Unlocking the Clean Energy Value of Dormant Corporate Properties — Part One: Advantages

More than 60 percent of the Fortune 500 companies have adopted sustainability commitments. Many other leading businesses have similar initiatives to reduce greenhouse gas emissions, conserve resources, increase efficiency, generate cost savings and give back to their communities.

Most of those sustainability commitments rely on increased use of clean, renewable energy sources. For many companies, this means discovering ways to co-locate clean power generation at their operations or procure clean energy, carbon offsets or renewable energy credits through contractual arrangements.

At the same time, tens of thousands of industrial sites lay dormant, burdened by the stigma of either actual or perceived environmental risk from contamination. At many of the same Fortune 500 companies with lofty sustainability goals, down the hall from the sustainability officer sits the real estate function, with responsibility for legacy and dormant properties: a cost sink incurring unproductive expenditures every year managing environmentally impaired properties.

For years, lawmakers and regulators have been encouraging the use of contaminated land for clean energy development through various governmental grants, incentives and programs. The U.S. Environmental Protection Agency’s RE-Powering America’s Land Initiative tracks over 80,000 contaminated land sites on more than 43 million acres, and has developed mapping tools to help stakeholders evaluate the renewable energy potential of those sites. As of June 2016, the RE-Powering program has facilitated 179 renewable energy projects on 171 contaminated properties, landfills or mine sites in 38 states and territories, totaling 1,124 megawatts of capacity.

While there are major potential economic and energy benefits, these projects are by definition exposed to increased environmental risk. This risk has continued to ward off developers and lenders from more fully embracing the opportunity to deploy renewables at impaired sites.

The surge of interest in corporate procurement of renewable power offers a major catalyst to spark renewable energy development at these fallow properties. Companies with portfolios of unused properties may realize significant project efficiencies and cost savings by siting clean energy projects on contaminated or dormant properties.

Advantages of Developing Clean Energy Projects at Impaired Properties

Developing clean energy systems at dormant or impaired properties can offer several inherent benefits:

  • Existing Infrastructure. Former industrial or commercial properties and mine sites are typically located close to vital infrastructure, such as electric transmission (or at least distribution) lines and substations, grid interconnections, roads, railways, and water supply. Capitalizing on existing infrastructure reduces development costs.
  • Close to Energy Load. Similarly, dormant industrial and commercial properties and municipal landfills are often located near energy load demand, reducing the need for transmission infrastructure and the attendant expense and delay of securing related easements and permits.
  • Fewer Permitting, Zoning or Natural Resource Risks. Relative to developing a greenfield project, a former industrial or manufacturing location likely will have fewer environmental permitting hurdles or natural resource impairment risks and is likely already zoned for development.
  • Preferential Treatment Under State Programs. Several states encourage the redevelopment of brownfield sites through incentive policies. For example, New Jersey’s renewable portfolio standard specifically identifies brownfields and properly closed landfills as the type of sites that are qualified to generate solar renewable energy credits. Massachusetts’ Clean Energy Results Program is among the many other state initiatives supporting clean energy development on brownfields and landfills.
  • Community Support for Revitalizing Dormant Land. Municipalities and states eager to enhance their tax base generally welcome the productive re-use of contaminated land. Many states offer streamlined regulatory approvals and expedited permitting, accelerated tax deductions, and tax abatements to support brownfields redevelopment and revitalization.
  • Available Funding. Under both the EPA Brownfields program and various state programs, direct funding may be available in the form of grants and discounted long-term loans.
  • Cheap Land. Whether due to the environmental risk itself or other market reasons, by definition the land is not being developed and so can typically be acquired at a discounted price, or will present a low book value commitment on the existing corporate balance sheet.

Risk Mitigation Strategies for Developing Impaired Properties

Despite these advantages, environmental risk – or even the perception of environmental risk – can be enough to scuttle any redevelopment, let alone one as complicated as a renewable energy project. Project developers are justifiably concerned about potential liability under the federal Superfund law (CERCLA) and liability schemes under other state and federal environmental statutes, as well as common law litigation risk.

However, various regulatory protections can substantially mitigate this risk. Combined with contractual protections offered by corporate buyers, in many cases the risk-reward balance can be shifted such that impaired property clean energy development is a viable strategy. Risk mitigation protections include:

  • CERCLA Bona Fide Purchaser and Tenant Guidance. CERCLA was amended in 2002 to provide landowner liability protections for bona fide prospective purchasers. To establish and maintain that defense, a purchaser must satisfy the “all appropriate inquiries” standard in the course of diligence and thereafter undertake “reasonable steps” to prevent releases of hazardous substances at the site. The protections subsequently were extended to tenants in EPA guidance issued in 2012.
  • State Voluntary Cleanup Programs. State voluntary programs typically offer a “no further action” letter and/or covenant not to sue once the site meets applicable criteria, often allowing for the use of risk-based clean-up standards and institutional or engineering controls, resulting in major cost savings for cleanups.
  • EPA Comfort Letters. While the EPA will not issue a “no further action” letter as some states will, the EPA may provide a “comfort letter” setting forth information known to the EPA about a site to give the developer some certainty that enforcement risk is low.

Even with these liability protections, however, a developer cannot completely eliminate environmental risk when developing impaired property. Therefore developers are best served by working with creditworthy counterparties who can retain and indemnify them for pre-existing contamination, and ensuring full attention to deal provisions allocating such risks.

In Part Two, we discuss how corporate strategies to procure clean energy can provide a compelling framework to overcome concerns about the potential scrutiny of impaired properties that might come with redevelopment. Click here to read Part Two.

From left:

Hayden Baker draws upon his combined environmental, energy and corporate expertise to assist clients in mergers and acquisitions, energy and infrastructure projects, securities offerings and financing transactions. His experience spans a variety of energy technologies including wind, solar, natural gas-fired generation, district energy, landfill gas and biofuels. He has been recognized by New York Super Lawyers, The Legal 500 US and Chambers USA.

Van Hilderbrand’s practice focuses on energy finance projects, regulatory compliance, environmental, and permitting matters. Van represents a diverse set of clients across energy sectors with project development and project finance transactions.

Jim Wrathall represents investors, developers and non-governmental organizations in energy finance and acquisition transactions and policy matters. Jim served as Senior Counsel to the U.S. Senate Committee on Environment and Public Works from 2007 through 2011, handling clean energy and climate change legislation and oversight. Jim also has over two decades of experience with AmLaw 20 law firms, including 11 years as a partner at a major Washington, D.C. firm.

Jeffrey Karp advises clients in renewable energy and energy efficiency matters, including infrastructure development.  He also represents clients in litigating and resolving disputes under a variety of federal and state laws.

This article was originally published by Sullivan & Worcester and was republished with permission.

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