Author: snydergroup

I still remember a site inspection that I performed more than 30 years ago. I had already represented Company X for some time and was not surprised when its President approached me. However, I was a bit taken aback when he said, “What are you doing here?’’ I got the message loud and clear that my presence was not appreciated and likely forecasted expenditures for environmental work and legal fees, neither of which the company president had any interest in.

Given this historic perspective, let’s fast forward to the present where changes in Environmental Law and the common perception of the role of lawyers have expanded the functional areas where legal expertise is needed. We are still very important in providing our clients with the risk analysis and compliance information that business people require in making business decisions. But now, much more is, or should be, expected of us.

This is particularly true in the area of site development where legal input can be extremely valuable in the identification of target sites and in the selection of remedial strategies, including the use of ELURs. With regard to site development, the potential for using the state Brownfield programs may eliminate the need to comply with the Transfer Act and the need to address groundwater plumes that have left the property. Further, the use of these programs may facilitate the issuance of a Covenant Not To Sue by DEEP.
When compared to the liabilities associated with a traditional conveyance subject to the Transfer Act, entrance into a Brownfield program may sufficiently reduce liability and cleanup costs to make a previously unattractive site a prime target for future development.

Of course, the factors discussed above impact lenders as much as buyers and sellers. Collateral value and the desirability of a loan are impacted by the cost of cleanup and the assessment of liability. We are no longer in a world ( and haven’t been for some time) where the presence of contamination is a deal killer. It is simply a factor to be considered, and a measure of creativity in structuring a transaction can make a big difference in a property’s marketability.

As a relatively small firm, we have been involved in a surprising number of major development projects. We have represented buyers, sellers, and lenders on very substantial acquisitions and represented large corporate clients in court and arbitrations as plaintiff’s counsel or defendant’s counsel. We have had many successes (which feel great!). We have also seen deals fail.

Deals die for many reasons. From an environmental perspective, most transactions do not fail because the property contains contamination. They fail for the following reasons:

The parties do not understand the liabilities associated with the site or if the site is suitable for the prospective purchasers’ use. Sellers who do not allow the prospective purchaser reasonable due diligence or try to control the extent of due diligence will have difficulty transferring their site. Depending on their level of risk aversion, sophisticated buyers will not accept sellers’ limited site characterization reports which do not reasonably quantify site liabilities and do not provide a basis for a reduction in purchase price based on anticipated future costs of investigation and remediation.

The parties cannot agree on the Transfer Act applicability. It is not simply a question of whether the statute applies but often deals with the question of which Transfer Act Form is appropriate. Those questions are often matters of judgment. If the parties cannot agree on Transfer Act applicability issues, they will not likely reach an understanding of the underlying site liabilities and costs of investigation/remediation. If potentially high-cost issues (such as tank releases, PCBs, or contaminated drinking water) are not addressed, most prudent buyers will not gamble that the seller’s Transfer Act interpretation is correct.

Quantifying likely environmental costs and resolving Transfer Act applicability issues requires the use of environmental consultants and attorneys who are competent in their fields and want to make deals happen. It requires professionals who understand their clients’ objectives and put those objectives in front of their own.

The parties to the transaction ultimately have to determine the importance of the deal and their tolerance for risk given their strategic plans. They need to exercise a level of control over consultants who may be recommending additional investigation that is unneeded. They need to control their attorneys who may be micro-managing the other party’s due diligence or imposing unreasonable conditions for site access and indemnification. They sometimes need to be directly involved in the negotiations to assure that the key issues remain the focus of attention.

In summary, if the environmental issues are understood and not overwhelmed by unknown and undetermined costs and liabilities, contamination concerns will not often kill deals. Sophisticated deals do not generally work when one side underestimates the other. They do work when the parties and their professionals understand their roles and want the transaction to come to fruition.

