ENVIRONMENTAL UPDATE

New Federal Act Enhances Municipal Financing Opportunities for Brownfields

By Elizabeth C. Green and John C. Lemmo

Recent federal legislation (H.R. 2869—the "Act") authorizes $200 million per year in grants for the next five years to redevelopment agencies, cities, counties, and certain other local public agencies to use for funding assessment and cleanup of environmentally impaired or potentially impaired properties, known as "brownfields." The grants have liberal qualification criteria and allow great flexibility in use. When used in conjunction with bond financing, the grant funds can be leveraged to provide a continuing financial resource for reclamation of brownfield properties. This new federal Act was reviewed and evaluated by a California municipal finance attorney, which resulted in the thoughts expressed in this article. Similar opportunities may exist in other states.

Brownfield sites eligible for funding under the Act are broadly defined as "real property, the expansion, redevelopment, or reuse of which may be complicated by the presence or potential presence of a hazardous substance, pollutant, or contaminant." Some types of sites are generally excluded, however, such as facilities that are already the subject of a planned or ongoing cleanup, or the subject of an administrative or court order, sites at which there has been a release of polychlorinated biphenyls (PCBs), and sites that appear on or are proposed for the CERCLA National Priorities List. Despite the general exclusions, a site may still be eligible for funds under the Act, on a case-by-case basis, if the assistance will protect human health and the environment, and promote economic development or enable the development of parks or recreational properties, or any other property used for nonprofit purposes. Many, if not most "excluded" sites that concern redevelopment agencies, cities, and other eligible entities are likely to qualify. Thus, the Act provides an unprecedented opportunity for redevelopment agencies, cities, and other agencies to thoroughly assess, inventory, and plan for the remediation and development of brownfields, and to partner with private landowners and developers by offering technical assistance and remediation loans.

The Act provides grants of up to $350,000 per site to redevelopment agencies, cities, counties, and certain other local public agencies ("eligible entities") for characterization and assessment of brownfield sites. An eligible entity may also qualify for grants of up to $2 million to capitalize a revolving loan program for remediation activities. These remediation loans are available to developers, property owners, "and any other person." Cities, counties, and redevelopment agencies are expected to be able to use the federal grant funds as reserve funds in connection with the issuance of redevelopment bonds and other bond programs established under California law, and similar laws in other states, in support of bond issues, as well as for direct loans and grants to property owners or developers. The bond proceeds could be used to make either grants, or tax-exempt or taxable loans, to owners and developers of brownfield properties for brownfield investigation and remediation. Grant funds may also be used to inventory and conduct planning activities related to brownfields, and to provide training, research, and technical assistance to any person or organization to facilitate brownfields development, including community involvement.

Most brownfields redevelopment costs can be paid from grant funds and bond proceeds. When grant funds are loaned or granted directly by the city, county, or redevelopment agency, or when taxable bond proceeds are used to make loans, such grant funds and loan proceeds may be used to pay the costs of investigation and environmental assessment of properties and for the cost of cleanup, as well as other expenses necessary or incidental to determining the feasibility of remediation of any site, and other costs incidental to the remediation of any site. In addition, "soft" costs may be payable from grants or loans, as well as bond proceeds, including the following: financing charges (including bank, letter of credit, and other transaction fees) and interest prior to, during, and for a period after completion of remediation; a limited amount of working capital; debt service reserves; financial and legal services, studies and estimates, and administrative staff time and expenses.

Under certain circumstances, it may also be possible to finance other "hard costs" associated with the remediation and cleanup of a site, such as the cost of acquisition of land, structures, real or personal property, rights, rights of way, franchises, licenses, easements, and interests acquired or used for a site; the cost of demolition or removal of buildings or structures on land so acquired, and the cost of acquisition of replacement property for relocation of buildings or structures. Regulations are expected to be issued that will provide definitive guidance in this area.

Brownfields bond programs may utilize several possible structures. Brownfields grant funds can be utilized for the establishment of a revolving loan program that would provide loans to property-owners, including "forgivable" loans, to pay all, or buy down a portion, of the total remediation costs for a problem site. In addition, when governmental or conduit revenue bonds are issued to pay remediation costs, the federal grant moneys could be held in a pooled reserve fund for all program bonds, and investment earnings on the grant/reserve fund can be used to pay administrative costs of the bond program as well as costs of issuance of the program bonds, subject to certain restrictions. Loans or grants made under the local agencies’ program could be combined with assistance made available to property owners utilizing available state bond programs. In California, local agencies utilizing the Joint Exercise of Powers Act may also join forces with other agencies in the creation of joint powers entities to administer loan and grant programs for properties within their respective geographic jurisdictions. Other states have similar joint powers statutes.

Another possible program is the creation of "brownfields districts." The ability to create specialized community facilities districts for brownfield remediation presents another opportunity for redevelopment agencies that are seeking to develop significant geographic areas of contiguous or adjacent brownfields. In California, the Mello-Roos Community Facilities Act of 1982 authorizes the establishment of community facilities districts to finance services with respect to removal or remedial action for the cleanup of any hazardous substance released or threatened to be released into the environment. The Mello-Roos Act also authorizes the establishment of a revolving fund in connection with the exercise of the remediation powers of the district and permits such fund to be established with bond proceeds, special taxes, or any other lawful source of funds. A district could be comprised exclusively of brownfields properties lying within a redevelopment project area or, by the creation of improvement zones within a district, within multiple project areas. The community facilities district would not be required to issue bonds, but would be formed exclusively to permit the collection of a special tax specially formulated to each remediated property or improvement zone. Bonds could then be issued by the redevelopment agency to finance remediation costs, and could be payable from both the special taxes and the property tax increment generated by the properties or improvement zones after remediation is completed.

Further flexibility is afforded by the ability to use local bond pooling as a financing vehicle. California’s Marks-Roos Local Bond Pooling Act permits two or more public agencies that have the authority to identify, plan for, monitor, control, regulate, dispose of, or abate liquid, toxic, or hazardous wastes or hazardous materials to, by agreement, jointly exercise any of these powers common to the contracting parties. The overlapping jurisdiction of the project area and the community facilities district could facilitate both bond issuance and the leveraging of grant or loan funds for the benefit of both the project area and the community.

The federal Act complements state initiatives around the country that have made brownfield properties much more accessible for redevelopment over the last several years and is expected to open the door to economic opportunity through the development of an estimated 500,000 contaminated sites for productive commercial, industrial, residential, and recreational uses. Local government agencies across the country are now afforded a unique opportunity to access these federal grant funds and, in reliance on existing redevelopment law initiatives, to establish loan and grant programs.

Elizabeth C. Green is a senior counsel in the San Francisco office of Foley & Lardner.

John C. Lemmo is a special counsel in the San Diego office of Foley & Lardner.