B. Brownfields vs. Greenfields Due Diligence
 

Due diligence required for a brownfield site clearly requires different steps and quite often more steps than those required to develop a greenfield site. This is not to say that all brownfield transactions are more complicated than greenfield transactions. A former developer in the Buffalo, New York area frequently reminds a local brownfield panel of experts that developers do not focus on the many steps typically required under the State Environmental Quality Review Act (SEQRA), local zoning laws, and other state and local requirements to develop a greenfield site. For example, installing new infrastructure and utilities through a wetland is a time consuming and common problem encountered during greenfield development. SEQRA, zoning and other local infrastructure requirements are generally not as problematic for a brownfield site, which are typically located in more developed and impacted areas. However, developers tend to be more comfortable handling greenfield development issues during the daily course of their business and do not consider such issues to be barriers to development, despite their associated cost or difficulty. 

By contrast, environmental contamination is perceived as a significant barrier to property development of any kind. The presence of the contamination itself is not necessary the barrier, but the number of "unknowns" that may be associated with the actual presence of such contamination or the perception of residual contamination even after the site is remediated effectively creates a development barrier. The "unknowns" include: (1) the lengthy and cumbersome process to redevelop a brownfield site in conjunction with State and/or federal agency oversight; (2) need to investigate on- and off-site contamination in certain circumstances; and (3) lack of liability relief even after a cleanup is conducted. Unless "location, location, location" is driving a brownfield transaction, these "unknowns" create barriers that overcome many brownfield transactions. 
 
 
 

C."Time is of the Essence" For A Successful Site Redevelopment Project
 

Lack of time destroys most real estate deals on greenfield or brownfield sites. In my personal experience working on brownfield redevelopment projects, time is more important in certain circumstances than money. Of course time and money are closely related; if a project takes too long, unreasonable costs may be incurred. However, the traditional length of time to investigate and remediate the average brownfield site (egs. gasoline stations, light industrial manufacturing facilities) under legislatively prescribed remediation programs is barely accomplished within the one to two year time frame typically associated with an entire redevelopment project. Unless remediation and redevelopment are accomplished simultaneously, time frames typically associated with development projects cannot be met on brownfield sites. 
 

Unfortunately, the New York State Department of Environmental Conservation ("DEC") does not view economic redevelopment of brownfield sites as one of its goals. Despite attempts by Governor Pataki and former Governor Cuomo to encourage redevelopment of such sites through initiatives such as the non-statutory Voluntary Cleanup Program and 1996 Bond Act Brownfield Restoration Program, until a new law is passed that establishes an expedited program for the redevelopment of such properties, brownfield redevelopment projects in New York remain difficult and time consuming. This article will focus on the various due diligence requirements necessary to move a brownfield project forward in an expedited fashion under both current New York State brownfield programs and future anticipated legislative programs.
 
 
 

• LIMITED TIME TO COMPLETE BROWNFIELDS DUE DILIGENCE 

 

As noted above in Section I, time is of the essence with most development projects. Prospective tenants or buyers generally have a schedule with limited flexibility on either side of their time line in which to handle newly discovered environmental issues. On the other hand, DEC is generally more comfortable with the following two scenarios involving contaminated property: (1) a parcel which experiences a new emergency spill and can be remediated in an expedited fashion with little investigation; or (2) a parcel on which long-term historic contamination has been discovered that is currently unoccupied. 
 

The emergency spill program has always worked well in New York with one exception. The two hour spill reporting requirement for a new spill encourages immediate action and cleanup. Time is not wasted delineating plumes before the bulk of contamination is removed. However, once a spill site is cleaned up, it is difficult to obtain a "closure" letter unless a formal post spill investigation is performed. In other words, former spill sites that were remediated receive little in the way of a liability release from the State. DEC may eventually issue a spill closure letter, which do provide lenders and buyers with some degree of comfort, but do not necessarily demonstrate that a certain level of cleanup was achieved making the site acceptable for resale or safe for a particular use. Therefore, the question remains on former spill sites whether the sites where cleaned up to a particular level allowing for specific redevelopment.
 