One of the most common issues we face when representing landlords is the unexpected triggering of the applicability of the Transfer Act, Conn. General Statutes §22a-134, et seq., by a tenant. This typically occurs when the tenant becomes an “Establishment” under the Transfer Act by generating greater than 100 kilograms of hazardous waste in a month. Unfortunately, a landlord and its counsel may not have recognized the potential that a pharmacy or big box tenant may exceed the 100 kilogram generation threshold during its routine practices of managing old, damaged or returned inventory or performing routine maintenance. That tenant may submit a notification of hazardous waste activity to the appropriate environmental agency as required under applicable environmental law indicating that it is either a small or large quantity generator of hazardous waste, both of which identify that tenant as generating more than 100 kilograms of hazardous waste in a month. Worse, a conveyance of that business may result in a Transfer Act filing requiring the investigation of the entire parcel.

Generating this level of hazardous waste is not a statutory violation. For many businesses, generating hazardous waste is simply part of facility operations necessary to produce goods. Note that in addition to becoming an “establishment” by generating greater than 100 kg of hazardous waste in any one month on or after November 19, 1980, a business may become an “establishment” by conducting the process of dry cleaning, furniture stripping or vehicle body repair on or after May 1, 1967. A business may also become an “establishment” by recycling, reclaiming, reusing, storing, handling, treating transporting or disposing of hazardous waste generated at a different location.

Being an “Establishment” is not unlawful. However, the unintended consequences of being so classified could have significant negative consequences for the landlord. First, it may inhibit the ability to sell the property as the conveyance of the property (or the sale of the business) may trigger the Transfer Act. Second, lenders may be less inclined to accept the property as collateral. Third, the investigation/remediation obligations under the Transfer Act may be quite substantial.

As operating as an “Establishment” is not illegal under environmental law, there may not be any recourse against the tenant based on such action….unless a provision is expressly inserted in the lease prohibiting the tenant from triggering Transfer Act applicability. If you are negotiating a commercial lease, stick this prohibition in the lease unless you knowingly are willing to accept the repercussions of Transfer Act applicability in exchange for obtaining a potentially excellent tenant. This is not a matter of good versus bad. It is merely a matter of understanding the business liability risk that may be encountered if this provision is not included in the lease.

To end on an upbeat note, all hope is not lost if the lease does not address this situation, and the parties to a transaction are concerned that tenant activities may have triggered Transfer Act applicability. Go back to the fundamentals of Transfer Act 101. The statute is often triggered by the GENERATION of greater than 100 kilograms of hazardous waste in any month since November 19, 1980. This is a matter of proof. Was the hazardous waste generated in small amounts over time, although disposed of in a quantity that appears to have triggered the Transfer Act? Was the self-declaration of a facility as a small or large quantity generator based on disposal records rather than actual rates of hazardous waste generation? Was it simply a conservative filing made years ago without an appreciation of the significance of the declaration?

The point is that the battle is not lost. Avoid Transfer Act applicability concerns by taking precautions in the lease and having your environmental attorney draft specific Transfer Act provisions. Address existing concerns by digging deep into whether the tenant’s business practices really did turn the site into an “Establishment”.

Environmental due diligence is fundamental to transactions involving properties that may have been subject to a hazardous substance release. Although such due diligence remains an important aspect of a successful property acquisition, the risks of due diligence have increased as more environmental conditions must be reported to the Department of Energy and Environmental Protection (DEEP).

As of July 1, 2015, more stringent reporting requirements under the Significant Environmental Hazard (SEH) statute, Conn. General Statutes §22a-6u, became effective. These changes originally passed in 2013 by Public Act 13-308 significantly lower certain reporting thresholds and will result in increased reporting to the DEEP.

The SEH statute requires reporting to the DEEP of the discovery of certain environmental conditions. Specifically, a “technical environmental professional” that discovers certain environmental conditions during the conduct of a site investigation is required to notify his/ her client and the property owner of such condition. The statute then requires the property owner (and in some cases the technical environmental professional’s client) to notify the DEEP of the hazard within a certain time period. The DEEP may then require the property owner to further investigate, mitigate and/or abate the condition.

Notably, the changes have significantly lowered certain reporting thresholds. For example, some important changes include the following:

• The reporting threshold has been lowered from 30 times to 15 times the Residential Direct Exposure Criteria for metals, PCBs and volatile organic compounds (some substances exempted) in soils within 2 feet of the ground surface if the property is in residential use.
• The reporting threshold has been lowered from 30 times to 10 times the volatilization criteria for volatile organic compounds in groundwater within 15 feet “of” a building instead of “below.”
• Notification is required for groundwater contamination located within 200 feet in any direction of a drinking water supply well.

