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Structured Approach Can Help Solar Developers Fulfill Promise of Brownfields

Tuesday, October 8, 2013

 

 

By Peter Trimarchi

Peter Trimarchi, counsel at Nixon Peabody LLP, advises on all aspects of environmental law, with a particular focus on regulatory, enforcement and transactional matters.

The significant potential of brownfields for commercial and utility-scale solar development in the U. S. has been recognized for some time now, and developers have spent many hours scouting former landfills and historic industrial sites for suitable project locations.

But developing such sites involves a number of challenges that must be addressed before a proposed project becomes a reality, not the least of which is obtaining financing.

This article discusses some of the key obstacles to successfully developing a utility-scale solar project on a brownfield site, outlines strategies to confront those obstacles and minimize their impacts, and, most important, identifies strategies for getting those projects financed.

I.The Promise of Brownfields
Brownfields are generally defined as any parcel of property where redevelopment or reuse may be complicated by the presence or potential presence of hazardous wastes, petroleum or other contaminants. They can include former municipal landfills, hazardous waste landfills, abandoned industrial sites, and even former gas stations and dry cleaners, and they can be found in just about every city or town in the country.

Owing to their industrial nature, brownfields are frequently located in inner cities or first-ring suburbs. Although that can make them less desirable for today's residential or commercial real estate markets, it makes them ideal for solar development. By virtue of their location in well-developed areas, brownfields are frequently close to transmission lines and utility substations, making it easier to transport to the grid the power they generate (if the developer is selling the power into the wholesale market).

Location, Location, Location
They are also often close to large industrial/institutional entities (like hospitals, universities and government buildings), which can purchase the power from a project directly in a “behind the meter” system. Brownfields are often abandoned or owned by an entity that is eager to get rid of them, making them relatively cheap. And municipalities are also eager to see these sites put back to productive use, which often leads local officials to streamline the process of obtaining required municipal approvals.

Most states have created programs to encourage the redevelopment of brownfields, which can be used by developers to make their projects more attractive to investors and lenders. Those programs typically consist of some combination of liability protection and financial incentives (in the form of tax credits). For instance, New York's program offers developers certain liability protections, a refundable tax credit worth up to 50 percent of certain remediation costs and a refundable tax credit for up to 22 percent of the project's capital costs. There is a certain cost/time/benefit calculation a developer must make before taking advantage of such programs, as they usually require developers to enter into agreements and submit progress/completion reports, which can add expense and cause delays. But in the right circumstances, such programs can provide financial and other benefits to developers that otherwise may not be available.

EPA Initiative
Governments have also created a variety of programs to specifically encourage solar projects on brownfields. The federal Environmental Protection Agency has been particularly active on this front. For years, the EPA has wrestled with the question of what to do with former federal superfund and other contaminated sites that are ready to be put back to use. In the hopes of redeveloping these sites with renewable energy projects, the EPA created the Re-Powering America's Land Initiative.

The main thrust of this initiative has been a significant effort by the EPA to prescreen 66,000 currently or formerly contaminated properties for various criteria important to renewable energy developers (like solar/wind resources, proximity to transmission, etc.).1 The EPA has also created various handbooks and guidance documents describing best practices for development on contaminated lands.2

The EPA is hoping this initiative will accelerate the redevelopment process and get developers more comfortable with the legal risks posed by these sites. New York is also taking a targeted approach to encouraging solar on brownfields. Proposed regulations would exempt solar installations of less than 25 megawatts on landfills from the need to comply with the State Environmental Quality Review Act (SEQRA), a requirement that often leads to lengthy environmental impact reviews and adds significant cost to a project.

In short, there is widespread agreement that redevelopment of brownfields is a good thing, and that redevelopment of brownfields with renewable energy projects is even better. Yet we still don't see solar projects on every abandoned corner gas station and closed landfill in the country. There are still several obstacles to the redevelopment of those sites in the context of a solar project. Those issues are not insurmountable, however, and a coordinated, well-planned approach can go a long way toward managing those issues.

II.The Problems (and the Solutions)
A.Responsible Party Negotiations
A developer may identify a site that's ideal for a solar project, but run into a property owner who is skeptical about allowing such development on the property. The property owner may have concerns about the impact of the project on any contamination remaining at the site or impacts on the engineering controls (i.e., caps or covers), or may just want to avoid the various hassles associated with property development.

