Environmental & Energy Law Monitor : Environmental & Energy Lawyer & Attorney : Cole Schotz Meisel Forman & Leonard Law Firm : NJ, Mid-Atlantic Brownfield & Climate Change Law

On February 17, 2009, President Obama signed into law the American Recovery and Reinvestment Act of 2009, also known as the Stimulus Bill. Among the numerous programs encompassed within the Stimulus Bill are significant proposed expenditures for environmental and energy projects. There are many opportunities for businesses to capitalize on the federal funding and tax incentives provided by the Stimulus Bill. But those businesses need to move swiftly to make sure they do not miss out on these opportunities.

Energy Programs

The Stimulus Bill includes approximately $30 billion for projects relating to the generation, transmission and distribution of renewable energy and approximately $5 billion for energy efficiency projects, including projects to weatherize certain properties. There are many opportunities for companies involved with the various aspects of renewable energy and energy efficiency to capitalize on the available funding within the Stimulus Bill. There may also be funds available for commercial or industrial property owners to help fund investments in energy efficiency technologies which have the potential to significantly reduce the future property operating costs. 

• Renewable Energy. Allocations in the Stimulus Bill include (a) $6 billion in loan guarantees for renewable energy generation and transmission projects, (b) $11 billion for research, development and pilot programs relating to the so-called “Smart Grid,” which will enable greater development and use of renewable power sources, and (c) $2.5 billion for research related to renewable energy and energy efficiency. Also included in the Stimulus Bill are tax cuts for businesses investing in renewable energy technologies.  Here is the link to the US Department of Energy discussion of the Stimulus Bill: http://www.energy.gov/recovery/index.htm
   
• Energy Efficiency. The Stimulus Bill also includes (a) $5.25 billion to make lower income housing more energy efficient, (b) $6.3 billion in grants for state and local government energy efficiency investments and (c) $300 million for consumer rebates for purchasers of energy efficient “Energy Star” appliances. The Stimulus Bill also includes tax cuts for individuals investing in residential energy efficiency improvements.

Environmental Programs

In total, the Stimulus Bill includes approximately $18.8 billion dollars in federal spending for environmental projects relating to site remediation, water infrastructure and flood control and mitigation projects. There may be opportunities to include funding for water infrastructure projects into on-going or planned development or redevelopment projects. Additionally, increased funding to the federal brownfields program may provide sufficient stimulus to continue planned redevelopments.

• Property Remediation. $600 million is allocated to the United States Environmental Protection Agency to fund the cleanup of hazardous waste sites listed on the National Priorities List, which is the USEPA’s list of some of the most contaminated sites in the nation. With this increased spending to cleanup Superfund sites, we expect there to be a potential rise in federal cost recovery litigation as the USEPA attempts to recoup those cleanup costs from the responsible parties. An additional $200 million is allocated to cleaning up properties with leaking underground storage tanks, and $100 million is allocated for grants providing for the cleanup and redevelopment of brownfields sites. Here is the link to the USEPA brownfields program: http://www.epa.gov/brownfields/
   
• Clean Water State Revolving Fund.  $4 billion is allocated to the states to fund loans administered under the Clean Water State Revolving Fund. This fund is designed to upgrade wastewater treatment systems and address stormwater management, nonpoint source pollution, and watershed and estuary management projects nationwide.   Here is the link to the Clean Water State Revolving Fund: http://www.epa.gov/owm/cwfinance/cwsrf/index.htm
   
• Drinking Water State Revolving Fund. $2 billion is allocated to the states to fund loans administered under the Drinking Water State Revolving Fund. This Fund provides loans to support infrastructure investments for both publicly and privately owned community water systems. Here is the link to the Drinking Water State Revolving Fund: http://www.epa.gov/safewater/dwsrf/index.html#facts
   
