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Autumn 1995
   
When Cleanliness Isn't a Virtue
Kenneth Silber
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For city dwellers, environmental issues often seem distant, involving such things as endangered species, wetlands, and old-growth forests. But cities have an "environment," tooindeed, environmental problems like garbage disposal or car and bus pollution are at their thorniest in areas of high population density. Though you might not think so, cities have an enormous stake in the raucous political debate over the costs and benefits of environmental regulation.

No urban environmental problem is pricklier, or more crucial for cities' economic vitality and competitiveness, than the "brownfields" issue: what to do about properties abandoned or underutilized because of real or imagined contamination. A web of federal and state law and regulation has driven development away from such propertiesespecially onetime industrial sites located in or near impoverished inner-city neighborhoodsand toward suburban and rural "greenfields."

Two powerful recent trends have engendered this state of affairs: a governmental tendency to impose environmental regulation without regard to economic consequences, and a litigation mania that assigns legal liability in defiance of commonsense notions of personal or corporate responsibility. Parties that had little or nothing to do with a site's contamination become liable for its cleanupespecially if they have deep pocketswhile genuine polluters escape accountability. Some cleanup requirements are unnecessarily stringent; others, ambiguous and ever shifting. The division of authority among agencies and levels of government is frequently unclear. And sites that contain little or no contamination become caught up in labyrinthine procedures designed for severely polluted toxic-waste dumps.

As property developers around the country find themselves stymied by confusion, uncertainty, protracted delays, and burdensome costs when they seek to reuse brownfields, urban industrial sites stand idle and housing development hangs fire, And the environmental consequences are as bad as the economic ones: sites that require prompt cleanup stay contaminated. Moreover, development is diverted into pristine greenfield areas, bringing further environmental harm, and the infrastructure that already exists in the cities must be constructed anew, often at great expense.

Nationwide, the brownfields problem is most acute in northeastern and mid-western cities; New York, rich in properties with a long history of industrial use, ranks prominently among them. In these cities, environmental concerns swell the long list of factorsincluding crime, high taxes, and the quality of the local schools—that deter investment. Says John Norquist, Milwaukee's Democratic mayor: "You end up having companies locating their plants far away from the workforce, creating all kinds of transportation problems and creating unemployment in central cities. There's enough bias against cities as it is without having environmental laws hanging over them like a cloud. And, of course, the worst part about it is that the intended goalcleanup of the environmentdoesn't happen very often either."

Much of the trouble grows out of the federal Comprehensive Environmental Response, Compensation, and Liability Act, commonly known as the Superfund law, enacted in 1980 in response to the discovery of toxic chemicals beneath the residential neighborhood of Love Canal in Niagara Falls, New York. In subsequent years, numerous states, including New York, passed their own Superfund laws, which closely mirror the federal law.

The federal Superfund law derives its name from its establishment of a trust fund, financed by industrial taxes, for the cleanup of polluted sites. However, this fund is of secondary importance to the law's liability arrangements, which are aimed at requiring polluters, rather than the government and taxpayers, to pay for cleanups. Key elements of the law are "strict, retroactive" liability and "joint and several" liability. Retroactive liability holds parties responsible for land contamination that took place prior to the 1980 statute, even if their practices were perfectly legal at the time. The joint and several provision means that any party responsible for even a small portion of a site's contamination can be held liable for the entire cost of the cleanup. In practice, such provisions turn out to mean that property owners can be held liable for the cleanup even if they had nothing to do with the contamination.

This liability scheme, written into many state laws as well, generates lengthy, expensive litigationa bonanza for lawyers but a disaster for both economic development and environmental protection. According to a RAND Corporation study, more than one-third of the $11.3 billion spent by the private sector on federal Superfund sites between 1980 and 1991 went for litigation rather than cleanup.

Like the interminable Jamdyce and Jamdyce lawsuit in Charles Dickens's Bleak House, some Superfund cases drag on for years. In North Hempstead, Long Island, for example, a property has been entangled in litigation since 1982stalling a much-needed remediation of the site's severe contamination. A federal court initially held the property's current owner, Shore Realty Corp., liable for the cleanup of cancer-causing chemicals and other waste resulting from a previous tenant's unlicensed disposal business. A subsequent court decision shifted liability to a group of 90 companies that had originated the waste.

