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.