• Other Water Infrastructure. $4.6 billion is allocated to the US Army Corps of Engineers for projects such as environmental restoration, flood protection and dam projects. An additional $340 million is allocated to the Natural Resources Conservation Service, an entity within the US Department of Agriculture, for watershed improvement projects, including flood protection projects and water quality protection programs. Here is the link to the Natural Resources Conservation Service: http://www.nrcs.usda.gov/

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On June 5, 2008, new legislation was introduced to address the overburdened New Jersey Department of Environmental Protection (“DEP”)’s current staff and budget constraints by expediting its report review process. Introduction of the Bill, sponsored by Senator Bob Smith, followed hearings before the State Senate Environment Committee and Assembly Environment and Solid Waste Committee at which the DEP recommended many of the proposed reforms set out in the Bill. An updated version of the Bill was issued on January 26, 2009, which was considered by the State Senate Environment Committee on February 2, 2009. The Bill proposes changes to the DEP Site Remediation Program that include the creation of a Licensed Site Professional (“LSP”) program. The LSPs are environmental consultants with specified education and experience who perform investigations and remediation at sites in New Jersey.

The Bill identifies who may become LSPs, establishes their qualifications, licensing procedures, a code of conduct and defines their role in the remediation process. In addition, the Bill establishes a separate Site Remediation Professional Licensing Board (“Board”), which is tasked with creating standards for education, training and experience that will be required of any person who applies for a license or a license renewal. The Board conducts examinations to certify that an applicant possesses sufficient knowledge of the state regulations, standards and requirements applicable to site remediation and the applicant is qualified to obtain a license or a license renewal. 

Since it will take some time for this legislation to be fully developed and implemented, after enactment of the Bill, it will provide for temporary licensing of LSPs . The Bill anticipates the applications for temporary LSP licenses will be submitted to the DEP within three (3) months of its effective date. Those seeking a temporary LSP license must have the same qualifications as a full LSP, as well as one of several professional certifications (i.e., certified hazardous materials manager from the Institute of Hazardous Materials Management, a certified groundwater professional from the National Groundwater Association, a licensed professional engineer from the National Council of Examiners for Engineers). Further, an applicant for a temporary LSP license must show that they have existing current site remediation experience. 

Within ninety (90) days of the effective date of the Bill, any submissions concerning the remediation of a contaminated site must be signed and certified by an LSP. The LSP certification required under the Bill will state that the work was performed, that the LSP managed, supervised or performed the work and that the work and submission conform to the Technical Requirements for Site Remediation, N.J.A.C. 7:26E-1 et seq. 

The level of coordination between the LSP and the DEP depends on the ranking of the individual site. The Bill establishes a 4-tier classification system for remediation sites. 

Tier-1: A responsible party has been recalcitrant and has failed to complete the remedial investigation after an extended period of time. DEP would review and approve/disapprove all LSP submissions and select the remedial action. Financial assurance would be required in the form of a trust fund, with DEP to pre-approve any payments out of the trust fund.  

Tier-2: High priority sites for economic development; or within brownfield development areas (commercial or industrial sites that are vacant or underutilized and contaminated) or other economic development priority areas; or posing significant detrimental impact on the public or the environment; or effecting sensitive populations such as child care or school facilities; or subject of federal oversight. DEP would review and approve/disapprove all LSP submissions. 

Tier-3: Sites that are not Tier-1, Tier-2 or Tier-4 sites. DEP would review screening documents and certifications submitted by the LSP. 

Tier-4: Leaking unregulated heating oil tanks provided there are no immediate concerns such as impact on drinking water wells or vapor intrusion risks. DEP would review required checklists and certifications.

As Tier-1, Tier-2 and Tier-3 sites are more complex, they require the involvement of LSPs, while a Tier-4 site could also be managed by a person certified to perform services at a site of an underground storage tank such as a subsurface evaluator. However, any responsible party would be allowed to submit a Preliminary Assessment/Site Investigation for sites where a no further action letter is sought from DEP based on a showing that no contamination above prevailing standards exists. 