With respect to historic contamination sites that are typically unoccupied, DEC has acknowledged that investigations can take between two to ten years prior to commencing remediation. In general, no redevelopment project is pushing the investigation and remediation time line. The site owner and/or other potentially responsible parties are not in any rush to cleanup a site that will have little value even after it is remediated. Unless a real estate transaction is pushing the envelope, the slow remediation process may indirectly benefit site owners and other responsible parties who can hold onto their money until DEC forces them to spend it.
 

Brownfield redevelopment sites pose a unique problem because either they are being actively used or if they are inactive, a redevelopment project is planned for the site that must inevitably push the environmental due diligence time frame in order to make the transaction work. In addition, brownfield sites typically do involve historic long-term contamination that may require an in-depth upfront investigation. 
 

B. First Challenge: Conduct an Expedited But Thorough Site Investigation
 

Therefore, the initial challenge for DEC and the prospective brownfield redeveloper or the existing and cooperative site owner is to conduct an expedited, but thorough, site investigation such that any required remediation can proceed simultaneously with the one to two year redevelopment project. As discussed in the "Managing Environmental Due Diligence" presentation, one of the first steps in most commercial/industrial property due diligence transactions is to conduct a Phase I site investigation, particularly when the history of a particular site may be environmentally suspect. 
 

1.Phase I Site AssessmentCreates a Perception of Potential Contamination

Lenders and many others rely on the preliminary conclusions contained in a Phase I investigation. It is important to understand an industrial standard "ASTM Phase I site assessment" is only a paper investigation of a site, not a physically intrusive one. In other words, a consultant is hired for between $1,000-$3,000 to review historic records, maps, and any other relevant documentation. In addition, the consultant typically walks around the site and/or interviews any relevant personnel regarding the history of operations and ownership of the site. Phase I site assessments do provide extremely useful information that can be used to determine whether a site is, at a minimum, like to be a brownfield site.
 

For example, a site that was formally a gasoline station, a manufacturing facility, or a commercial establishment that may have used chemicals, all are good historical indicators that the site may be a brownfield site with actual contamination. A Phase I site assessment, which reveals these and other similar historic uses, generally recommends a Phase II site assessment, which is a physically intrusive subsurface investigation of the site. 
 

2.Phase II Site InvestigationCreates Initial Data on Site Contamination

Depending on whether the Phase I investigation reveals the presence of underground storage tanks, underground storage areas or other above-ground visual indications of possible subsurface contamination (egs. floor drains, trenches, fill pipes), different investigation techniques will be employed. There are new and improved above-ground techniques to locate underground utilities and tanks, including magnetometer surveys. However, most environmental investigations involve the drilling of borings to sample soil and permanent or temporary wells to sample both soil and groundwater. While horizontal sampling techniques can be employed (particularly to determine the conditions of soil and/or groundwater under structures), typically vertical drilling techniques to a variety of depths are used. 
 

The size of the site generally plays a factor in the number and depth of wells and borings necessary to conduct a Phase II investigate of a site. In general, consultants will explain that a minimum of three subsurface sampling locations are necessary in order to develop a triangular pattern. Triangulation is necessary to determine groundwater flow direction on and off the property. Consultants typically do not explain to their clients that a basic Phase II investigation of a site is not usually acceptable as a complete site investigation. A complete investigation of a site is generally defined in New York as the full characterization of the nature and extent of contamination on and off the site. In other words, if subsurface contamination is found, any contaminant plumes found in soil or groundwater emanating from the source area must be identified and delineated.
 

