Strategies for Brownfields Redevelopment

Real estate developers and investors, and their environmental consultants, need strategies to deal with contaminated properties, especially as commercial and residential projects increasingly target previously developed parcels in urban areas and village centers.  Transit Oriented Development (TOD) and “smart growth” projects commonly reuse sites that have a history of environmental impairment, to accomplish Brownfields redevelopment.

For instance, Governor Patrick’s current plan for 10,000 new housing units per year prioritizes development of sites in urban areas and village centers.  Although those properties may be perfect for re-use, it is likely that the developer or contractor will encounter some amount of oil or hazardous materials prior to the acquisition or during construction, or both.

In the past, environmental contamination could stop a good redevelopment plan in its tracks.  However, current regulations and industry practices can be used to manage the risk and facilitate redevelopment. 

Here are some points from a talk I recently gave to Licensed Site Professionals (LSPs) and environmental consultants on Brownfields Redevelopment and Environmental Due Diligence:

1.                   Chapter 21E creates the “Eligible Person” and “Eligible Tenant” categories to provide liability protection for new owners and new tenants that did not cause or contribute to the contamination.  An Eligible Person can receive liability protection after cleaning up the property and an Eligible Tenant can receive protection if the contamination was previously reported to the Department of Environmental Protection (DEP).

2.                  If an Eligible Person needs liability protection before completing the cleanup, the Attorney General’s office can issue a “Brownfields Covenant Not to Sue”, to provide liability relief while the cleanup is underway.  In addition, the Covenant Not to Sue can be used to protect a prospective purchaser as well as a responsible party who caused the contamination as long as the cleanup revitalizes an area and provides public benefits.

3.                   Chapter 21E provides liability relief for a “Secured Lender” to protect banks while they are servicing a loan as well as after a foreclosure.  The Secured Lender must satisfy several conditions to maintain this status but they are not onerous on their face.  In addition, subsidized environmental insurance under the Brownfields Redevelopment Access to Capital (BRAC) program can provide an additional level of comfort for lenders, with Pollution Legal Liability and Cleanup Cost Cap policies.

4.         Similar liability relief is provided to municipal entities such as a redevelopment authority, community development corporation, and economic development and industrial corporations.  Thus, public projects can proceed with a level of comfort.

5.         The Brownfields Tax Credit program has provided up to a 50% credit of the response action costs to achieve a cleanup within economically distressed areas, of which there are many under the applicable State program.  However, Governor Patrick vetoed an extension of this program last year and lawmakers have until August 2013 to conclude action on a further extension.

6.         The Phase I Environmental Site Assessment (ASTM E1527-05) is often considered the industry standard for conducting environmental due diligence in real estate transactions.  However, the scope of E1527-05 does not cover many issues that are frequently of concern in a real estate deal, such as indoor air quality or vapor intrusion, asbestos material, wetlands, regulatory compliance, business environmental risk, and subsurface (soil, groundwater) sampling.  Thus, it is important for the developer and environmental professional to consider the appropriate scope of due diligence in cases where the relatively limited scope of ASTM E1527-05 may not be sufficient.  (Also note that E1527-05 is due to be reissued this year, so some of the provisions may change, including for the soil vapor pathway.)

7.         It will be important to follow DEP’s current proposed amendments to the Massachusetts Contingency Plan (MCP), to determine how the final regulations might affect Brownfields redevelopment.  The current draft includes changes regarding vapor intrusion, future construction on sites with remaining contamination, the close-out process (e.g., eliminating Response Action Outcome (RAO) in favor of Permanent Solutions with or without Conditions and Temporary Solutions), and the deed riders known as Activity and Use Limitations (AULs) restricting future use of a parcel.

Please contact me if you or a colleague has any questions regarding Brownfields Redevelopment, environmental contamination, or real estate or business transactions. 

Who is Liable in Business Transactions?

In real estate and other business transactions, information is typically conveyed to the buyer from the seller, broker and consultants.  If the information turns out to be incorrect, and the buyer had relied on it and suffered damages as a result, the parties may end up in litigation.  The big question becomes, who is liable to the buyer, if anyone? 

The Supreme Judicial Court recently ruled that a real estate broker may be liable for conveying incorrect information from a seller to a buyer.  In that case, the SJC ruled that a broker, like any person engaged “in the course of business,” may be liable for failing to exercise reasonable care in conveying information and making representations to a buyer.

In the case titled, DeWolfe vs. Hingham Centre, LTD., the seller incorrectly informed its broker that the property was zoned for business use when it was actually zoned “residential”.  The broker prepared a multiple listing service (MLS) listing for the property stating that it was zoned for business use and had written that “business” was the applicable zoning district.  After acquiring the property, the buyer learned that the property was zoned “residential” and that its planned business was not a permitted use. 