The proposed Bill is designed to streamline the DEP’s review of environmental reports, so that transactions are not delayed due to the lack of responsiveness from the DEP. We shall see whether New Jersey can join states like Connecticut and Massachusetts, where effective LSP programs are run. 

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Often the hardest issue to negotiate in a real estate transaction involving a contaminated property is which of the parties has to pay if the actual environmental cleanup costs are much higher than the estimate used by the parties when they negotiated the deal terms. Many deals used to die over this issue either because neither of the parties to the transaction were comfortable accepting the risk or because the purchaser’s lender was the uncomfortable one. Now Guaranteed Cleanup Cost Contracts – in which the environmental consultant agrees to complete the cleanup for no more than an agreed upon guaranteed cleanup cost – are used to close many of these deals. If the guaranteed cleanup cost is exceeded, the environmental consultant pays the cost overruns to the extent provided by the Guaranteed Cleanup Cost Contract (“GCCC”). Where cost cap environmental insurance is purchased, an environmental insurance company pays the cost overruns to the extent provided in the policy. By laying this risk off on someone who is otherwise not a party to the real estate transaction, it often becomes much easier to get the parties to close. These deals are not easy to close, but much easier than they were before GCCCs.

GCCCs Without Environmental Insurance: GCCCs can be used to help close contaminated property deals regardless of the purchase price or the amount of the guaranteed cleanup cost. For transactions with a lower purchase price or guaranteed cleanup cost, the GCCC may be the only practical way to address the issue so that closing can occur immediately. This is because the parties may be unwilling to pay the cost of environmental insurance or environmental insurance may be unavailable and therefore the only practical way to secure the payment of costs in excess of the guaranteed cleanup cost is to get the consultant to accept the risk. 

All of the environmental documents the seller has concerning the contamination on the property are provided to one or more consultants; who review the documents and provide a proposed guaranteed cleanup cost to obtain a regulatory sign-off from the appropriate governmental agency with jurisdiction over the cleanup (e.g. – the New Jersey Department of Environmental Protection). If the amount of information concerning the contamination on the property is not sufficient for the consultant to provide a guaranteed cleanup cost, they are asked to provide a proposal for whatever additional work they would need to do in order to provide a proposed guaranteed cleanup cost – different consultants require different amounts of information depending upon how risk adverse they are. Some consultants require a governmentally approved cleanup plan in place before they will agree to enter a GCCC, while others simply want enough sampling data so that they can somewhat confidently predict what the governmental agency that will one day oversee the cleanup will require.

A consultant is then selected to do the cleanup, usually on some combination of their skill and experience and having a relatively low guaranteed cleanup cost. A GCCC is then negotiated with the consultant selected whereby the consultant agrees to perform the cleanup of the known contamination for no more than the guaranteed cleanup cost. Typically, the consultant entering the GCCC agrees to cleanup only the known contamination, which is broadly defined to include the entire discharge of contamination of which there is any evidence in the existing sampling data, both its source and the full extent of its migration. Newly discovered discharges of contamination not seen by the consultant in the sampling data before the GCCC was entered are not part of the consultant’s remedial obligation, although environmental insurance can be obtained to cover this risk as discussed below.

Some consultants want the guaranteed cleanup cost to be paid in full no matter what the cleanup actually costs them to perform, while others are willing to be paid on a time and materials basis with the understanding that upon completion of the cleanup the consultant will receive some percentage (e.g. – 50 percent) of the unspent portion of the guaranteed cleanup cost as a bonus. These GCCCs cover a wide range of issues, but most importantly they make it clear that the environmental consultant is liable for all costs to clean up the known contamination in excess of the guaranteed cleanup cost. Of course, often the only security for the environmental consultant’s obligations, which may take many years for the consultant to fully perform (e.g. – where there is groundwater contamination), is the financial strength of the environmental consultant. Clearly, that financial strength may change over time and could reduce the security of the property owner for the consultant’s performance, so that it needs to be scrutinized at least before entering a GCCC.

