more importantly, the political leadership must inject into the city, a healthy dose of hope for the future and instill unabashed excitement about the possibilities.

A Clear, Concise and Bold Agenda

After studying three of the more successful $200,000 dollar Brownfields pilot programs (Louisville, KY, Trenton, NJ and Portland, OR) and conducting literature reviews, interviews and analysis of the redevelopment barriers and available tools, the USEPA concluded the following: "None of the cities studied employ a systematic approach for considering the various factors in setting redevelopment priorities. Because of the different values and objectives of different participants in the process (e.g. economic development agencies, community development organizations, and developers), priority setting is a necessarily subjective process, and any systematic approach must be flexible enough to accommodate this subjectivity." While the study goes on to recommend a helpful framework and set of criteria for assisting municipalities with selecting Brownfields sites and setting redevelopment goals, the findings of the study point to the obvious. No two cities are alike. There is no singular redevelopment blueprint for success. There are however, leadership models and shining examples to follow.

So, then how does a city sift through its needs and prioritize its goals? Where to start? Where to invest? How to target resources? How to attract end-users? How to gain political support? The answers can be boiled down to this advice: Adopt a total urban agenda and communicate the vision clearly. Brownfields decisions can then be made consistent with that agenda.

Best practices tell us there are three objectives to be accomplished by Brownfield redevelopment: "Redevelopment of mixed use areas with highly exposed, low income, minority populations will address environmental justice issues and revitalize residential neighborhoods. Redevelopment of industrial areas with large land tracts will provide employment with the potential for higher wage jobs. Redevelopment of Brownfields in desirable waterfront and downtown areas will have significant economic redevelopment benefits associated with increased tax revenue."

While some cities need to accomplish one or all of these redevelopment objectives, the political leadership must begin its efforts somewhere. More precisely, once the urban agenda is set, then decisions must be made as to the level of public commitment core projects will receive within the targeted area. Leadership decisions are needed on where to allocate municipal energy.

To make these decisions, a city should consider and prioritize redevelopment opportunities into three categories: The "low hanging fruit" opportunities are where private development will take place largely without public assistance if the city creates a hospitable and business-friendly environment. The USEPA calls these "highly marketable sites," "such as waterfront or downtown areas for which traditional sources of development funding are likely to be available for redevelopment, but non-monetary assistance such as guidance pertaining to environmental issues or help with zoning or permitting may be necessary."

The other two opportunities are: "Sites that are marketable for specialized developers with experience in site remediation, and knowledge of and access to alternative funding sources" and "sites with low marketability where public funding is necessary."

A city should always use this framework to stay on agenda and match efforts to the desired result within the targeted area. After inventorying its barriers and available tools, a city needs to critically examine the targeted area, assess the site inventory, determine challenges and make resource commitment decisions. Does the city have willing developers for the targeted area who complain of confusing regulatory complexities and slow governmental decisions? If so, then the city has a low hanging fruit problem and a one-stop shop permitting may be part of the solution. Are there specific sites with particular problems in an otherwise lively market? If yes, the city then may need specialized developers and should focus marketing efforts accordingly. Are there large quantities of available property with perceived environmental issues? Then, the city likely has a low marketability problem and finding major public financing is paramount.

Pittsburgh for example used this framework and opted to target grand scale development of its downtown area and increase tax revenue as its urban agenda. Primarily, Pittsburgh has focused on low marketability sites and committed tremendous public resources.

The main commitment of Mayor Tom Murphy's administration has been the adoption of a clear master downtown "mega-remake" plan called "Market Place at Fifth and Forbes." The plan's focus is a singular $200 million dollar project with the City assuming a central role. For its public commitment, the City will take 80 buildings through eminent domain, demolish 40 and turn all of the properties (with clear title) over to Urban Retail Properties (Water Tower Place, Chicago) to develop a unified downtown shopping district. The concept is that the district will be a "unified commodity that can be developed, managed and marketed with a single vision and a single developer."

The lesson of Pittsburgh is that without a bold agenda and clear leadership, Pittsburgh may still be in its "civic depression" brought on by loss of 150,000 jobs over the last 10 years as the steel industry dwindled. Instead, Pittsburgh is, as the Mayor said, "in the moment when we are going to move forward at an accelerated pace, or we are going to lose our nerve." For cities in a similar position, his advice is key: "You have to talk to a scale of activity that captures people's imagination."

A Healthy Dose of Hope and Unabashed Excitement About the Possibilities

Let's take a look at the optimism in Philadelphia. Infamously known for its riots in the 1980's, budget deficits and decaying structures, Philadelphia was suffering from the same plight as most aging cities. Manufacturing jobs died and urban dwellers moved to the suburbs. The city became dirty and crime-ridden. Taxes were high.

