Real estate available in Portland’s hot market often comes with an asterisk: contamination. Buyers, brokers and bankers all know that purchases of contaminated properties can shift cleanup costs to new owners. And nothing can delay or kill a deal faster than the unknowns associated with that risk.
But as the market has heated up, the Oregon Department of Environmental Quality has helped dozens of new owners manage environmental risks through its Prospective Purchaser Agreement program. A PPA, as it is known in the blur of environmental acronyms, allows a buyer to settle its liability to the DEQ, and in some cases, to neighboring property owners, if the buyer agrees to perform some environmental work that provides a “substantial benefit” to the public.
Here’s how the program works: A prospective buyer finds property with known or potential contamination. That party contacts the DEQ about the potential deal and outlines its vision for the property, including how any development would address contamination that may exist on the property.
The prospective buyer and the DEQ then negotiate a Prospective Purchaser Agreement. Under the PPA, the buyer agrees to a scope of work that will address environmental risks at the property. In return, the DEQ agrees to release the buyer from any additional environmental liability or obligations that might otherwise result from merely owning the property.
The agreement is recorded on title and runs with the land, allowing future owners to benefit from the same protections.
At the heart of the PPA program is the “quid pro quo” deal between the DEQ and the buyer. What the DEQ expects from each buyer depends on the location and condition of each property. One size does not fit all. But by way of example, over the past several years the DEQ has agreed to:
- Assessment and removal of contaminated soils from a vacant former truck repair facility
- Ensuring that municipal water was used for a retirement community project at a former garbage truck maintenance facility
- Infrastructure improvements and contribution to a fund (to clean up the Columbia Slough) at a former metal fabrication site
- Completion of soil removal started by a former owner at a former oil storage facility
- Installation of a vapor control system for mixed-use developments and low-income housing projects at former dry cleaning and gas station locations
- Implementation of a stormwater control system for future development at a facility containing contaminated fill
- Maintenance and/or improvement of existing site features designed to control contamination and risks to neighboring properties at a wood products facility
The benefits of a PPA are symbiotic and extensive. Having a known scope of work in the PPA allows the buyer to estimate its development costs with more precision. The liability protections eliminate certain future risk factors and help owners, investors and lenders calculate the asset’s value with more certainty. Users of the property benefit from knowing that the development meets or exceeds the DEQ’s standards for health risks. The surrounding community benefits from the improvement of underutilized or even abandoned properties. And taxing authorities benefit from productive use and reuse of underutilized or abandoned properties.
But for most buyers, the most appealing aspect of a PPA is the protection from liability. There are several types of PPA options available to a buyer. All of those options include a promise that the DEQ will not come after the buyer for any work or cleanup costs other than what is agreed to in the PPA.
The more robust PPA agreements protect buyers from claims for cleanup costs by neighboring property owners. These protections from liability do not mean that the DEQ or neighboring property owners cannot seek cleanup costs from earlier owners, operators or polluters. But they do mean that new and later buyers have protection against such claims.
The PPA option does add a few boxes to any transaction checklist. The PPA process usually extends the closing schedule to allow the agreement to be negotiated and finalized. A buyer will likely hire a qualified environmental contractor to assess site conditions, and legal counsel to draft the required documents. The DEQ charges for its time to negotiate and finalize the PPA. Some projects performed as part of the PPA may impose additional permitting obligations from local authorities. And if a buyer fails to meet its promises under the agreement, it can lose the protections provided by the PPA.
A PPA may not be the right tool for every transaction involving contaminated land. Properties that have already been cleaned up might not be eligible. A party that has caused any contamination on the property is also not eligible for a PPA, nor would its affiliates be in most cases. For example, the DEQ likely would not issue a PPA to a subsidiary of a parent company that caused contamination.
In situations where a PPA may not work, other tools such as price adjustments, indemnification agreements, insurance or escrowed funds can be utilized to address future risks. But for many transactions involving contamination, a PPA is an effective tool that can address many of the uncertainties that give buyers panic or pause.
This article was originally published in the Daily Journal of Commerce on January 26, 2017.
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