To convince such a reluctant landowner, the developer has to demonstrate the positives associated with such a project. First, if the owner uses significant amounts of electricity, the developer can sell the owner power directly, often at a discount to the retail rates charged by a utility. If the owner is currently conducting remediation at the site, some of the power generated by the project can also be used to run remediation systems (“green remediation”). The developer can also sell the property owner the environmental attributes generated by the project, giving the landowner the bragging rights to the green aspects of the project. If the landowner is a corporation with significant tax liability, the developer can explore making the landowner a tax equity partner, giving the landowner the federal tax credits generated by the project (although manystars would have to align to make that one work).


Perhaps the best option for a developer is to offer to purchase the property from the landowner.

Perhaps the best option for a developer, though, is to offer to purchase the property from the landowner, either in connection with the development or at a future date. Many brownfield owners would like nothing better than to rid themselves of the headaches (and carrying costs) such properties present. They can often be persuaded to give a purchaser a long-term indemnity for any liabilities that arise in the future, just to free themselves of the hassle of the day-to-day ownership and operation of the site. Some combination of these sweeteners may be enough to persuade a reluctant landowner to give its blessing to a project.

B.Liability for Cleanup
U.S. environmental laws governing cleanup of contaminated properties are principally focused on making sure someone is around with the financial ability to address the contamination. Thus, these statutes are drafted very broadly, and generally impose cleanup obligations not just on the person or entity that caused the contamination, but also on the current owner and operator (i.e., tenant). A developer who buys or leases a contaminated property could be legally responsible for all cleanup required there. Developers therefore have to be very careful before stepping into ownership or control of a brownfield site.

This broad liability scheme imposed by environmental laws has been cited as one of the reasons why we have so many brownfield sites in the U.S. in the first place. But lawmakers and regulators have recognized this problem for some time and have crafted solutions to address it. Congress passed legislation back in 2002 that provides a defense to federal superfund liability for “bona fide prospective purchasers” who conduct a Phase I Environmental Site Assessment at the site before acquiring it (and take reasonable steps with respect to contamination they know to exist at the site).3

The EPA recently issued new guidance indicating that it would exercise its enforcement discretion to extend this liability protection to tenants as well.4 Most states have enacted similar liability protections under applicable state laws, although the scope of those protections varies from state to state. Accordingly, a developer who performs a Phase I prior to acquisition is afforded significant protection from the type of liability that used to scare many developers away from otherwise valuable property.

'Comfort' for Renewables Developers.
Further, the EPA has indicated more willingness to issue “comfort letters” for prospective purchaser/prospective lessee agreements in the context of renewable energy transactions. Such letters/agreements generally confirm the state of the EPA's knowledge about a site, and, in the best of circumstances, provide a statement that the agency has no current plans to pursue response or enforcement actions. Although the EPA has been very reluctant to issue such letters in the past, its recent guidance extending the bona fide prospective purchaser defense to tenants also included three model comfort letters to be used for lessees involved in renewable energy projects on contaminated property.5 Many states have similar letters/agreements they can issue to potential developers. Comfort letters aren't a cure-all for potential liability, as they are often quite limited in their scope. But in the right context, they can help a developer or lender get more comfortable with certain aspects of the legal risks associated with a contaminated site.

The most common way of managing the legal risks associated with these sites is through a contractual indemnity from the responsible party at the site. This can be part of a purchase or lease agreement with the current owner or a standalone agreement with the party responsible for the cleanup. A well-drafted indemnity will clearly allocate to the owner or responsible party all liabilities associated with contamination at the site (including both cleanup costs and toxic tort liabilities), be transferable to future owners, and allow the developer/future owners to control any future cleanups (to minimize interference with the operation/development of the project). The developer needs to do some diligence on the party granting the indemnification to make sure it has the financial wherewithal to stand behind its commitment, but assuming that is the case, a well-crafted indemnity can provide real protection against future liability for existing conditions.


If all else fails, environmental insurance can play a role in getting developers and lenders comfortable with liability risk.

If all else fails, environmental insurance can play a role in getting developers and lenders comfortable with liability risk. Although such policies generally don't cover known conditions, they can cover unknown conditions that arise in the future (subject to deductibles and coverage caps). Again, this is not a cure-all for those risks--such policies usually contain significant exclusions and limitations that limit the coverage, and they are expensive. But lenders love them, and they can be an effective tool to help get a deal done in a pinch.

In sum, there are several ways for a developer to limit its legal liability for historic contamination at a site. If possible, it is best to layer several of these protections on top of each other to provide some redundancy. With those protections in place, developers and their lenders can often find comfort in knowing the risk of incurring cleanup liability is sufficiently remote to move forward with the deal.