Then came Mayor Edward G. Rendell. Early on he brutally concluded that "manufacturing jobs are gone, never to come back. The middle-class families are gone, and until schools improve, they, too, are never coming back."

He recognized that the City population will never be two million again. But he had a vision for the City. "Cities must be playgrounds - cultural beacons that serve as the social entertainment core for their metropolitan regions." Then Mayor Rendell set a course of relentlessly selling the City.

Philadelphia will host the 2000 Republican National Convention that the Mayor expects will infuse $123 million into the local economy. Twenty-three conventions of over 2000 participants were slated in 1998 - up from one in 1993. Rather than commit public resources the City did not have, Philadelphia used the convention approach to bring new money into Philadelphia and focus efforts on improving the downtown area to accommodate the convention traffic. Ten new hotels are under construction to provide 30,000 rooms by convention time. What else has the Mayor's selling of the City brought? - A new arena, a bustling Reading Terminal Market, new restaurants and thriving urban center. This revitalization and the Mayor's ability to convey simple ideas and messages into the larger public has translated into making the City the place to be. For instance, every Wednesday is "make it a night" when restaurants, museums and shops stay open late so that suburbanites stay in the City for fun and to spend money.

\What does Philadelphia's urban agenda mean in terms of Brownfields redevelopment? Without the greater vision in Philadelphia, would it have been possible that the Bellevue Stratford, where 28 American Legion Convention attendees died of the first outbreak of Legionnaires disease, could be redeveloped into shops, offices and a hotel?

Let us also consider Detroit and the leadership example set by Mayor Dennis Archer. Prior to Mayor Archer's taking oath, Detroit's previous mayors had managed to alienate and drive a wedge between the City and its suburbs. The City was known for Devil's Night, an over-reliance on the auto industry and a flight of over one million people to the suburbs.

Mayor Archer brought a revolutionary approach into office. He substantially departed from his predecessors, healed old wounds and instead, courted the wealthy suburbs. He envisioned a City and its suburbs were inextricably linked and symbiotically reliant upon one another. He proposed and achieved one of America's first Empowerment Zones which linked the region.

What does his reaching out to the possibilities mean to Detroit? About $7 billion in new investment in Detroit's urban core. Most of which the Mayor believes comes from private investment from Detroit's suburbs. Granted, Detroit has a long way to go, but consider the simple truth that investor confidence in Mayor Archer must be very high that he was able to leverage $7 billion in private investment in a City that most Americans know as a warzone and when Detroit suburbanites "declared pridefully that they had not been to downtown Detroit in 25 years."

What Does it All Mean to Brownfields?

Brownfields are one part of the larger urban redevelopment picture. In most cases, a Brownfields site cannot alone be redeveloped. Generally, Brownfield properties are located within a real estate market and are part of a larger problem. Cities must consider the overall agenda, and determine where Brownfield redevelopment fits within the agenda. Once a city has determined its needs, it can set a course for marshalling all available resources to accomplish its goals.

The point being that without a critical self-examination of the state of the city and communication of a bold, clear agenda, developers and business can not, will not and should not risk private investment in a risky venture with limited and potentially negative return. When asking where the businesses and investors are, a city's leaders must recognize that Brownfields and urban decline exist because leadership has been absent for quite some time. If a city wants urban revitalization, a leader must emerge to set the tone, assure private investment is safe in the city...and above all, to carry the message that hope springs eternal.

THE DEAL ON DEED RESTRICTIONS

Bruce A. Keyes and Edward B. Witte

Foley & Lardner

Besom-Clean: adj. Clean only on the surface; clean by sweeping, but not by washing.

-Alexander Warrack's Scott's Dialect Dictionary, 1911.

In the 1970s dawned the era of environmental laws. The 1980s were the era of "enforcement style" cleanups. The year 2000 closes an era of rationality and reform of environmental laws.

On both a state and federal level, the last several years have seen remarkable reform in the requirements for cleaning up environmentally contaminated properties. Less frequent are the decade long active site remediation projects and lower volumes of contaminated soil travel on our highways as a part of commerce. Rather, with increasing frequency, society has learned to tolerate some amount of contamination left on site - if the contamination poses no apparent threat to health or to the environment, if the contamination is not spreading and if it is expected that in time, the degree of contamination will diminish to meet state and federal standards.

The Gap In Contractual Agreements

A typical real estate lease from 1980 provided that:

Lessee agrees to indemnify and save lessor harmless against and from any and all claims, damages, costs and expenses, including reasonable attorneys fees, arising from the conduct or management of the business conducted by lessee on the premises.

Lessee shall maintain and keep in good repair the premises at its own expense and shall, upon the expiration of the initial term of this lease or any extension thereof, deliver of the premises in as good condition and repair as received.