The buyer sued the broker and her real estate agency, alleging “negligent misrepresentation” and other claims.  The broker attempted to defend by asserting that she had merely conveyed zoning information that her client had provided to her, and that she was under no duty to confirm the zoning status of a property.

The SJC rejected the broker’s arguments, ruling that a broker has a duty to investigate before making representations as to the zoning classification of a property.  The broker has a duty to exercise “reasonable care” in making such representations.  If the broker’s misrepresentations were based on information provided by the seller or third-party, the fact-finder (a jury or judge) will determine whether it was reasonable under the circumstances to rely upon the seller’s information.

Stated another way, if it is reasonable under the circumstances for a broker to rely on information provided by the seller, the broker should not be liable for conveying such information to a buyer without conducting further investigation.  In contrast, if it is unreasonable under the circumstances for a broker to rely on information provided by the seller, the broker has a duty to investigate further before conveying such information to a buyer.

In the DeWolfe case, the SJC indicated that the broker’s reliance on the seller’s information was not reasonable:  the broker was experienced in selling properties in the town, the broker was not aware of any prior business use of the property, and the broker observed only houses and not businesses adjoining the property on either side.

The broker also attempted to defend on the basis of the “exculpatory clause” in the standard form Purchase and Sale Agreement.  That clause provided that the buyer had not relied on any representations not incorporated in the Agreement “or previously made in writing.”

The SJC ruled that the exculpatory clause did not immunize the broker because the buyer had relied on prior written representations of the broker (e.g., the MLS listing and the broker’s handwritten designation of the “business” zoning classification).

Although the DeWolfe case concerned a commercial real estate transaction, the SJC’s decision indicates that the doctrine of “negligent misrepresentation” applies to any person engaged “in the course of business”.  Thus, any business person who “failed to exercise reasonable care or competence in obtaining or communicating the information” conveyed to others may be liable if that information was false, justifiably relied upon, and resulted in economic loss to the other person.

Please contact me if you or a colleague has any questions regarding real estate or business transactions. 

Why Form an LLC or a Corporation?

We are often asked by business owners if they should organize as a Limited Liability Company (LLC) or a corporation.  Here are some of the considerations that we typically discuss with them:

1.         Liability Protection:  Both an LLC and corporation insulate the owners from the company’s debts and obligations provided that the formalities are followed.   This liability protection often is a chief reason to move beyond a sole proprietorship.  (I previously circulated a memo on avoiding personal liability.  Please contact me if you would like a copy.)

2.         Tax Treatment:  An LLC and an “S corporation” (a corporation that has elected to be taxed as a partnership) are both treated as pass-through entities for federal tax purposes.  That is, the tax occurs at the member or shareholder level, avoiding a double tax that would otherwise occur at the corporate level, such as for a “C corporation".  On the State level, Massachusetts imposes a minimum tax on S corporations as well as a separate tax if total receipts exceed a threshold (in 2012, $6 million or more).

(Keep in mind that tax law is complicated and the comments above are simply general guidance. Specific tax advice is needed for each business.) 

3.         Who Are the Owners:  An S corporation may have restrictions on the number and types of owners, whereas an LLC may provide more flexibility.  This may be a concern if there are corporate owners or many of them.

4.         Management and Control:  An LLC may be either manager-managed or member-managed, whereas an S corporation is governed by its board of directors as elected by the shareholders, with operations handled by the officers.  An LLC can provide flexibility insofar as a manager(s) can be delegated broad authority in the Operating Agreement to run day-to-day operations as well as take more significant actions, with members reserving control over certain significant decisions.

5.         The Business Plan:  A relatively straightforward, stand-alone business may use either form.  If various businesses are contemplated, each organized as its own entity, multiple tiers of LLCs or corporations may be used, and series LLCs may allow setting up multiple businesses within one LLC.  The consideration is to shelter each business from the liabilities of each other business.

6.         The Contributions and Rights of the Respective Owners:   Consideration is given to owners who may make different contributions (e.g., cash, services, property) or may be active participants or passive investors, or if distributions of cash are to be made on other than a pro rata basis. LLCs may allow different and flexible distributions of cash and corporations may allow for priority distributions through the use of preferred stock.

7.         Financing and Capital Structure:  If the financing will be relatively straightforward, either entity may work.  However, outside financing from angel or venture capital investors may dictate the choice of entity. 

8.         Employee Compensation:  Either entity may work for standard compensation plans.  Stock options may favor a corporate form, although an LLC can be structured to provide analogous interests. 

9.         Filing Fees:  The original and annual filing fees in Massachusetts are slightly lower for corporations than LLCs. 

These are just some of the considerations.  Please do not consider them “legal advice” because the specific details of each business should be discussed with experienced counsel.

Please contact me if you or a colleague has any questions regarding forming an LLC or corporation or other business matter.  Please forward or share this post or blog with a colleague if you would like.

