1012 Corridor

Environmental regulation is constantly evolving, and the pace of change has certainly quickened with the election of President Obama. These changes include alterations to previous policy and regulations, as well as new programs. Potential pitfalls, as well as opportunities, exist for businesses. The following are tips regarding certain important and sometimes overlooked issues in the area of environmental due diligence and planning for developers and other business owners.

The standard for environmental assessments: Under a long-standing principle of environmental law, a current property owner may be liable for the costs of cleaning up environmental contamination, even if the contamination was caused entirely by others and occurred before the current owner purchased the property. As a result, prospective purchasers began conducting “environmental due diligence,” which consists primarily of an environmental assessment of the property.

Why conduct an environmental assessment? An environmental assessment can serve several purposes. First, it can help identify environmental risks before closing a sale, which can affect the purchase price and other terms of the sale. It can also provide proof—a baseline—of the environmental condition of the property at the time of sale, which may be useful in determining who is responsible if additional contamination is discovered after the sale. And, significantly, the assessment can help establish certain statutory protections from environmental liability, including the “innocent landowner” defense, which protects the purchaser from liability for existing contamination that is not identified by the assessment, and “bona fide prospective purchaser” status, which can protect the purchaser from liability for existing contamination that is identified by the assessment. Thus, a properly-conducted environmental assessment can be quite valuable to a purchaser.

To qualify for these liability protections, however, the environmental assessment must be conducted in accordance with the standard approved by the U.S. Environmental Protection Agency in November 2006. Even though these new requirements have been in place for a few years, experience shows that environmental assessments, even those performed by experienced consultants, often do not comply with the new requirements. A common oversight is the failure to obtain necessary information about the property from the buyer regarding his or her specialized knowledge of the property, whether the purchase price is consistent with the fair market value of the property, and similar matters. An assessment report that does not include this information and otherwise complies with the required standard will not support the liability protections that the buyer thinks it is receiving.

Simply put, when reviewing an environmental assessment report, information that is not in the report can be as important as what is in the report. The report should be carefully reviewed to be sure it meets the required standard and that the purchaser is getting what he or she paid for.

Potential liability of the current lessee: A common misconception is that only the current owner is liable for existing contamination, and therefore liability can be avoided by leasing property instead of buying it—not so. Environmental law imposes liability on the current owner or “operator” of the property, and the term “operator” includes a lessee. Thus, as is the case with a prospective purchaser, it is often important for a prospective lessee to conduct a proper environmental assessment before beginning operations on the property.

The “shelf life” of an environmental assessment report: An environmental assessment must be performed within a specified time period before the purchase (title transfer) in order to meet the required standard. An assessment that was prepared more than 180 days prior to the purchase must be updated, including a new visual inspection of the property, additional interviews, and updating of records reviews. If the assessment report was prepared more than one year prior to purchase, it does not meet the standard and a completely new assessment is must be performed.

“Non-scope” issues: Environmental assessments performed in accordance with the new standard normally address only “hazardous substances” and petroleum contamination. Many contaminants and environmental issues fall outside of the scope of the assessment. For example, the typical environmental assessment—even one that fully complies with the required standard—will neither address matters such as materials containing asbestos, lead-based paint, radon, mold, or naturally occurring radioactive materials (NORM), nor will it delineate wetlands on the property. A buyer should carefully consider whether separate evaluations should be requested to address such “non-scope” matters.

Local requirements: Cities and parishes are increasingly enacting ordinances that may affect development projects within their jurisdictions, such as zoning, land use, storm water management, landscaping, and “green” building requirements. A prospective buyer should take a close look that the local ordinances and requirements to determine their potential effect on his or her project.

Addressing known contamination: If existing contamination has been identified during an assessment, this discovery need not doom a sale or lease transaction. Federal and state laws have been enacted to encourage the development of properties with known or potential contamination. For example, Louisiana and many other states have enacted voluntary remediation programs, which provide that the buyer and its lenders can receive a statutory exemption from liability if the contamination is assessed and cleaned up in accordance with plans approved by the state agency. Also, funding for the assessment and cleanup may be available through EPA Brownfield grants, which need not be repaid, or related state or local programs. In Louisiana, the Louisiana Department of Environmental Quality may perform the environmental assessment at its expense, and provide very low-interest or interest-free loans to cover cleanup costs. Further, under Louisiana law, the owner may be entitled to a tax credit of 15% of the assessment costs and 50% of the cleanup costs, which can be credited against income taxes or sold to another Louisiana taxpayer. Notably, the stimulus bill signed into law by President Obama in February 2009 provided an additional $100 million of funding for Brownfield cleanups, some of which should benefit projects in Louisiana. All options and incentives should be carefully considered.

New “green” incentives: Finally, it has been reported that upwards of $100 billion of the $787 billion stimulus bill is intended to fund or encourage environmental and renewable energy projects, energy efficiency, and related infrastructure. Anyone involved in these types of businesses would be well-advised to consider the funding opportunities and tax incentives that may be available, and the procedures and timelines for funding requests and decisions.

Yes, as they say, the times are a-changin’. With careful planning and sound advice, businesses can avoid the problems and capitalize on the opportunities that lie ahead.

Boyd Bryan is a partner in Jones Walker’s Environmental and Green Law and Sustainability groups. He can be reached here.