By: Charles Jordan
With heavily discounted prices, environmentally challenged real estate draws interest from industrial and commercial developers. Land price advantages can make a pro forma sing! The “challenge” is a function of the cost of overcoming media contamination and environmental stigma. A similar problem is presented by “Class C” energy-inefficient buildings with fixtures so unsustainable that efficient operation becomes too complicated. Is there a sweet spot for environmental or energy deficiencies serious enough to warrant a meaningful discount in pricing, but solvable enough to be mitigated economically?
A unicorn property, indeed. But creative developers will consider development incentive programs for brownfield projects to aid in the hunt. There is widespread familiarity with economic development incentive programs driven by job- and tax-base creation. How do the handful of federal and state programs designed to spur brownfield development compare?
Economic development incentives supply carrots like long term property tax savings or abatements, or even direct development subsidies (e.g., a grant of funds to be applied to public works associated with a site development plan). Availability often depends on factors such as the projected tax base a tenant will create with taxable equipment and fixtures or (more familiarly) the projected job creation resulting from tenant hiring.
In contrast, the earliest (and, most well-known) federal programs designed to incentivize brownfields development focus on relief from potential liability of the owner or operator for clean-up of environmentally challenged sites. Such legal exposure is created under statutory programs mandating responses to environmental contamination discovered by owners or operators.
The Environmental Protection Agency (EPA) has conveniently summarized the federal statutory provisions and enforcement documents drafted for addressing owner liability in redeveloping brownfields property. The EPA’s Revitalization Handbook features a menu of federal enforcement policies developed since the early 2000s designed to mitigate owner liability concerns under the two principal federal statutes applicable to contaminated real estate (often referred to as CERCLA (or The Comprehensive Environmental Response, Compensation & Liability Act) and RCRA (The Resource Conservation and Recovery Act)). The most commonly applied are:
- The “bona fide prospective purchaser” defense;
- The “innocent landowner” defense;
- The “contiguous property owner” defense;
- The CERCLA “secured creditor” exemption; and
- The Superfund “comfort/status letter.”
While clearly stating agency intention to encourage site cleanup and reuse to achieve environmental protection goals, decades after promulgation, the landowner and mortgagee protection policies have achieved limited success in the market. Industry participants cite the absence of reliable liability “safe harbors” coupled with the uncertain extent of cost for site assessment, monitoring, and clean-up.
In contrast, Texas environmental incentive programs provide tangible, predictable “carrots” for developers with green ambitions. They are created with modest though well-defined policy goals. Neither program excludes more traditional economic development incentives. They could be combined where a particular site redevelopment warranted relatively public subsidies.
One Texas program is designed to provide property tax relief for taxable pollution control property, defined generally as a “facility, device, or method for the control of air, water, or land pollution.” Not only equipment, but certain portions of the land comprising a commercial site, may potentially be tax-exempted. The program, administered by the Texas Commission on Environmental Quality (TCEQ), is not limited to brownfield sites, but may apply there. For example, development of a landfill site (frequently attractive to industrial developers given ease of permitting and political support from local governments for property rejuvenation) will require (by state law) the installation of foundation liners and certain methane venting equipment. An owner of property used “wholly or partly” for pollution control may apply to the TCEQ for the agency’s “use determination” affirming that the property is used wholly or partly for pollution control purposes and (for land or equipment not wholly dedicated to pollution control) specifying the percentage of use allocable to pollution control. The owner then applies to the applicable county appraisal district for the exemption, based on the TCEQ use and percentage determinations. The regulations describe specific types of eligible pollution control equipment for air, water, and soil. While many property classes describe equipment specifically designed for waste treatment or emissions control, a number of categories describe more commonly used fixtures and equipment routinely incorporated into industrial sites (e.g., settling basins, artificial wetlands, equipment and fixtures for storm water containment, oil/water separators, and groundwater monitor wells).
The Texas Property Assessed Clean Energy Act (PACE Act) creates a second program of special interest to industrial developers. The PACE Act policy is to facilitate environmentally sustainable design and retrofitting of energy and water systems serving eligible projects. The PACE Act authorizes cities and counties to adopt local programs to facilitate financing of construction or installation of green building features, such as insulation or trendy alternative energy generating systems. The official authority for implementation of the program, the Texas PACE Authority, describes the legislation as “enabl[ing] owners to lower their operating costs and use the savings to pay for eligible water conservation, energy efficiency, resiliency, and distributed generation projects. Owners gain access to private, affordable, long-term … financing … not available through traditional funding avenues.” PACE financing, underwritten through energy and/or water savings, is provided by private market lenders. A novel feature of the program is a hybrid form of lien on real estate, allowing PACE lenders superior priority in the financing hierarchy. Priority is based on a local government’s assessment authority. PACE financing is only implemented with the consent of the project mortgagee(s) to be subordinated.
The PACE Act is an enabling statute, only. Availability in any particular municipality or county depends on adoption of the PACE program by the city’s or county’s governing authority. PACE program jurisdictions are listed at https://www.texaspaceauthority.org/service-areas/. Brownfield development is not for the faint of heart – but can yield bonus entitlements for the green-minded developer.