2013 Housing Score: Builders 2, Towns 0

     The stars continue to align for builders in 2013. As if low interest rates, pent-up demand, and the Governor's plan for 10,000 new housing units per year were not enough of a tailwind, along comes the Supreme Judicial Court and issues not one but two decisions approving affordable housing developments. 

     The recent SJC decisions continue to recognize the importance of constructing affordable housing (rental or ownership) under the "comprehensive permit" law, Chapter 40B. The decisions also remind local boards to not deny a project based on unreasonable concerns, because improper reasons will be overturned.

      1.  On January 8, the SJC ruled that the Town of Lunenburg had improperly denied a 146-unit condominium project. The SJC rejected the Town's argument that the project would be inconsistent with the Town's master plan, because the Town had not actually created any affordable units under that plan.

     The SJC also held that the Town's affordable housing stock for purposes of Chapter 40B consists of subsidized units with long-term affordability ensured by a deed restriction. Thus, low-cost market rate housing does not qualify as "affordable housing" under Chapter 40B.

      2.  On January 14, the SJC held that the Town of Sunderland had improperly denied a 150-unit rental project. It was wrong for the Town to deny the project on the basis that the fire chief had alleged fire safety concerns (i.e., the Town did not have a ladder truck or a garage to store it in). The SJC determined that those concerns were not valid where the 3-story buildings would have an extensive, state-of-the-art sprinkler system, the Town had mutual aid from a neighboring town that owned a ladder truck, and the Town's zoning bylaw allowed taller buildings than those proposed by the applicant.

     Importantly, the SJC also ruled that the alleged "fiscal impact" of the project was not a lawful basis for denial. The Town had argued that the project would increase the school age population and necessitate an increase in the school budget; require hiring additional police officers and firefighters; and, create additional maintenance expenses for roads, sidewalks and drainage, all in excess of the tax revenue generated by the project.

     The SJC rejected the Town's argument, holding that a fiscal impact analysis is not permitted under Chapter 40B. The one limited exception is if the alleged inadequate municipal services were due solely to unusual topographical, environmental or other physical circumstances of the project, which did not exist in this case.

     As a final exclamation point, the SJC ruled that the Town had improperly charged the applicant a $10,000 "filing fee", ostensibly to pay for the Town's attorney for general legal representation. Such burdensome "application fees" were prohibited under the affordable housing regulations.

 

    3.  The affordable housing regulations of the Department of Housing and Community Development (DHCD) and the Housing Appeals Committee (HAC) support proactive municipal efforts to create housing (e.g., adoption of "smart growth" zoning overlay districts to create new housing "by right" under Chapter 40R, commitment of Community Preservation Act (CPA) funds to construct affordable housing, etc.). However, as the SJC recently indicated, the local efforts and plans will not be credited if they do not result in actual construction of affordable units.

     In December 2012, I circulated a memo on the Governor's housing plan and "5 Tips for Real Estate Development". Please contact me if you would like a copy.

     Please contact me if you or a colleague has any questions regarding comprehensive permits, Chapter 40B, real estate development, or construction issues.

Does a Buyer Inherit All of a Seller's Liabilities?

One important part of any business transaction is negotiating the rights being acquired, and the liabilities being assumed, by the purchaser.  Naturally, a buyer wants to broaden the rights while narrowing liabilities.  Although this may be possible in a corporate asset purchase, it may be difficult to do in other deals, such as a real estate deal with lease and tenant obligations, as the Appeals Court ruled in September 2012.

The Appeals Court held that the buyer of a commercial building that was subject to an existing lease and tenant could not cherry-pick the obligations of the lease that it agreed to assume, particularly where the tenant had not consented to the arrangement.  Thus, even though the buyer had executed an "assignment and assumption agreement" with the seller/landlord that purported to limit the buyer's future obligations, the Court rejected that agreement as an improper, unilateral alteration of the lease.  The Court imposed all of the underlying lease obligations on the buyer as the new landlord.

The case was titled, Bright Horizons Children's Centers, Inc. v. Sturtevant, Inc.  Sturtevant had purchased a building that was subject to an existing lease with the Bright Horizons tenant.  The lease obligated Sturtevant' seller, as landlord, to construct a building for Bright Horizons by a certain date or pay a rental credit for late delivery. 

 

At the time Sturtevant purchased the property, the building was already far behind schedule.  After further delays, Bright Horizons finished the building and then sought its costs and the rental credit from Sturtevant.  Sturtevant claimed that it had signed an assignment and assumption agreement with the seller which absolved Sturtevant of any construction-related lease obligations owed to Bright Horizons. 

At trial, the judge agreed with Sturtevant's argument.  However, on appeal, the Appeals Court rejected it, holding that Sturtevant and the seller were not allowed to alter Bright Horizon's rights under the lease simply by conveying the property and entering into an assignment and assumption agreement. 