GCCC With Environmental Insurance: Environmental insurance is often used either to provide coverage for the discovery of new discharges of contamination (which are excluded from the consultant’s remedial obligation under the GCCC) or as a better form of security for the consultant’s performance than is provided by the consultant’s assets. Typically, the environmental insurance policy can provide two kinds of coverage: Pollution Legal Liability Coverage and Cost Cap Coverage (the names of coverages vary from insurance company to insurance company).

Pollution Legal Liability Coverage: Pollution Legal Liability Coverage ordinarily covers new discoveries of pre-existing contamination during the policy term. This covers what is ordinarily excluded from the consultant’s remedial obligation under the GCCC. Since the time when pre-existing contamination is most likely to be discovered is in the course of cleaning up the known contamination, we strongly recommend purchasing this coverage as it is usually quite affordable.

Pollution Legal Liability Coverage also covers third party lawsuits (i.e. – lawsuits by anyone other than the seller and purchaser of the property) for property damage or bodily injury arising from any pre-existing contamination, whether known or not when the policy was purchased. So if groundwater contamination on the property migrates off-site and impacts a neighbor’s property, the Pollution Legal Liability Coverage would protect against a lawsuit by the neighbor for property damage or bodily injury. Coverage can be purchased for claims for either new discharges of pollution occurring after the policy is purchased or for business interruption caused by the contamination or its remediation. This coverage is often the key to getting the parties to close, as it covers virtually all of the risks about which a purchaser of contaminated property and its lender are concerned.

Cost Cap Coverage: Cost Cap Coverage generally provides insurance coverage if the cost to cleanup the known contamination exceeds the guaranteed cleanup cost. For as long as the Cost Cap Coverage remains in place, the environmental insurance company is primarily liable for cleanup costs in excess of the guaranteed cleanup cost that must be incurred to obtain the regulatory sign-off from the governmental agency with jurisdiction over the cleanup. There are only a few insurance companies interested in issuing cost cap coverage, as its claims history has often resulted in it being unprofitable.

The guaranteed cleanup cost serves as the deductible that must be exceeded before the insurance company is obligated to provide the Cost Cap Coverage. While this would seem to take the environmental consultant off the risk of such cost overruns, ordinarily the environmental consultant assumes the risk of such overruns once the term of the Cost Cap Coverage has expired and also if the cost of the cleanup exceeds the amount of the Cost Cap Coverage. Since the insurance companies are only willing to provide Cost Cap Coverage for a fairly tight timeframe (e.g.- usually only one year longer than the consultant’s estimated time to conduct the cleanup), this motivates the environmental consultant to finish the cleanup before it assumes the risk of all cost overruns in excess of the guaranteed cleanup cost.

In our experience, using the environmental consultants that we recommend, the insurance companies are willing to provide Cost Cap Coverage even where there is no cleanup plan approved by the governmental agency with jurisdiction over the cleanup. There just needs to be enough investigation done for the consultant to have a good handle on the nature and extent of the contamination. It is the consultant’s job to convince the insurance company that there is a sound basis for its guaranteed cleanup cost to serve as the deductible for the Cost Cap Coverage.

Using one of the options above can make it much easier to close a transaction involving a contaminated property. In fact, by using a GCCC with both Pollution Legal Liability Coverage and Cost Cap Coverage, and adding the lender to the policy as an insured, we have been able to get many of the large institutional lenders to accept the contaminated property as the sole collateral for a purchase money mortgage. Otherwise, they would never accept the contaminated property as the sole collateral for the loan. And when the GCCC and environmental insurance make both the parties and the lender comfortable with the risk, the transaction can close immediately. Only time will tell if, and the extent to which, the recent global economic difficulties for insurance companies and banks will change how GCCCs and related environmental insurance will be used to close transactions involving contaminated property.

This article originally ran in the February 23, 2009 issue of New Jersey Law Journal.

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