C. #1 Brownfield Deal Killer: Off-Site Groundwater Contamination
 

If a Phase II or subsequent site investigation reveals a confined on-site soil only contamination problem that may be associated with an underground tank or former drum storage area, the brownfield redevelopment project can continue with some creative lawyering, engineering, and project management. An on-site groundwater contamination problem is more difficult and expensive to remediate but very often can be handled if the economics of a remediation system do not eliminate the feasibility of the transaction. The current Voluntary Cleanup Program can be used to provide Department oversight and a liability release at the completion of the cleanup while redevelopment proceeds. In general, since a brownfield site property price is discounted as a result of the contamination, purchasers may be willing to incur the costs of investigating and remediating on-site. 
 

However, if a Phase II or subsequent site investigation reveal significant off-site soil, or even worse, groundwater contamination, this will be one of the most difficult problems confronting the pending brownfield transaction. If a buyer is interested in purchasing a brownfield site, he or she is generally not interested in buying costs associated with remediating the property next door. In addition to the costs mounting with respect to the initial acquisition brownfield site, they now find themselves in a position of being potentially responsible for investigating and/or remediating the adjacent property. Therefore, depending on the nature and extent of the off-site contamination, a brownfield redevelopment project may or may not move forward over this issue. It is difficult to comprehend under current law why any one would voluntarily take on an off-site groundwater investigation and remediation project on and under adjacent property.
 

Under the current New York State Voluntary Cleanup Program and under the petroleum remedial program, even innocent prospective buyers are often being required to investigate off-site for petroleum contamination due to the potential strict liability of the State's Oil Spill Fund for any residual off-site contamination that is not remediated by the developer. It is currently unclear if a prospective buyer, who is otherwise non-responsible, would be required to investigate for off-site hazardous contamination; however, it appears based on recent Voluntary Cleanup agreements that DEC is making all parties investigate off-site. 
 

The present unclear and unfriendly off-site investigation and remediation policies have had the recent effect of discouraging New York State brownfield redevelopment. In addition, the DEC's emerging policies, which have begun to mandate off-site soil and groundwater investigations, even deep bedrock groundwater investigations, illustrate an interesting policy dichotomy. The State is apparently so scared of liability exposure, particularly to the Oil Spill Fund, that it would rather discourage investigation and redevelopment of contaminated sites by mandating off-site investigations rather than creating a more reasonable brownfield policy regarding off-site contamination issues.
 

• New Legislative Initiatives Soften the Off-Site Contamination Blow & Give Non-Contributory Site Owners a Break 

 

Further, the Business Council's Bill A.8470, sponsored by Assemblyman Aubry

(D-Brooklyn) and certain Assembly bills sponsored by Assemblywoman Destito (R-Rome) and Assemblyman Brodsky (D-Westchester), may be updated and reintroduced in the Year 2000 session. Unfortunately, these latter bills have not moved forward and are viewed as "one-house" bills with little chance of being adopted.
 

1.No Off-Site Investigation/Remediation Obligations for True Volunteers 
 

Both the Governor's Bill and The Brownfield Coalition Bill ("Coalition Bill") legislative proposal provides relief to prospective purchasers of brownfield sites who discover off-site contamination. Under the Governor's Bill, innocent prospective buyers of brownfield sites do not have the obligation to investigate or remediate off-site. However, such buyers are required to perform an off-site exposure risk assessment. The bill does not go into great detail on the requirements for the risk assessment. Some risk assessment are very expensive and elaborate. What is important is that the Governor's Bill recognizes that innocent buyers cannot take on an off-site remediation project at their own expense.
 

Under the Coalition Bill, non-responsible party buyers do have the obligation to conduct an on-site property boundary investigation to determine if off-site migration is occurring by assessing the property boundary on-site conditions. In other words, a buyer is responsible for determining if off-site migration is occurring from the on-site source. However, non-responsible buyers are similarly not responsible for off-site investigation or remediation. 
 

Therefore, both legislative proposals recognize that detailed off-site investigation and remediation should not be the responsibility of a true voluntary prospective purchaser. The big difference between the two bills is that the Coalition Bill makes any necessary off-site cleanup an affirmative obligation of the State and gives the developer the option of conducting the off-site cleanup to save time and recoup the money spent while the Governor's Bill is silent on who is responsible for cleanup of the off-site contamination. This single legislative improvement to existing New York State law would have a significant impact toward encouraging brownfield redevelopment. 
 