But the story didn't end there. State environmental authorities then initiated a new round of studies to determine the hazards involved. Wrangling over the site continues, and cleanup is far from complete. While millions of gallons of chemicals have been removed from aboveground storage tanks, the surrounding land and water remain contaminated. "We were willing to do a reasonable study and pay for the waste removal, and instead World War III broke out," says David H. Peirez, a Long Island attorney who represents Shore Realty. "Thirteen years later, litigation is still pending. Millions and millions of dollars have been spent—and the property is still sitting there, useless and barren."

Under the Superfund laws, virtually anyone even remotely connected with a contaminated property may be dragged into court and fleeced. Crucially, this includes financial institutions. In several cases, notably a 1991 federal lawsuit called United States v. Fleet Factors Corp., courts have held that lenders foreclosing on a property may be held liable for cleanup costs. Even when banks avoid such an extreme liability nightmare, the discovery of environmental problems on a site can severely impair the value of a property held as collateral against a loan. Similarly, municipal governments that take over properties for tax delinquency or other reasons may subsequently discover contamination and become responsible for an expensive cleanup.

The overlapping jurisdictions of federal and state environmental authorities intensify liability worries. Developers receiving approval from one level of government may still face action from another level, and admitting wrongdoing in a settlement with one agency could increase one's liability with another agency. "A main problem, especially for some larger industrial sites, is the. fact that nobody knows exactly who's calling the shots," says Mark D. Anderson, counsel for the Greenfields Group, an industry-backed lobbying organization based in Virginia. "Is it the U.S. Environmental Protection Agency, or is it the state agency? At times, it may be both."

Developers thus face a patchwork of cleanup standards: federal, state, and, particularly in large cities, local. Typically such standards are not clearly specified in legislation but left to the discretion of regulatory authorities. Often regulators take little account of the proposed use for a site, holding locations to be used for a warehouse or parking lot to the same standards as those planned for residential development. They often base risk assessments on grossly unrealistic scenarios. In 1994 the EPA concluded that one contaminated site on Long Island, belonging to Liberty Industrial Finishing, posed a health threat since trespassers might enter the location. The EPA's assumption: that a trespasser would eat or have dermal contact with soil on the site two hours a day, twice a week, for nine years.

The result of all this is that developers and financiers frequently shun properties that carry even the slightest hint of contamination. "People fear the uncertainty of what the environmental standards are going to be and what the environmental process is going to entail," says Diane L. Donley, assistant general counsel at Clean Sites, a Virginia-based environmental group. "Therefore, they simply avoid brownfield sites and go to a suburban site."

Determining the full dimensions of the brownfields problem is a difficult task. Information is scattered among a variety of organizations, public and private, and official statistics tend to cover only those already entangled in the regulatory machinery, ignoring properties that go undeveloped because of the mere possibility of entanglement. A well-intentioned if not altogether helpful estimate by the federal General Accounting Office places the number of brownfields in the nation at somewhere between 150,000 and 450,000. But efforts to quantify the problem within a particular geographic area have found disturbing news. The Regional Plan Association, for example, a nonprofit group that studies land-use issues, has inventoried brownfields in Union County, New Jersey, which includes the city of Elizabeth. The tally: 56 derelict sites in Elizabeth, totaling 824 acresmore than 11 percent of the city's entire land area.

Once landing on a federal or state list of actual or suspected contaminated sites, a property often remains unmarketable even after cleanup. The EPA's Superfund Tracking System list, for example, until recently contained nearly 40,000 sites, including many properties designated "No Further Remedial Action Planned." Yet these still carried the often fatal stigma of having attracted attention from the federal hazardous-waste bureaucracy. (Lately, in recognition of this problem, the EPA has begun removing, such sites from the list.)

In New York City, federal and state Superfund laws have combined with the bureaucratic inertia of environmental agencies to form a powerful barrier to the cleanup and reuse of properties, especially along the Manhattan and Brooklyn waterfronts. Former industrial areas that could be converted into parkland, stores, or residences languish in disuse. While some sites on the waterfront and elsewhere are indeed thoroughly polluted and would require extensive cleanup before reuse, all too often properties descend into pariah status on slender evidence of contamination.

