And you thought you had all the bases covered. That former industrial parcel is perfect for waterfront mixed-use redevelopment. The local planning board loves the project, and the prospect of adding retail and residential tax base to that underused land has the city council jumping for joy. The small park you included along the waterfront quelled any public opposition. Your pro forma works (or so you think), and you are ready to break ground.

You were not concerned by soil and groundwater contamination left over from the former industrial use. You worked with the seller to carve out a hold-back, and you worked with state and local officials to follow the rules, cleaning up some of the problems early and timing the rest to coincide with redevelopment. Common practice. Developers do these deals all the time.

Six months later, you get a letter from the state, demanding a settlement for damages to groundwater resources and wetlands at the site. The settlement amount is clearly spelled out, but the demand only leaves you 30 days to settle - leaving very little room for negotiation. You thought you had all the right permits from the local boards and commissions. You got a letter of approval for cleanup from the state. What went wrong?

Rapid and Significant Change Occurs on Many Fronts
The ball is moving on a couple of very important fronts when it comes to state and federal environmental programs right now. The advent of voluntary response action programs and brownfields statutes has provided some new deal-flow tools to private development. Changes in the process for establishing liability relief are making full attention to these tools even more important at the beginning of a deal. Additional changes in the way that Natural Resource Damage Assessments are assessed and levied provide the way for damage costs to sneak up from behind. That is where we will start examining the problem.

Natural Resource Damage Assessments (NRDA) are penalties levied for damages caused by the release of toxic substances in the environment. These penalties are imposed over and above the cost of cleanup. NRDA recovery began in earnest in the 1980s and reached its height of publicity with the Exxon Valdez oil spill (a $900 million award). Assessments have, for the most part, focused on the most visible, highly contaminated sites.

NRDA claims are levied on behalf of the public by trustees designated under the federal Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) and Oil Pollution Act statutes and related state laws. These trustees are not working on behalf of the U.S. Environmental Protection Agency (EPA) or a state agency having jurisdiction. They are suing for damages on behalf of the citizens of that locale. As a result, NRDA penalties are awarded in court separately from civil or administrative penalties imposed by government agencies. These agencies, to be sure, support the NRDA effort, but it is handled under a distinct section of applicable statutes.

Historically, NRDA cases have been complex and costly to pursue. As a result, trustees picked their battles carefully, targeting only the largest possible settlements. This meant that the ExxonMobils of the nation were most likely to feel the heat. Some states, notably Washington, Florida and Louisiana, sought to streamline the process, opening up smaller spills to settlement. These efforts were generally viewed as positive by the petrochemical and bulk handling facilities that were the targets of the settlements, because it added certainty to the process and decreased costs to achieved settlement. These are “pay by the gallon” systems, and the costs to the industries they impact are fairly predictable.

Settlement Options Designed for Public Good
But both of these forms of NRDA settlement have their basis in language in the environmental laws that provides for suit on the behalf of the public to cover the costs of the NRDA suit and to fund environmental restoration efforts. Neither of these parts of the law has much impact on the development community.

There is another part of the law that does, however. A final piece of the NRDA laws allows for recovery of damages to the public for a loss of services from the environment that is impaired. In this part, states are beginning to find grounds for settlements against almost any impairment.

Further streamlining the process, several state programs have developed systems where NRDA costs are based on the number of gallons of groundwater impaired, or the size of a wetland impaired. They promote the use of straightforward calculations based on the per-gallon local value of municipally provided water, or engineering costs for structures to provide equivalent wetland functions such as stormwater management. In such cases, the facts are viewed as unambiguous by the plaintiff agency, resulting in a much greater willingness to file suit, even for small impairments. This opens up a universe of potential settlement cases that can include any impaired property.

New Jersey has led the way in this effort. The New Jersey statute was interpreted by the governor's office to allow for suit against any owner or operator of an impaired property who did not qualify for liability relief under the law. Mindful of the statute of limitations on these provisions, the governor instructed the Department of Environmental Protection (DEP) to support NRDA suits against up to 4,000 known waste sites. In some cases, the suits were pressed against sites for which approved cleanup measures had been conducted in accordance with NJ DEP guidance. If groundwater remediation had been performed, it was actually viewed as an additional temporary impairment and NRDA costs were increased accordingly. It is a seemingly no-win situation for property owners. Rhode Island has followed suit with a similar streamlined NRDA claim against the Navy. Several other states have sent representatives to the NJ DEP to study the process. Massachusetts has reportedly hired consultants to evaluate implementing a similar system.

The Danger: Sudden, Significant, Unexpected Costs
So, that is the bad news. No development project benefits from unpredictable and sudden costs that add no value to the underlying investment. One developer I'm working with is facing liens by the U.S. Environmental Protection Agency, and is scrambling to stem the bleeding. It will take months of negotiation, and a capital loss of several hundred thousand dollars, to resolve the issue.

Now that you are aware of this potential liability, how can you control it? The key is in the liability protections provided for in the very federal and state laws that establish the NRDA right. These statutes provide that if an appropriate level of environmental due diligence is performed before the purchase of a property, and if reasonable care is exercised in regard to controlling environmental hazards and avoiding any actions that might exacerbate the contamination after purchase, a purchaser can qualify for relief of potential NRDA liability.

As I alluded earlier, the NRDA changes are only one place where rule changes are occurring. It is the liability relief provisions where the second set of important changes is found.

When the original statutes that govern these liabilities were established in the early 1980s, the due diligence concept was included. Standards for what that due diligence should consist of lagged behind. The American Society for Testing and Materials (ASTM) issued a standard protocol that has served as the benchmark for a number of years. Recently, the federal government, in response to the 2002 Federal Brownfield Act amendments, has put out draft guidelines for conducting such qualifying due diligence, called “All Appropriate Inquiry” (referred to in the industry as AAI). These guidelines go beyond the current ASTM standard, including such things as disclosures about amendments in purchase price for environmental impairments, and research into the existence of public environmental liens.

Although these guidelines are not finalized, their release in draft form has caused a shift in the market. Most experienced attorneys and consultants are now using these guidelines as a basis for due diligence. Most importantly, some at the U.S. Environmental Protection Agency are evaluating whether parties are appropriately considering or implementing steps that meet the “reasonable care” benchmark based on the content of AAI assessments. What you find and acknowledge in the initial assessment will serve as the basis for judging whether a new owner has met these requirements, and as a result, whether that owner is shielded from public penalties that include NRDA suit.

Keys to a Successful Defense
The “keys to the game” here are:
1. Engage experienced legal counsel in the feasibility and planning stages of a project;
2. Engage a consultant or engineer who is experienced in environmental issues at the same time;
3. Make sure you are meeting the benchmarks for due diligence-based liability relief;
4. If there are environmental impairments at the site, work to develop a reliable estimate of potential costs going forward so that the project pro forma is solid; and
5. Make sure public communications lines include regulators at the state or federal level who have jurisdiction over the project. This may occur directly through voluntary programs or by proxy in privatized oversight systems such as those in Massachusetts, Connecticut and New Jersey.

If done properly, costs to evaluate and control environmental liabilities can be treated similarly to costs to conduct capital improvement studies and designs. Integrate these costs into the pro forma the way you would architectural or civil engineering services. A little money spent up front can spare the project large outlays later on.

I hope this information helps you plan for project performance. Don't get caught finding out you have hidden environmental costs after the project has gone firm. Plenty of experience exists in the marketplace on which you can draw. I wish you prosperity and good health in all your projects. SLDT