It is also important to note that for certain hazards, the changes to the statute require the property owner to conduct specific actions to evaluate and confirm the hazard within short time periods of time.

The impact of the changes to the SEH statute will result in increased reporting to the DEEP. Therefore, buyers, sellers, lenders and property owners conducting environmental investigations should plan for the possibility of a SEH reporting obligation. Prior to the conduct of site investigations, the parties should address how they will manage a SEH reporting obligation and who will be responsible for the notification, responses actions and costs. Parties to a transaction should also address who will be responsible for any long term response actions (and associated costs) that may extend past the closing date of the transaction.

Environmental Laws, just like tax policy, can be a powerful force in bringing businesses and jobs back to the cities. This is particularly important in Connecticut where budgetary and fiscal concerns limit growth. Here are some ideas for change at the state regulatory and statutory levels that could prove effective:

1) Relax soil and groundwater standards in inner cities where the contamination will not impact health or the environment. Basically, limit standards to volatilization concerns as well as direct exposure issues in unpaved areas.

2) The Transfer Act is sometimes triggered by one-time cleanups of unused or discarded chemicals occurring prior to or in connection with a business or property conveyance. Some of the old abandoned inner-city factories are a mess. These areas, exempt such remedial efforts from triggering Transfer Act applicability.

3) Similarly, post-closing building materials abatement and tank removals should not trigger Transfer Act applicability.

4) Joining parcels to redevelop inner-city properties should not result in the combined parcel being subject to the Transfer Act.

The bottom line is that the Transfer Act and the Remediation Standard Regulations (RSR) can be used to encourage rather than discourage urban redevelopment. It can be a significant component of a larger policy aimed at breathing new life into many of our cities.

There is this great program that no one in Connecticut seems to know about which has the potential to provide huge benefits to property developers. Since the Brownfield Remediation and Revitalization Program (the “Program”) was created by HR 11-141 in July 1, 2011, only 20 applications have been submitted. Once a bona fide prospective purchaser is accepted into the Program it must only investigate and remediate any contamination within the boundaries of the property. An applicant is not required to investigate or remediate any pollution or contamination that exists outside of the property’s boundaries, including any contamination that may exist off site or has migrated to sediments, rivers, or streams off site.

In exchange for performing this investigation and remediation, the applicant is no longer liable to the state or any third party for the release of any regulated substance from the property. Additionally, a party accepted into the Program is exempt from filing as an “Establishment” pursuant to the Connecticut Transfer Act, Conn. Gen. Stat. §22a-134 et. seq.

The Department of Economic and Community Development (“DECD”) works with the Department of Energy and Environmental Protection to administer the Program. An application is available on the DECD website and may be submitted to the DECD on a rolling basis. As part of the application, the applicant must submit (1) a title search, (2) Phase I Environmental Site Assessment conducted by or for the applicant, (3) current property inspection, (4) documentation demonstrating the satisfaction of the eligibility criteria required under the certification section, and (5) information about the project that relates to the twelve state-wide Portfolio Factors.

If you want to learn more about the application process, please review my in-depth analysis of the Program. I am available to assist as you navigate this Program or answer any questions you may have regarding the Program. Please feel free to contact me at 203.874.7110.

Cleaning up contaminated property comes with its own set of special obligations and, remarkably enough, special benefits. With tax season fast approaching, careful consideration and creative accounting of remediation costs may offer some unexpected relief.

A. THE BASICS… DEDUCTIBLE VS. CAPITAL EXPENSE

The IRS, through relevant revenue code sections, generally strives to match expenses with the revenues of the taxable period to which the expenses are properly attributable. This process requires that distinctions be made between capital expenditures and ordinary expenditures.

Section 162 allows for the deduction of repair and maintenance costs associated with ordinary and necessary business expenses. Treasury regulations allow for deductions of incidental repairs which neither materially add to the value of the property nor appreciably prolong its life, but rather keep it at an ordinarily efficient operating condition. However, repairs in the nature of replacements, to the extent that they stop deterioration and appreciably prolong the life of property, should be capitalized.