2.Non-Contributory Owners Finally Get "Brownie Points" for Cleaning Up Their Own Sites
 

When confronted with an environmental problem, clients who owns or have operated on a brownfield site, most frequently argue how unfair environmental liability is, particularly when they did not contribute to the contamination on the site. Environmental liability strikes any current or past owner, operator, or party that arranged for disposal or transported material to a given site that is now contaminated. This liability scheme is particularly painful for owners of property who did not cause or contribute to the contamination on their site and are now found stuck with the monetary responsibility for investigating and remediating such contamination.
 

Owners of brownfield sites, who did not contribute to the contamination on their site but are potentially responsible parties (i.e., "non-contributory owners"), are also given "breaks"and are encouraged to remediate their own sites. The Governor's Bill does distinguish between persons responsible for the disposal of hazardous waste or the discharge of petroleum under applicable principles of statutory or common law liability from persons whose liability arises solely from ownership and operation of the site subsequent to the disposal activity and appears to suggest that the latter category of non-contributory owners do not have to remediate off-site regardless of the extent of off-site contamination. This is a clearly a benefit to such parties but may create problems in the future if off-site contamination poses a significant threat and there are no responsible parties from whom the State could seek indemnification or contribution. 
 

Under the Coalition Bill, a non-contributory owner/operator is required to investigate an on-site plume that is migrating off-site to determine the nature and extent of the contamination. DEC then evaluates the information and is required to make a determination whether the off-site contamination poses a significant threat or not. If the contamination does not pose a significant threat, the owner is not required to remediate the off-site contamination. The State would be responsible for any necessary off-site remediation. If the contamination does pose a significant threat, then the owner is required to remediate both on- and off- site. 

In sum, if a Phase II investigation reveals a well-defined on-site soil and/or groundwater contamination problem and the costs of remediation are affordable given the economics of the redevelopment project, the brownfield project may move forward under current State programs and policies, albeit at a snail's pace. However, when off-site issues arise, particularly off-site groundwater issues, without new ways to overcome the off-site remediation requirements (such as those being offered in the new legislative proposals), off-site problems shall continue to seriously interfere with the prospect of redeveloping most brownfield projects. The State should, at a minimum, develop a policy which encourages prospective purchasers to acquire brownfield sites by not requiring off-site investigation and remediation but requiring the State to pick up this burden where off-site work is warranted.
 
 
 

III.CURRENT DEFENSES TO LIABILITY ARE OF LIMITED VALUE
 

In 1986, the Federal Superfund Law was amended to clarify the third party defense in order to distinguish this defense from the innocent purchaser defense. Unfortunately, both defenses, which hinge on the nature of the contractual relationship between the purchaser and the previous owner, are still so narrowly drafted and so strictly interpreted by the courts that very few purchasers have been able take advantage of the defenses. In order to establish the third party defense, a party must show that the release was caused solely by a third party (who cannot be one of the party's employees or agents) in connection with a contractual relationship (i.e. land contract, deed, or other instrument transferring title or possession) existing directly or indirectly with the party, after the disposal or placement of the hazardous substance on, in or at the facility, provided the party establishes by a preponderance of evidence that (1) he exercised due care with respect to the hazardous substance concerned, taking into consideration the characteristics of such hazardous substances, in light of all relevant facts and circumstances, and (2) took precautions against foreseeable acts or omissions of any such third party and the consequences that could foreseeably result from such acts or omissions. 

In order to establish the innocent purchaser defense, a party must show all of the above plus show that at the time of acquisition, the party did not know and had no reason to know that any hazardous substance, which is the subject of the release or threatened release was disposed at the facility. To establish that the party had no reason to know, the party must have undertaken at the time of acquisition all appropriate inquiry into the previous ownership and uses of the property consistent with good commercial or customary practice in an effort to minimize liability. Factors the court may take into account include: the party's specialized knowledge, purchase price, commonly known property information, obviousness of contamination and ability to detect contamination. 
 