Among the parcels of land trapped in the regulatory toils are the 26 sites in the city currently on the New York State Department of Environmental Conservation's registry of "inactive hazardous waste disposal sites." They range from the 297-acre Fountain Avenue Landfill in Brooklyn to the half-acre Levco Metals property in Queens, onetime site of metal-finishing processes believed to have contaminated the nearby groundwater. Some properties sit on this registry for years before the degree of environmental hazard even becomes known. Take, for example, the 25-acre waterfront lot near the Gowanus Canal in Brooklyn, officially known as "the rear of the Bush Terminal Building." In the early 1980s, law-enforcement authorities compiled evidence of illegal dumping of solvents at the site. In 1985 a state environmental study recommended additional research, and a second study in 1990 confirmed the presence of contaminants but found "no significant threat" to the environment. The lot then attained its current status of a "class 3" hazardous waste location, meaning that further action may be deferred indefinitely. Meanwhile it languishes on the registry, its prospects for development virtually nil.

The same department has vastly complicated development of the West Side of Manhattan by a report labeling the entire West Side Highway between Battery Place and 59th Street a "hazardous substance waste disposal site," an assessment based in part on the presence of dead vegetation and discolored soil near the roadway and on the location of industries nearby. In addition, preliminary tests showed elevated levels of lead and other metals. But whether any actual threat to the environment or to public health exists, the report acknowledged, is unknown. Yet now any purchase of property adjacent to the highway—potentially valuable real estate with easy access to the Hudson River and the city's midtown and downtown business districts—entails enormous risk, including the possibility of becoming liable for exorbitant cleanup costs.

Not only properties with the singular misfortune of being officially identified as toxic-waste dumps but also hundreds of New York City sites listed in government databases as containing some lesser degree of contaminationeven many sites that could become a problem once an environmental review occurs—hang in development limbo because of liability risks. "There's hardly a site for development in New York City that doesn't have some level of contamination that could under some scenario trigger liability," says Kathy Wylde, president of the New York City Housing Partnership. "If someone changed the oil in a car on the site, or threw away old tires or a battery, or if there was a building there that was demolished that had paint and asbestos or that had an oil tank left in the basement that percolated a little oil, or if there was a dry-cleaning establishment anywhere near the place, or if old paint cans were disposed thereall of that potentially triggers liability."

Some properties frozen by the regulatory climate do not require cleanup at all. The Housing Partnership, a nonprofit organization that works with the city and private developers to build low-income housing, set out in 1989 to build 50 two-family homes on a derelict, city-owned site in the South Bronx. The site passed three separate government environmental reviews. Yet a lender required the builder collaborating on the project to conduct an additional review, which revealed the presence of petroleum residuesprobably from neighborhood residents using the vacant lot to park and repair their cars. "The environmental consultant the builder hired came out with a report that said the site wasn't 100 percent clean, but that he wasn't really sure if we had a problem or not," says Jody Kass, director of technical services at the Housing Partnership.

This ambiguous assessment deterred the bank from proceeding with the loan, and the project remained stalled during the next four years—generating some $100,000 in additional legal and consulting fees. "The builder hired several different environmental consultants, thinking maybe the consultant wasn't any good," says Kass. "He hired several different lawyers, thinking maybe he was getting bad legal advice." Finally, another bank provided the loan, after accepting a consultant's report that the site was safe for residential development. The housing was built and is now occupied. The only "cleanup" that occurred was the addition of six inches of new topsoilsomething the builder had intended to do from the very beginning.

New York State and City have lagged behind much of the country in grappling with the brownfields issue. Numerous states have launched reform efforts aimed at expediting cleanup procedures and clarifying liability. Increasingly, urban states that have not undertaken significant reforms will face a competitiveness problem, as investment dollars migrate toward sites that can be cleaned up and redeveloped at reasonable cost and risk.

Key to reform is eliminating the most onerous liability provisions of the various Superfund laws. Some states have already taken action. Michigan recently passed legislation replacing joint and several liability with a provision holding parties liable only for contamination it is proved that they caused. While such an approach may in some instances result in cleanup costs' being paid by the government when no liable party can be found, it also spares purchasers the threat of endless litigation that would make them avoid contaminated properties altogether.