To be considered ordinary and necessary expenses under section 162, the costs must be: (1) paid or incurred during the taxable year, (2) for the purposes of carrying out a trade or business, (3) an expense, (4) necessary, and (5) ordinary. An expense has been held to be “necessary” when appropriate and helpful for development of the business and “ordinary” when related to a transaction of common and frequent occurrence or accepted in the trade or business.

Section 263, on the other hand, limits deductions for repairs by defining capital expenditures. An expenditure should be capitalized if it: (a) materially increases the value of the property, comparing the value of the asset before the condition necessitating the expense arose with the value of the asset after remediation, or (b) substantially prolongs the useful life of the property beyond the taxable year, or (c) is incurred to adapt the property to a new or different use, after consideration of its original intended use, the degree of change and the intent in making the expenditure.

B. SO WHERE DO ENVIRONMENTAL REMEDIATION COSTS FIT IN?

The IRS has declined to provide specific guidance as to the deductibility of particular environmental remediation costs although for a brief time, it did allow taxpayers to request a letter ruling on the deductibility of an environmental expense. Unfortunately, that procedure was a pilot program that has since expired. Now, we are left with revenue rulings and court decisions contradicting one another, leaving taxpayers without a clear answer on how to characterize environmental remediation expenditures.

Environmental costs are generally considered to be common, appropriate, and helpful since they often satisfy a liability of the business. Therefore, for remediation of contamination that the taxpayer caused on its site or the property of another, the costs are generally deductible given that remediation costs do not increase the property’s value and are necessarily and ordinarily incurred while carrying on the taxpayer’s business. When, however, the remediation costs are incurred by way of a general plan that ultimately increases the property’s value, the costs may be required to be capitalized under section 263.

Historically, the IRS has taken may approaches in reviewing the deductibility of environmental remediation costs, many of which are inconsistent. Here are a few examples:

Soil and Ground Water

Soil and groundwater remediation costs are deductible if the taxpayer purchased the property as uncontaminated and the land was subsequently contaminated by virtue of taxpayer’s business operations on the property. In this circumstance, the soil remediation and the operation and maintenance of groundwater treatment systems represent ordinary and necessary expenses incurred in the course of the taxpayer’s business. It should be noted, however, that the costs of the equipment associated with the groundwater treatment system may need to be capitalized.

Underground Storage Tank

Costs incurred to remove and replace underground storage tanks are capital expenditures under section 263. However, in cases where the tanks will not be replaced, and the costs are incurred by the taxpayer who caused the contamination, the costs to remove underground storage tanks and remediate the soil are deductible under section 162. This does not apply in cases where the costs are incurred to adapt the property to a new or different use.

Once again, the equipment costs associated with the installation of monitoring systems, wells, or other machinery associated with the remediation and clean-up of the contaminated area, generally must be capitalized and depreciated.

PCBs

PCB soil excavations must be capitalized when the cleanup resulted from the decision to forego annual maintenance. Under the view of the IRS, the replacement soil increases the value of the property, since it prevents the occurrence of additional government penalties and liabilities, makes the property safer for workers, and increases the property’s marketability.

C. WHAT YOU REASONABLY SHOULD NOT HAVE KNOWN MAY HELP YOU.

Expenditures made to cure defects or remedy situations that, by the exercise of diligence and prudence appropriate to the circumstances would not have been discovered at the time of the acquisition, should be deducted as expenses, assuming all other criteria are met; otherwise, expenses that could have been reasonably discovered may require capitalization.

Given Connecticut’s current program which requires due diligence when acquiring potentially contaminated property, it is unlikely that a taxpayer will be able to deduct remediation costs associated with contamination existing onsite, but unknown, at the time of purchase. However, environmental consultants sometimes, despite their best efforts, do not find all contamination, and therefore, the exercise of reasonable due diligence may save the deduction.

D. AND WHAT ABOUT THE BROWNFIELDS TAX INCENTIVE?

First enacted by the Tax Relief Act of August 1997, and subsequently codified as § 198(a) of the Internal Revenue Code, the Brownfields Tax Incentive allows for an immediate tax advantage for remediation expenses, helping to offset short-term cleanup costs. Qualification for the tax incentive requires the taxpayer incurring eligible expenses and holding property for use in a trade or business or for the production of income to demonstrate that there has been a release or threat of release or disposal of a hazardous substance at the property by obtaining and submitting a statement from CT DEP confirming the release or threat of release. The Brownfields Tax Incentive allows the same property owners to expense such costs even if they are changing the use.

