Contaminated Property May Be More Valuable Than You Think Epstein Becker & Green, P.C. (212) 351-4500

Seen as an opportunity to spur investment in blighted communities and revitalize development in urban industrial areas while promoting a combination of economic return and risk management for buyers and sellers alike, federal and state "brownfield" programs have proliferated in recent years. Brownfield programs are being used across the nation to foster the redevelopment of previously unmarketable industrial and manufacturing facilities, service stations and dry cleaners, and landfill sites. With reduced liability to both sellers and purchasers, these sites are being transformed into revived industrial, commercial, residential, and mixed-use developments in prime areas of many cities. At the same time that these former industrial areas are revitalized, more pristine tracts of land that might be located in nearby rural or suburban areas are protected from development and urban sprawl.

Thousands of brownfield properties are located throughout Georgia, and many are being redeveloped through the state's Hazardous Site Reuse and Redevelopment Act (the "Reuse and Redevelopment Act"), O.C.G.A. § 12-8-200, et seq., which is overseen by the Georgia Environmental Protection Division ("EPD"). Due to its limited applicability to sites on Georgia's Hazardous Site Inventory ("HSI"), the Reuse and Redevelopment Act was amended in 2002 to make it applicable to all contaminated properties, whether on the HSI or not, and to eliminate the need for groundwater remediation by a prospective purchaser.Further spurring the redevelopment of Georgia brownfields, the legislature in 2003 amended Georgia's tax laws to enable a prospective purchaser of brownfield property to recoup some or all of the remediation costs through a potential ad valorem tax savings.

The Reuse and Redevelopment Act offers a "prospective purchaser" of a "qualifying property" a limitation of liability to the state and to third parties for remediation of, equitable relief relating to, or damages resulting from a "preexisting release" at the qualifying property. A "prospective purchaser" is "a person who intends to purchase a property where there is a preexisting release" and who has not contributed to a release at the qualifying property or been affiliated with the current owner or any person who has contributed to a release at the qualifying property. O.C.G.A. §§ 12-8-202(b)(6) and -206(a). A "preexisting release" is "a release which occurred prior to the prospective purchaser's application for a limitation of liability."O.C.G.A. § 12-8-202(b)(5). A "qualifying property" is a property that has a preexisting release, that is not a federal Superfund site or a regulated hazardous waste facility, and that "a prospective purchaser intends to purchase and bring into compliance with the risk reduction standards."O.C.G.A. §§ 12-8-202(b)(7) and -205.

To obtain a limitation of liability for a qualifying property that is not on the HSI or is on the HSI and has not yet been designated as needing corrective action,1 "any party desiring to qualify for a limitation of liability . . . . shall certify the qualifying property to be in compliance with the risk reduction standards for source material or soil by submitting a compliance status report" to EPD.O.C.G.A. § 12-8-207(c)."Risk reduction standards" are those promulgated by the Board of Natural Resources pursuant to the Georgia Hazardous Site Response Act ("HSRA").O.C.G.A. § 12-8-202(b)(8)."Soil" is any unconsolidated earth material together with any foreign material that has been incorporated into it.O.C.G.A. § 12-8-202(b)(9)."Source material" is any hazardous waste, substance, or constituent that has been released and requires notification under HSRA.O.C.G.A. § 12-8-202(b)(10). The process of shepherding non-HSI properties through the certification process has been made as timely and efficient as possible for all parties involved in the transaction.

For properties that have been listed on the HSI as Class II sites, the process may take somewhat longer, unless the seller is willing to have the site designated as needing corrective action and reclassified as a Class I or Class III site. The advantage to doing so is that the prospective purchaser can obtain a limitation of liability upon EPD's approval of a "prospective purchaser corrective action plan" ("PPCAP").The obvious disadvantage is that the seller now has a Class I HSI property, and if the purchaser decides not to buy the property or cannot remediate it in accordance with the PPCAP, the seller would be responsible for remediating the property, including the groundwater.