C.Cleanup Costs
In many U.S. jurisdictions today, it is difficult to make a utility-scale solar project work from a financial standpoint. The price the developer can obtain for the power generated by a solar facility is often not high enough to cover development costs and debt service while still providing a reasonable return on investment. Accordingly, solar projects often operate on very thin margins. The prospect of having to add significant investigation, remediation and/or site preparation costs for a brownfield site is often enough to make brownfield projects too expensive to pursue.

For that reason, it is important for a developer interested in pursuing a brownfield project to choose the right property, and that usually means avoiding sites where cleanup is not yet complete. There are just too many risks associated with the possibility of future cleanup activities to make it worth the gamble in most cases. In addition to the costs involved, a developer can't risk putting solar panels on a site where active remediation may have to occur, as such activities could interrupt the project's operation due to required sampling or soil excavation. An exception to this rule might be for sites where all soil remediation has been completed but long-term groundwater treatment or monitoring is still occurring (although even that may be risky if additional “hot spots” are found later on). It is best to leave such sites alone (but keep them in mind for the future).

There are plenty of sites out there where remediation has been completed for developers to focus on first. Closed municipal landfills, sites with “no further action” letters issued by state agencies, and sites where a Phase I or other site investigation has revealed that contamination concerns are overblown can be found fairly easily. A developer is better off focusing on one of those sites and ignoring those still being cleaned up.

D.Site Engineering
Assuming remediation is complete, a developer has to thoroughly understand existing site conditions to make sure the site is appropriate for solar development. Here are some considerations in that regard:

If the site is “capped” (i.e., has a surface barrier to prevent exposure to subsurface materials and rain infiltration), the characteristics of the cap must be well understood. The installation of solar panels and associated equipment may require the placement of base materials (like rock dust or soil), ballast (to make sure the panels remain in place in high winds) and even the construction of roads, all on the cap. The developer needs to be certain that the cap is stable and strong enough to support such activities.

If the site was a former solid waste landfill, some amount of settling may occur in the future, depending on the age of the landfill. As materials in the landfill decay, they change shape and size, which can lead to changes in the surface where the panels are installed. Developers often avoid landfills that have been closed for less than 10 years, to allow the majority of settling to occur before development takes place.

Solid waste landfill sites generate a significant amount of methane as a result of decomposition. That methane is then captured and burned to generate power for sale, or vented or flared to the atmosphere. Although the presence of a landfill gas generating station at the site may facilitate certain aspects of development (like access to an off-taker and/or transmission lines), it may also cause complications (such as making certain areas off-limits to development). If methane is flared or vented, the Occupational Safety and Health Administration requires certain minimum buffers around the flares/vents, limiting development space. The developer will have to take these conditions into account when designing a project.

Stormwater and erosion management is a major consideration for development on remediated sites. Caps are typically designed in a way that very carefully controls and manages stormwater coming off the site, and regulatory agencies will want to protect any stormwater and erosion control systems they designed with the responsible party over a period of years. To get approval to build on one of these sites, the developer will have to have a comprehensive plan addressing stormwater, including engineering analysis that shows how the project will address the addition of impervious surfaces (such as roads and even the panels themselves), how continuous drips from the bottom of the panels will be dealt with to avoid cap erosion, and the impact of additional layers of rock dust or soils as base materials.

E.Regulatory Approval
Maintenance of a cap or other engineering controls is often a requirement of a post-closure permit held by the site owner. Moreover, many remedial action plans, closure plans and “no further action” letters issued by state agencies require state approval when the use of a site changes. The owners or operators of those sites would be risking the ire of state regulators by installing solar panels (not to mention base materials and roads) without permission. Accordingly, a developer needs to make sure it has obtained the appropriate regulatory sign-off to proceed properly.
Obtaining regulatory sign-off will be much easier if the developer chooses a technology with as little subsurface penetration as possible.

Regulators are not monsters, though, and they recognize the benefits of installing solar at these facilities. As long as they're satisfied that the project will not have an adverse impact on the site, they will usually grant the required approval. This will typically require a sit-down meeting with the regulatory agency, and perhaps some follow-up meetings between the project's engineers and the agency's technical staff. Although the approval will likely come, it takes time. Getting agency approval should be very high up on the project schedule, to try to get it in hand before conversations with investors/lenders begin in earnest.

Developers should also choose their racking/mounting technology very carefully. There are many different technologies available for mounting and securing solar panels, some of which require little or no subsurface penetration. The process of obtaining regulatory sign-off will be much easier if the developer chooses a technology with as little subsurface penetration as possible.