A 1990 agreement for the sale of real property was much more sophisticated as to the obligations of the parties, specifically addressing outstanding environmental issues:

The groundwater remediation ... shall continue until written documentation is received from the Department of Environmental Quality .... stating that all remediation efforts may cease and that no further remediation is necessary to comply with all environmental laws in effect.

Nevertheless, with changes in the methods of conducting cleanups and in state oversight, contract language once thought to be adequate has proven to be ambiguous. Some degree of difficulty arises as State governments reorganize and the jurisdiction for environmental cleanups changes. More difficulty arises when a state ceases to issue any formal letter of completion and relies, for instance, upon licensed site professionals to determine the completion of remediation. These changes in the administration of cleanup programs have largely been the response to shortages in staff resources or shortfalls in state supported petroleum cleanup funds.

Most problematic to the relations between buyer and seller or landlord and tenant is the new ambiguity in what it means to require that remediation continue until no further remediation is "necessary to comply with all environmental laws in effect." Under current risk based remediation practices, states will sanction allowing contamination to remain in soil and groundwater above a state mandated action, accompanied by some form of institutional control.

The Range of Institutional Controls

The typical risk based remediation requires that the future owners be provided with some form of notice that contamination exists on the property that, if disturbed, may pose a threat to health or the environment. In some instances, the notice is recorded directly on the deed for the property. In other instances, there may be some form of central registration, such as a database of leaking underground storage tanks or of more recent application, a Geographic Information System registry. The same objectives of protecting health and the environment may also be accomplished through controls such as a moratorium on the construction or use of drinking water wells.

Measuring the Cost of Institutional Controls on the Value of the "Deal''

The use of institutional controls may leave a buyer of property or a landlord feeling as if it did not get the full benefit of their bargain. A claim for specific performance may offer some recourse, but not necessarily a remedy.

Inherent in the use of institutional controls is the principle that the incremental cost of an active cleanup outweighs the benefit. This corresponds to contract theories of recovery, which hold that an appropriate measure of damages in the case of a breach arising from environmental contamination is diminution in value when the cost of remediation is far greater than the anticipated resulting increase in property value.

Appraising the value of property begins by determining a fair market value for a property as if it did not have any issues of contamination. The fair market value depends upon the "highest and best" use of the land. Highest and best use is determined taking into consideration 1) those uses which are physically possible, 2) uses which are legally permissible, 3) the uses which are financially feasible, and 4) the uses which are maximize the productivity of the property.

There are three common methods for determining a dollar value of property - the cost approach, the sales comparison approach, and the income capitalization approach. Absent unusual circumstances, all three methods should be used to arrive at a single estimate.

# The cost approach method determines the value of a property based upon the cost of an equivalent substitute, dividing the land into both land cost and the depreciated cost of improvements.

# The sales comparison approach examines actual prices paid for comparable properties.

# The income capitalization approach determines property value through a calculation based on the net income of a property.

Using these three methods of property evaluation, a benchmark can be found for the value of the property without the impairment of environmental contamination.

At the onset of discovery of an environmental condition associated with a property, the value is diminished taking into account the costs (and uncertainties) associated with the assessment and repair of the condition.

At the completion of the remediation stage (at "closure" or "no further action") the value of the property may be diminished by:

# Ongoing responsibilities, such as monitoring, maintenance of an impermeable cap and increased future construction costs;

# Diminished use - but only to the extent that the claimed use would other wise be a permissible and constitute a highest and best use, as discussed above;

# Risk - of reopening the matter with the state and that further action may be required at some time in the future. Insurance may be available to mitigate this risk or as a measure of the risk. However, specialty or niche insurance is unlikely to be an accurate measure of cost in an immature market; and

# Risk of market resistance to the institutional control which may impede the sale of the property. Market resistance will diminish as the use of institutional controls becomes more widespread. Lower market resistance is also expected the more attenuated the institutional control from the property, such that a city-wide moratorium on drinking water wells would be expected to have the least market resistance, while a deed restriction, at least initially, would likely have the greatest stigma value.

# Time multiplier - the degree to which the permanence of the detriment, or of the surrounding stigma, will affect the present day value of the detriment.

Recommendations

1. Draft agreements which avoid later conflicts by 1) anticipating regulatory and institutional changes, including a change in regulatory jurisdiction, 2) anticipating a change in standards, by using a performance benchmark which takes into consideration the action required on a property and the effect upon property value. By way of example:

Seller shall engage an environmental consultant to complete the remediation of environmental conditions which exceed applicable standards established by federal, state, and/or local law in a manner consistent with applicable federal or state or local law such that seller shall obtain from the agency with jurisdiction over the environmental conditions at the property written notification of compliance with applicable standards in a form reasonably satisfactory to the purchaser and which may incorporate commercially reasonable institutional controls (including, specifically, deed restrictions and/or well use restrictions, provided the same do not have a material adverse effect on the salability or fair market value of the property).

