Environmental Programs That Close Real Estate Transactions
by Jill A. Kotvis
Your transaction is moving along on schedule. The purchaser’s Phase II investigation identifies contaminated soil or groundwater. A time-out is called. What do you do to get to the closing goal line?
Six programs of the Texas Commission on Environmental Quality (TCEQ) can help you score a closing depending on the source, type and extent of the contamination, and the level of protection, speed of closure and cost limitations desired. Dry Cleaner releases can be closed in the Dry Cleaner Remediation Program (DCRP), Voluntary Cleanup Program (VCP) or Corrective Action Program (CAP). Petroleum storage tank (PST) releases can be addressed in the leaking PST (LPST) Program, CAP or VCP. Contamination from other commercial or industrial operations can be closed in the CAP or the VCP. Why would you choose one program over another and how will it help move the transaction ball forward?
If the contamination was caused by an on-site source, the choice of program will depend on the type of contaminant involved. Both the LPST and the CAP Programs are closed with a No Further Action Letter and offer no release of liability upon closure; however, they generally result in a less costly and more rapid closure. Neither program requires contribution to the agency’s costs, but the applicant pays for all of the investigation and response action costs. The VCP will generally require more investigation, and take longer to close; however, a Certificate of Completion (COC) issued upon closure provides a release of on-site cleanup liability to future owners and lenders for contamination then existing. Prospective purchasers and lenders also qualify for the release if they are a VCP Applicant prior to closing on their purchase or loan. The VCP applicant pays the agency’s costs as well as all investigation and response action costs. Properties involving prior remediation or permits that carry cleanup obligations are not eligible for the VCP.
Timing and costs of closure in the above programs can be reduced by addressing groundwater contamination through the Municipal Setting Designation (MSD) Program. The MSD is an official state designation certifying that the designated groundwater on that property is not used, and is prohibited from use, as potable water. The prohibition is in the form of a municipal ordinance or a restrictive covenant filed in the property records. Upon completion of certain MSD notice requirements, an MSD application is filed with the TCEQ, and if acceptable, the TCEQ will issue an MSD Certificate. None of the above programs provide a release of liability for third-party claims, or from cleanup liability for contamination migrating off-site. However, with an MSD Certificate, groundwater contamination migrating off-site is deemed to meet residential criteria and no notices to or permission from the off-site property owners are required for closure.
The DCRP Program provides a release of cleanup liability to the property owner applicant for contamination on and migrating from the property, however, closure times are long and no closure is guaranteed. Applicants incur no on-going investigative or response action costs once the TCEQ accepts the property into the DCRP and takes the lead in closing the site, but applicants do share in the agency’s costs with a $5,000 deductible obligation and annual property owner registration fees that are retroactive (with penalties) to 2007.
If the property is impacted by contamination migrating on-site from an off-site source, the Innocent Owner/Operator Program (IOP) can provide some level of comfort to a prospective purchaser. The IOP provides a process for current owner/operators to be certified as “innocent” and immune from liability for assessment and remediation if they can prove that they (and the property) did not cause or contribute to the contamination migrating onto their property. The immunity is contaminant and media specific. Prospective purchasers and operators may be included in IOP applications in order to facilitate property transactions, in which case the TCEQ will issue a letter stating that the prospective party will be eligible for an IOP Certificate once evidence of ownership of the property is provided to the TCEQ.
Each of the programs described have further elements and nuances in their criteria and TCEQ’s implementation, which cannot be described in detail due to the space limitations of this article. Whether and to what extent these programs will benefit your transaction will depend on the specific facts of your transaction and the program nuances. Experienced environmental counsel can help you determine which program will provide the game-winning touchdown in each of your transactions.
Jill A. Kotvis has been an environmental practitioner for 27 years. She can be reached at firstname.lastname@example.org.