More than 20 states have sensibly adopted voluntary cleanup programs, aimed at encouraging parties not responsible for the contamination of a site to purchase and develop the property. Such programs, which vary widely from state to state, typically allow prospective purchasersor prospective sellersto agree to clean up a site to a clearly specified standard in exchange for some form of assurance, to lenders as well as developers, that they will not become caught in open-ended liability arrangements. While most voluntary cleanup programs are still at early stages of development, some have already enjoyed notable success.

Minnesota, among the first states to undertake such an initiative, provides a model worth following. It gives developers and lenders who meet clearly defined cleanup standards an array of liability protections, from "no-action" letters that assure they won't be the subject of a state lawsuit to "off-site-source" letters, affirming that they aren't legally responsible for contamination known to have originated from a neighboring property. More than 450 properties have entered the program so far. At the same time, Minnesota has kept in place state Superfund provisions that enable it to take action against actual polluters. Says Ken Haberman, the voluntary program's supervisor: "We haven't released anybody who's really responsible for the contamination. What we've done is provided all sorts of cushions and parachutes for non-responsible parties to be protected from Superfund liability."

Such measures can determine whether a property gets developed. In Pennsylvania the enactment of voluntary cleanup legislation in mid1995 opened the way for the sale of a northeastern Philadelphia food-processing plant that had been shut down for six years. Quality Foods, a frozen-meat company, purchased the property after state environmental authorities gave the company a "covenant-not-to-sue" for contamination existing prior to the purchase. Meanwhile the Pennsylvania Department of Environmental Resources required the previous owner to remove old storage tanks and tons of petroleum-contaminated soil. Says Quality Foods chairman and CEO Robert Gioia: "We saw the site and we realized it was perfect for our needs. Then we recognized that there were environmental problems, and we lost interest. Without the covenant the deal would not have gone through. If governments want to rebuild or rehabilitate inner-city industrial sites, they're going to have to do something like this, because no owner will ever touch these sites without some assurances that he's not going to be liable."

Making cleanup standards clearer and more realistic is another essential reform. Increasingly states are adopting standards based on future land use. Michigan, for example, recently established 11 categories of sites, representing varying degrees of residential, commercial, industrial, and recreational use. Each category requires a different cleanup standard, based on reasonable assumptions about how many people will be exposed to toxins and for how long.

Resolving the brownfields issue will also require federal action, for a significant weakness of state voluntary-cleanup programs is that they cannot shield participants from federal liability. What's needed is a delegation of authority from Washington to the states, reasonable enough when you consider that contaminated properties, unlike various other environmental problems, are inherently a local matter. Lately state environmental agencies and the federal EPA have begun trying to sort out lines of authority. Minnesota's Pollution Control Agency negotiated an agreement with the EPA's regional office that the MPCA would be the "lead agency" in handling sites that enter Minnesota's voluntary program. Still, a more sweeping changefor example, barring the EPA from any site already in litigation under a state Superfund lawis needed to reduce the uncertainty bred by overlapping jurisdiction.

Another promising avenue for reformjust beginning to be exploredis partial privatization of the regulatory process, making it cheaper and more efficient. Several states, including Ohio and Massachusetts, have established as part of their voluntary cleanup programs a system of licensing private environmental consultants to review sites and determine whether cleanup requirements have been met, tasks normally performed by government officials. Sites that pass such reviews will receive official state approvals, including liability protections. However, the private reviews will be subject to random audits by government inspectors; in Ohio, for example, some 25 percent of sites will be audited.

Such reforms build upon the private sector's ability to regulate itself. Throughout the country, banks routinely require environmental testing of properties as a precondition for lendingbecoming, in effect, surrogate regulators. Insurance companies are taking on a similar role: some now offer environmental-liability insurance to developers and lenders and hence have an interest in ascertaining that cleanup occurs.

Government's traditional approach to contaminated properties, exemplified by Superfund, assumed that markets provide little incentive for cleanup; hence the emphasis on strict enforcement and punitive liability measures. In reality, however, the existence of large areas of urban land with severely diminished market value presents not only a problem but an opportunity for profit, once the uncertainties created by current laws and regulations are overcome. Says Robert Berger, a SUNY/Buffalo law professor: "There's a lot of money to be made in brownfields."

 

 

 
Environmental rules make it hard to reuse old industrial sites. Result: economic and environmental decay in U.S. cities.
City Journal Autumn 1995.
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