Our SB 989 Legislative Accomplishment

The Historical Problem

Under existing law, present owners, and certain prior owners and operators, are liable to the government for property investigation and site cleanup and remediation costs associated with contaminated soil and groundwater. Additionally, when a property owner firsts tests a property and discovers site contamination, the property owner is required to report the "release" to appropriate state and federal agencies, which in turn means that the property owner becomes forced to (at some point) fully test and remediate the contamination. If the contamination is deep in the soil and/or has gone to groundwater, the costs of remediation (which can involve the cleanup of offsite soil or groundwater plumes emanating from the site) may be astronomical.

Since a contaminated property owner often won't know how bad the problem is until the testing begins, and since a significantly contaminated property is not readily salable, and often provides little or no cash flow to assist with cleanup efforts, until the site is remediated or at least until the amount of cleanup costs, as well as the source of payment for such costs, is fully defined, many property owners prefer to hold these properties rather than incurring the unknown investigation/cleanup costs. This problem is more pronounced at the corporate level, since the discovery of contamination, especially at a property that may have been purchased years ago and is therefore being carried on the books at its original low (by comparison to today's real estate market) cost, may result in a significant liability (or worse, an unknown contingent liability) with minimal real property value to offset the liability. This problem has resulted in the practice by large corporations of "stockpiling" contaminated properties which are situated in urban infill areas.

(The problems outlined above are even more pronounced in California. Since a large amount of California's drinking water comes from its groundwater, almost every California property sits on top of a "potential source of drinking water." This means that the potential for significantly "upside down" properties is greatly enhanced when dealing with properties situated in California.)

SB 989 As A Means Of Attracting Brownfield Development Capital

Several years ago, changes in federal and state law provided new liability protections to lenders that lend on (and might ultimately foreclose on) contaminated properties. These changes in the law were done to encourage loans on property that might be contaminated. Similar protections were added for trust administrators and trustees. SB 989 (which became law January 1, 2007) is an important new tool created by the Daehnke Cruz Law Group to free up capital to facilitate the cleanup and redevelopment of Brownfield properties. The goal of SB 989 is to encourage investment in contaminated properties by providing a mechanism to limit liability risks associated with those cases where cleanup costs turn out to be substantially higher than the value of the property in an uncontaminated condition. This SB 989 relief is available only where a developer occupies a property as a long-term ground tenant (e.g., a 99-year ground lease), and has no impact on the existing statutory liability scheme that applies to present, prior or future owners of the property. SB 989 encourages private investment to pay for investigation and cleanup costs and to redevelop Brownfield sites.

Under SB 989, a developer that redevelops a Brownfield property as a ground tenant will be liable for site investigation costs and cleanup costs only to the extent that the cleanup is necessary to bring the site to a point where there is no unreasonable risk to human health or safety for the intended site occupants. This means, for instance, in a typical deep groundwater contamination scenario a ground tenant developer's cleanup responsibility might well be limited to the removal of three or four feet of soil and the installation (and long term monitoring) of a vapor barrier to protect against human health effects at the site.

SB 989 provides that a qualifying "Bona Fide Ground Tenant" receives immunity from liability for cleanup costs beyond those which are necessary to ensure that there is no unreasonable risk to the human health and safety of intended site occupants. This immunity is based on the overlay of the new AB 389 streamlined cleanup process. A developer wishing to limit its liability as a Bona Fide Ground Tenant must enter into an agreement with the DTSC or a regional water board and either the owner, or a redevelopment agency, city or county, whereby this third party agrees to conduct the site cleanup efforts. With such an agreement in place, the BFGT gets an immunity once the site is placed in a position where there is no unreasonable risk to the human health or safety of intended site occupants.

There are several provisions in SB 989 which are designed to ensure that the redevelopment plans of the developer ground tenant are consistent with local plans for the area. Health risk assessments are also required, where appropriate. The bill additionally provides for public participation consistent with the AB 389 cleanup process.

Revenue Streams to Fund Cleanup Efforts

In many instances, SB 989 will provide an important source of revenue to pay for site cleanup efforts. This is because under SB 989 the developer's ground lease payments will be earmarked to be used for site cleanup. Thus, by making it commercially viable from an environmental liability standpoint to redevelop the property, an otherwise non-performing piece of property can be turned into a performing asset that now generates monies to pay for cleanup, jobs for the community and additional property and/or sales taxes. These projects should typically be win/win situations for everyone.

Use Of SB 989 In Lease/Option Deals

Developers can use the provisions of the bill to move forward with a development project at an otherwise environmentally risky site, knowing with substantial certainty that liability will remain limited as long as the developer keeps its status as a ground tenant.

It is expected that in those properties where the site is not "upside down" (i.e., where the cleanup costs are not in excess of the land value in a clean state) the developer will decide to purchase the property (typically under a lease/option arrangement) once the developer is satisfied that the costs to clean the property do not make ownership untenable.

The Re-Development Model Using SB 989

The ground lease model (together with the liability protections of SB 989) allows for the development of commercial projects, multi-family and affordable housing projects, "work force" housing (i.e., condominiums and townhouses priced in the $250K-$400K range) projects, and mixed use projects. By reducing the risk to developers (and their lenders), and by creating otherwise unavailable revenue streams for existing property owners, many sites in California should benefit from this model.