2. Craft restrictions, such as agreements to maintain impermeable caps or deed restrictions, as narrowly as possible and include a mechanism to assure that the restriction can readily be removed should it no longer be required either through a demonstrated improvement in site conditions or through modifications in state standards.

3. In determining the diminution in value of a property, an appraisal may be of great value. However, environmental detriments are complex by nature and there is little data to aid in determining the marginal detriment of an institutional control. Consequently, parties should assure that the appraiser clearly articulates all underlying assumptions and limitations. Parties should also carefully review the basis for the appraisal and assure that the appraiser is well versed in the subtleties of the governing laws, including the availability of cost recovery, reimbursement or tax benefits which may reduce or nullify any diminution.

Conclusion

In the waning days of the 1990's, environmental remediation issues continue to play a critical role in transactions, as they have since the enactment of the laws mandating soil and groundwater cleanups. However, the focus of these cleanups has noticeably shifted from questions of "who is responsible?" and "how much will it cost?" to "how much remediation is really necessary?". With that shift has come the inevitable tension between satisfying a government agency or published cleanup standard, on the one hand, and satisfying a contractually related third party, such as a buyer or landlord, on the other. Remediation projects have become more rational and are more closely tailored to the necessity of protecting health and the environment - rather than to achieving a 'one size fits all' benchmark cleanup objective. Brownfield laws have created new incentives to look again at distressed properties and have been successful in conjunction with other cost saving measures.

The first part of the next decade will be spent catching up to the flurry or reforms of the 1990's. Some disputes will reach the courts and will clarify the obligations of parties to perform under contracts that have become ambiguous. Most significantly, the market will continue to speak and provide remediation stakeholders with a better sense of whether institutional controls are actually detrimental to the value of land. Early experience suggests that there is little or no stigma value associated with institutional controls and that institutional controls are likely to gain widespread acceptance. Nevertheless, attorneys can exercise control over the form of these controls to minimize their actual impediment on the use of property. Finally, the last decade has taught us that agreements which do not seem at all ambiguous can become so as a result of regulatory changes. Contracts should be drafted to anticipate change, including a move toward the increasing use of institutional controls, less regulatory oversight and state brownfield programs which require, among other things, that parties to pay a fee for services.

 

ENVIRONMENTAL INSURANCE

Robert F. Lawrence
Milbank, Tweed, Hadley & McCloy

Environmental insurance presents opportunities and challenges for environmental lawyers. With environmental insurers taking in over $1 billion in premium revenue in 1998, environmental insurance has become a market force worth understanding. This article will analyze for the benefit of environmental lawyers the promise and prospects of environmental insurance.

Overview

Environmental insurance is a specialty insurance product designed to cover some of the common site contamination risks lawyers encounter in transactional contexts. Environmental insurance is billed as a means of transferring or limiting risk, mainly of unknown or reasonably well understood contamination conditions. In the past, sales of environmental insurance suffered from the perception that such insurance offered little actual risk coverage, and that the prices for such insurance were unjustified by the risks.

Several factors have contributed to a fundamental change in the environmental insurance market. First, site cleanup costs and enforcement have generally followed a downward trend, in part due to "brownfields" legislation and incentives. Second, insurers have grown more comfortable with the risks relating to environmental issues, risks they sought to avoid at all costs for many years beginning in the 1970s. Third, the insurance market is "soft," meaning that insurers are competing aggressively on price and other terms in order to generate premium revenues.

As a result, environmental insurance offers a realistic alternative to lawyer-intensive means of managing environmental risks. Instead of drafting complex indemnities or performing detailed due diligence, parties may instead buy insurance. Whether environmental insurance effectively addresses the needs of the insureds remains, however, a business question based upon a fundamentally legal analysis.

Types of Insurance

Environmental risks fall into many possible categories. Among the possibilities is the risk that there is unknown contamination on a site, the risk that cleanup costs will be incurred for known contamination and the risk that contamination will lead to personal injury, loss of use of property or business interruption. These environmental risks are generally excluded from standard property and liability policies and are insurable, if at all, through special environmental insurance products or endorsements.

For historical reasons, the insurance industry refers to policies that cover an insured for contamination or cleanup of its own property as "first-party" policies. "Third-party" policies cover the insured for contamination or cleanup liability relating to property owned or operated by parties other than the insured. Both types of policies can be obtained to cover claims relating to personal injury, loss of use of property and business interruption.

First-part and third-party coverage for cleanup costs generally covers unknown site conditions. In a transactional context, such insurance may cover undisclosed site conditions or site conditions that are not indicated to be likely to lead to cleanup costs based on pre-closing due diligence by the parties or underwriting by the insurer itself. Personal injury coverage may apply for the same types of conditions.