III.Financing
Banks engaging in classic non-recourse project financing are exceptionally risk-averse. Since the loan is paid back exclusively through the proceeds of the project's operation, banks require developers to completely address any risk that could prevent the project from operating as planned. Some banks are also still spooked by the possibility that they may incur environmental liability themselves in the event they have to foreclose on the project, despite the fact that such fears were addressed many years ago by statutory protections at both the federal and state level.
Most renewable energy projects these days require the participation of a tax equity partner to get off the ground.

Further complicating the financing picture in renewable energy transactions is the participation of tax equity partners. These are third parties who become true equity partners in a deal to take advantage of the tax credits generated by renewable energy projects. Most renewable energy projects these days require the participation of a tax equity partner to get off the ground, and those entities similarly need to get comfortable with the risks involved before they will agree to join the deal.

Nevertheless, with more and more successful renewable energy projects occurring on contaminated lands, many banks and tax equity partners are getting comfortable with the idea of lending to these projects. Both entities will still deploy an army of lawyers and engineers to complete an excruciatingly detailed due diligence process, but if their diligence checks out, they're willing to participate. Obtaining financing for a brownfield project is still difficult, however, and it is important for a developer to create a well-thought-out approach to these issues to demonstrate to financing parties that it has thoroughly considered the risks associated with the project, and addressed them all comprehensively.

These liability/risk management measures need to be in place before the developer first sits down with a potential lender or tax equity partner. If those measures are not in place early on, those parties will simply tell the developer to come back later when those issues have been addressed. The developer will get far better traction if it enters the first meeting with a very tight, buttoned-up presentation that anticipates and addresses all of the financing parties' questions about potential risks.

In addition to having the basic building blocks of a typical solar project in place (site design and performance specifications completed; a long-term, stable revenue source identified; and municipal/state approvals in place), the developer should have the following information fully developed at that first meeting:

• all due diligence and engineering analysis of the historic contamination, showing (a) exactly what contamination remains at the site, (b) how it's being dealt with through engineering/institutional controls (such as caps and deed restrictions), and (c) what the regulatory status of the cleanup is at the time;

• a development plan for the project, showing how sensitive areas of the site will be dealt with or avoided;

• regulatory approval for any impacts to an existing cap or other remedies in place at the site;

• a detailed legal analysis showing how available liability protections apply to the project;

• a contractual indemnity from a financially stable third party protecting the developer from future cleanup costs and personal injury claims; and

• if available (and meaningful), a covenant not to sue or other comfort letter from applicable regulatory agencies.

With those items in place, a developer can demonstrate that the risks associated with the property have been properly addressed.

Even with all those items at its fingertips, a developer still may encounter skepticism or reluctance from financing parties. It's at that point that the financials come into play. Not surprisingly, the better looking the pro forma, the more likely those parties will be to get comfortable with the environmental risks. Conversely, the thinner the margins on a project are, the more likely those parties will be to simply walk away. The developer should make an honest and accurate financial analysis of the project's projected returns as early as possible to determine the likelihood that a lender or tax equity partner will accept the risks inherent in the project. If the likelihood is low, it may not be the right project at the right time, and the developer can move on to other options.

Although they've improved some over the past few years, project finance markets continue to be tight. It may be that even a perfectly financeable project will struggle to find a lender willing to bite. In that case, it may make sense to seek alternative financing sources in private equity/hedge fund markets. There are a number of different funds that are interested in the kind of long-term, steady returns renewable energy projects generate and that understand development risks. Such funds often demand a significant premium for their investment, but it may be worth it in the right context to get a project off the ground. When going to market with a brownfield project, a developer should come prepared, keep all of its options open, and take the best deal it can get.

IV.Conclusion
Solar power systems provide an elegant solution to our country's brownfields and energy problems. The satisfaction of watching a formerly blighted, abandoned property generate 100 percent emissions-free power for 20 to 30 years (and make money in the process) should provide both the developer and applicable regulatory agencies with the incentive to address the known issues in a constructive and productive manner.

Given all that we've learned about brownfield development in the past 15 years, and the liability protections provided in state and federal statutes, there is no reason that a well-designed project shouldn't be able to get approval from applicable regulators and satisfy the concerns of willing financing parties. An intelligent, structured approach to such projects will put the developer in the best position to obtain required financing and make its project a reality.

1 See http://www.epa.gov/oswercpa/.

2Id.

3 42 U.S.C. §9607(r)(1).

4Revised Enforcement Guidance Regarding the Treatment of Tenants Under the CERCLA Bona Fide Prospective Purchaser Provision, dated Dec. 5, 2012.

5Id.

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