Yes You Can — Buy It; Build It

By Christopher L. Reive

A headline in my local daily newspaper caught my eye last year. It read: "Deal for Kyocera Site Falls Apart. VHA (Vancouver Housing Authority) Balks Due to Polluted Groundwater." The Columbian, May 24, 2006.

That headline epitomized the Brownfields dilemma. A significant parcel of industrial property had a known environmental contamination problem. The property owner wanted to sell, and there was a ready, willing, and able buyer in the wings who could use the property for different purposes safely and without contributing to or exacerbating the existing environmental problem. Yet, that buyer was reluctant to buy because of the significant liability that could come with ownership of the parcel.

There are many good reasons for an aggressive strict liability scheme for environmental contamination. The alternative is to risk adding to the already large number of abandoned or "orphaned" industrial sites, the public costs of such vacancies, and the public exposure to contaminants. Making owners of contaminated properties strictly liable for such costs protects taxpayers and encourages cleanups. But one result of this policy is to discourage buyers from acquiring and redeveloping such sites. To counter this outcome, Brownfields programs have emerged, which seek to minimize or eliminate the potential of liability attaching to a new property owner.

The message of the above headline is that many buyers and sellers are still working under an old paradigm. So, a little education is in order.

Both Oregon and Washington have laws on the books that allow their responsible state environmental agencies to enter into agreements with "potentially responsible parties." In return for a buyer's agreement to address an environmental problem, the agencies may grant the buyer immunity from future claims. In some cases, the buyer can be immunized from claims by the state, and in others, the buyer can even be immunized from potential claims by third parties. A prospective buyer of real property is, by definition, only "potentially" responsible for environmental contamination. Thus, the key to purchasing a former industrial property is to plan ahead, talk to the appropriate regulators, and be ready to trade some positive environmental services for complete protection against future liability.

A case in point: MJB Associates, Inc. recently purchased the highly contaminated former CHJ Lilly site in Northeast Portland. A condition of that purchase was MJB is obtaining transactional immunity for existing herbicide, pesticide, and fungicide contamination in soil and groundwater. The seller had limited assets and was unable to address the existing environmental contamination. Our client, MJB, was interested in the property because of its location, building configuration, land use classification, and access to transportation access. The subsurface contamination was a significant concern; closing a transaction in the normal course would have resulted in MJB's becoming liable to the State of Oregon and neighbors for offsite contamination.

The seller wanted to sell, MJB wanted to buy, and Oregon's Department of Environmental Quality ("DEQ") was very interested in seeing an inactive contaminated industrial property cleaned up and put back into positive use.

The purchase agreement dedicated a portion of the purchase price to cleaning up subsurface soils, abandoning an existing storm drain groundwater injection system, and constructing a new storm water containment and treatment system. All the work was done by MJB after closing, pursuant to a preclosing agreed-on scope of work negotiated by all the parties and approved in advance by an Oregon court.

This marriage of three motivated parties, with different interests, resulted in a win for all involved:

• The seller's potential future liability for untreated contamination and offsite contamination was unchanged by the transaction. But the seller converted a liability into an asset, saw funds dedicated to cleanup, thus reducing its financial exposure, and obtained additional resources with which to continue to constructively address unresolved environmental issues.
• MJB obtained the real estate for its market value and put it to its highest and best use. In addition, MJB obtained immunity from future claims for that contamination from state government and third-party neighbors who might otherwise have claimed both injury and liability.
• DEQ made progress toward cleanup using private dollars, and is assured that the Seller has additional money to fund more work.

MJB's transaction involved the active participation of Oregon's Economic and Community Development Department, which served as a low-interest lender for a portion of the initial purchase price. The state's investment will be returned, both by repayment of the low interest loan and by a net positive impact on the local environment. This deal, the first of its kind for the state of Oregon, should be a sign of more to come.

This article is intended to inform the reader of general legal principles applicable to the subject area. It is not intended to provide legal advice regarding specific problems or circumstances. Readers should consult with competent counsel with regard to specific situations.

BACK TO TOP | BACK TO ARTICLE INDEX | PRINTER-FRIENDLY PAGE