The Brownfield Tax Incentive was most recently extended on December 17, 2010 by the “Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010.” As a result, eligible costs paid or incurred through December 31, 2011 may qualify for the deduction, although the IRS has declined to publish regulations identifying specific eligible environmental expenses.

E. BOTTOM LINE

The IRS has made it a difficult task to expense environmental remediation costs. Revenue rulings have wavered on their treatment of remediation costs and it is important that each situation must be evaluated independently. There are many effective strategies for minimizing, or at least spreading out, environmental expenditures needed to comply with government mandates. Recording Environmental Land Use Restrictions, selecting natural attenuation as a remedial option when appropriate, or negotiating favorable contract terms are several obvious strategies that come to mind. Just don’t forget that good tax planning can also help. Talk to your tax advisor.

Jacobi & Case, P.C. is not in the practice of tax law. This article provides a general and cursory review of the status of environmental remediation costs and does not address all issues associated with expensing environmental remediation costs nor does it purport to provide advice regarding specific situations of individual taxpayers. The information contained in this article should not be relied upon when preparing income tax returns, but instead should be used as a tool to facilitate conversation between the reader and his client or tax advisor. The reader should consult with an attorney or tax advisor about their particular circumstances.

IRS Circular 230 disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any tax advice contained in this communication (including any attachments) was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any matters addressed herein.

The problem with environmental law in Connecticut is that it suffers from a lack of clear direction. Contrary to public opinion, the regulators at the Department of Environmental Protection are, for the most part, extremely competent and hard-working. Government employees are simply an easy target given the economic and political climate of the past few years. However, whether or not the bureaucracy is a convenient scapegoat, the truth is that our environmental laws are not designed to protect us from harmful contaminants while promoting economic growth. The parts per billion standards are often excessive and economic wellbeing is not a factor. As will be discussed below, those two goals are not in conflict. Adding a dose of commonsense to our statutory framework can, in fact, accomplish both objectives.

In Connecticut, the primary statute for achieving site cleanup is the Property Transfer Act. Often, when industrial or commercial properties are purchased, the Transfer Act is the law which requires a party to the transaction to remediate the site. However, the law is partially blind to the realities facing that property. These realities include scarce buyers and market values that often are less than the cost of remediation. In this regard, a property in an urban area must justifiably meet cleanup standards that protect site occupants from direct contact exposure and volatilization of contaminants into the structure. However, those same sites must also comply with requirements to protect surface water quality and to protect groundwater from leaching concerns even if the receiving water body is thoroughly degraded. Additionally, if a site in an urban area was originally developed or expanded with the use of fill, those contaminants in the fill are subject to remediation by the property owner even if that party had no connection to the placement of fill material and even though that fill material may be buried under concrete or asphalt surfaces.

The fact is that many properties remain abandoned and unmarketable because the cost of cleanup is far too high. Further, those contaminants below urban structures are often not creating an environmental hazard to site occupants or to neighboring water bodies. The net effect of these laws is to keep underutilized properties in disrepair. These sites sit idle with no development opportunities and, therefore, with the contamination remaining unaddressed. Remember, in Connecticut, most sites get cleaned up as a result of requirements that are only triggered on the conveyance of the site.

Why not simply assure that these sites are remediated to prevent direct contact exposure and to minimize issues pertaining to indoor air quality? Why not encourage investors to develop these sites and spark a renewal of urban growth? Why not make it clear to the development community that cleaning up an urban site will be less expensive than cleaning up a site in a more sensitive environmental area? If money truly talks, reducing the costs of remediation in urban areas will result in a new development in these areas.

In summary, it is unfair to blame DEP employees for performing their role of enforcing existing law. We really need to take a hard look at how our laws affect behavior and how we can use these laws to promote growth while protecting our citizens. A naïve approach that ignores job growth and revitalization of urban areas is not in our best interests. We can do much better if we stop assigning blame to the regulators and begin to tackle the real problems which we face every day.