To qualify for a limitation of liability for preexisting releases, the prospective purchaser must submit a compliance status report that satisfies the HSRA requirements for such reports and contains a certification that the property meets the applicable risk reduction standards for all soil contamination and source material on the property.2 <^->The submission of a compliance status report accompanied by a nonrefundable fee of $3,000 is deemed to be an application to participate in the Reuse and Redevelopment program.O.C.G.A. § 12-8-209.Within thirtydays, EPD must provide an estimate of the projected costs to review the application, and a written concurrence with the certification of compliance with the risk reduction standards cannot be issued until all fees have been paid.Id.

Upon EPD's approval of a PPCAP for Class I, III, or IV HSI properties or upon EPD'sconcurrence with the certification of compliance with the risk reduction standards for both non-HSI and Class II HSI properties, "a prospective purchaser shall not be liable to the state or any third party for costs incurred in the remediation of, equitable relief relating to, or damages resultant from the preexisting release, nor shall the prospective purchaser be required to certify compliance with risk reduction standards for groundwater, perform corrective action, or otherwise be liable for any preexisting releases to groundwater associated with the qualifying property."O.C.G.A. § 12-8-207(a). This limitation of liability also extends to the prospective purchaser's lenders, provided that those lenders did not actively participate in the management, disposal, or release of hazardous wastes, substances, or constituents on or from the qualifying property.O.C.G.A. § 12-8-207(d). The limitation of liability will extend only to the contamination addressed in the certification of compliance and in EPD's concurrence, so it is important for a purchaser to be certain that all potential contamination at the property has been addressed in the compliance status report and in EPD's concurrence letter. O.C.G.A. § 12-8-208(e).

A limitation of liability is "fully transferable to the heirs, assigns, and designees of the person to whom such limitation of liability is granted," provided that such transferee is not a person who has contributed or is contributing to a release at the qualifying property.O.C.G.A. § 12-8-208(c).The limitation of liability does not limit the authority of EPD to respond to any release or threat of release and to seek recovery of its costs from any person liable under HSRA.O.C.G.A. § 12-8-208(f).Thus, for example, if the prospective purchaser were to obtain a limitation of liability and EPD were to determine that it needed to remediate groundwater beneath the property, EPD could do so and seek to recover its costs from previous owners and operators but not from the protected purchaser.

The ad valorem tax laws now allow for the recovery over a ten-year period of some or all of the cost of remediating brownfield property. O.C.G.A. §48-5-7.6. This is accomplished by the acquisition cost of the property, or the appraised fair market value of the property as recorded in the county tax digest at the time that application was made to EPD for participation in the Reuse and Redevelopment Program.O.C.G.A. 48-5-2(3)(F). The property is then taxed at this value or "taxable base" for up to ten years, or until such time within the ten-year period as all "eligible brownfield costs" certified by EPD as having been incurred and directly related to the receipt of a limitation of liability have been recovered on the tax savings realized as a result of the difference between the taxable base and the taxes that otherwise would be due on the actual fair market value each year.O.C.G.A. §48-5-7.6. Thus, eligible brownfield costs are likely to be recovered only when the value of the property has been substantially impaired by the contamination or when the value of the property is substantially increased by its redevelopment.

Even if remediation costs cannot be recovered, a limitation of liability is itself a significant asset that can facilitate the financing and marketing of brownfield properties. Thus, the Reuse and Redevelopment Act, coupled with the potential for recovering some or all of the costs of remediating brownfield properties, is an option that should be considered in every transaction involving urban property.

1 Properties listed as Class I, III, and IV have been designated as needing corrective action.

2 Petroleum-related releases are excluded from the HSRA release notification requirements. Therefore, if petroleum contamination is believed to be present on a property that is listed on the HSI, a compliance status report that may have been previously completed may have to be revised to reflect certification of compliance for any petroleum releases.Ga. Comp. R. & Regs. r. 391-3-19-.04(2)(g) and (h).

Published April 1, 2004.