The Court cited "black-letter law" on these issues:  "A deed transfer of real property, subject to a leasehold estate, operates as a matter of law as an assignment of the lease", so that "a successor lessor, who takes by deed real property subject to a pre-existing valid lease, stands in the shoes of and has the same rights and duties under the lease as had been held by its predecessor." 

 

Also, "one party to a contract cannot alter or modify the rights or duties of a counterparty by unilateral action." 

Sturtevant was not able to use its assignment and assumption agreement to carve out obligations that were otherwise contained in the lease (e.g., construction and rental credit responsibilities), which obligations transferred to Sturtevant when it acquired the property.  One important lesson from this case is the value of thorough factual and legal due diligence for a buyer before closing on a transaction, to make sure the full scope of liabilities is known and addressed.

Although the Court rejected the assignment and assumption agreement in this context, it noted that a buyer could lawfully cherry-pick obligations and liabilities that it would agree to assume in a corporate asset purchase.  In an asset purchase, the buyer and seller can negotiate which assets and liabilities will be transferred to the buyer, and which ones will remain with the seller. 

 

In July 2012, I circulated a memo concerning asset and stock purchase deals and "10 Terms for Your Term Sheet".  Please contact me if you would like to obtain a copy of that memo.

Please contact me if you or a colleague have any questions regarding assignment and assumption agreements, asset or stock purchase agreements, or the purchase or sale of a business or real estate.

Five Tips for Real Estate Development

According to a November 2012 editorial in Banker + Tradesman on housing development, "Now is the time for the private development community to step up and start building."

The Boston Foundation's 2012 Housing Report Card for the Greater Boston area documents the need to double or triple yearly housing production through 2020 (to 12,000 - 19,000 new units per year), with a likely shift in demand toward multi-unit condominiums and rental housing but with a significant number of single-family homes, too.  The Foundation predicts that the market will be shaped by young households "increasingly saddled with student debt" as well as the aging of the baby boom generation looking to downsize.  Both factors point to smaller housing units.

Governor Patrick's housing plan calls for 10,000 new units per year through 2020 with an emphasis on "transit-oriented development" (higher-density housing near village and urban centers or near trains, subways, or other public transportation).

The Boston Foundation concludes that, "More than ever, the Commonwealth should see housing development and housing affordability as both a moral obligation to its residents and an economic necessity for a prosperous future."  (my emphasis)

 

Now for some practical information:  Many real estate development projects were permitted but not built due to the economic recession.  For owners, engineers and consultants looking to start construction under those permits, or for buyers purchasing those projects or lenders advancing funds to develop them, it is important to confirm that construction is truly ready to begin.  Here are some considerations:

1.         The existing approvals need to be reviewed carefully to ensure that they have not expired and do not include pre-conditions that could delay the work.  Bear in mind that the 2012 Permit Extension Act provided an extension for many local and state permits that were in existence between August 15, 2008, and August 15, 2012.  (I circulated a memo regarding the Permit Extension Act in August 2012.  Please contact me if you would like a copy of it.)

2.         A strategy should be developed to address permits that may have expired or are close to expiring.  Note that the expiration date in some permits refers to completing work whereas in others it refers to starting work, which can be a big difference.  A strategy to deal with possible permit expiration could involve filing a request for an extension or renewal (with adequate documented reasons), appearing before the permit granting board, commencing some aspects of the work or otherwise exercising rights under the permit, or taking some other measures.

3.         Many permits contain requirements that must be met before work can begin.  Although some requirements may be inexpensive and easy to satisfy, some pre-construction conditions may be time consuming or costly.  For instance, if an additional study or plan was required, that could take significant time or money.  Similarly, time and money would be involved if a condition required the creation of an entity to perform future operation and maintenance (O+M) activities or required the grant of a conservation restriction or some other real estate conveyance.  Thus, the pre-conditions need to be evaluated carefully.

4.         The bylaws, ordinances and regulations should be reviewed to determine if there have been new amendments since the project was approved.  Although "grandfather" protection may exist under certain land use laws, that protection may not be absolute and may not extend to all laws and regulations.

5.         If the land or building is controlled through an option agreement or purchase and sale agreement with provisions for permitting or other due diligence, the agreement should be examined to ensure that all conditions to complete the transaction have been or will be satisfied.  For instance, if the agreement contains provisions for notice, extension, or achievement of certain milestones, it is important to confirm that those steps are taken.

 

After the tough real estate conditions over the past several years, it will be interesting to see if we meet the annual housing goals leading up to 2020.  With our "moral obligations" and "economic prosperity" on the line, let's hope that the market rate and affordable housing that our area needs is actually constructed.

Please contact me if you or a colleague has any questions regarding real estate development or construction issues.