Due to the constraints of both defenses, even prospective buyers that have conducted Phase I and Phase II investigations have still found themselves unable to utilize the defenses after site acquisition.
 

Under New York State's existing remediation program, there are no defenses to environmental liability for innocent owners. Under the current New York State Superfund Program, an owner is required to conduct an investigation and remediation of a site under a consent order or other legal instrument. In general it is difficult to obtain a liability release even subsequent to the completion of the remediation. Consent orders have been negotiated that contain liability releases but they are difficult to obtain.
 

Under the State Voluntary Cleanup Program, a contractual liability release is provided in exchange for a site investigation and/or cleanup. However, the State continues to add new reopeners to the liability release weakening its effect. The standard reopeners include:  fraud, discovery of new contamination unknown at the time the agreement was executed, cleanup levels are no longer sufficiently protected to enable the contemplated use of the site to proceed, and the agreement is not being implemented to the satisfaction of the Department. However, the Department has added a new "off site migration" reopener which, particularly for petroleum sites, defeats the entire benefit of the liability release. 
 

If on-site petroleum contamination on a brownfield site is not migrating, or does not have the potential to migrate off-site and the site is not located in a ubiquitous contaminated neighborhood, the off-site migration reopener in a voluntary cleanup agreement is not problematic. For example, I have personally found this reopener acceptable in an agreement on a 200 acre site where the on-site contamination was in the middle of the property and there was no potential for off-site migration of a minor contamination plume. However, on a typical brownfield site in an urban setting where adjacent properties might also be contaminated with petroleum, this reopener has the unintended effect of reversing the burden of proof onto the volunteer to prove that any off-site contamination discovered on an adjacent site is not coming from their property. If such proof cannot be made, the release is lost. Under existing law, the off-site property owner would have to prove that the contamination on their own site is coming from adjacent properties and not their own. 
 

The Governor's Bill at first blush appears to improve the liability release currently provided by the non-statutory Voluntary Cleanup Program since it does not include the off-site migration reopener described above. Fewer reopeners (five rather than seven) apply in the event a party conducts a residential level of cleanup. However, one new reopener so vague and broad that I believe it has a similar, if not worse, impact than the off-site migration reopener. The reopener is as follows: "the remedy is not sufficiently protective of public health or the environment". Given that a voluntary cleanup agreement is negotiated with the department and implemented under department oversight (in fact, the department oversight costs are charged to the volunteers) it is unclear under what circumstances a remediation project could not be implemented correctly such that the entire liability release protection provided in the agreement should be waived. According to a recent speech given by Charles Sullivan on October 7, 1999, this reopener was placed into the bill in case "DEC makes a mistake". The problem is that if DEC makes a mistake, the volunteer has to pay the price. 
 

The Coalition Bill has the most comprehensive and far-reaching liability release. When the Bill was negotiated, environmental groups and the business community found themselves in agreement on two key issues: (1) the remediation of sites should be conducted in a more expedited fashion; and (2) in exchange for an expedited cleanup, a volunteer should obtain a liability release that will encourage both the cleanup and redevelopment of the property. As a result, the liability release provided in the Brownfield Coalition Bill has fair and narrowly drawn reopeners which do not provide DEC with broad and unfettered discretion to eliminate the liability release. The reopeners include: 
 

• unknown conditions not sufficiently protective for the current use; 

• the department affirmatively demonstrates that an environmental standard or other risk factor which a remediation program pursuant to this title was based renders the remediation proposed or implemented at a contaminated site no longer protective of public health or the environment; or 
• due to fraud committed by the volunteer in demonstrating attainment with the remediation requirements established for the contaminated site pursuant to this title where such fraud resulted in avoiding the need for further remediation of such contaminated site.