Buying Closing Military Bases
September 2004
By Gregory F. Hurley, Esq.
R.E.A., Greenberg Traurig, Orange County Office
View or download the PDF version of this Alert.
Mr. Hurley is a shareholder with the Orange County office of Greenberg
Traurig and has worked on base reuse projects across the nation. He received
commendations for his work on closing bases from the California legislature
and the U.S. Marine Corps. Mr. Hurley serves on and has chaired the Restoration
Advisory Board for MCAS El Toro. He is currently working with private sector
developers purchasing military property in California. He is a California
Registered Environmental Assessor.
Over 120 military bases have been identified for closure and privatization.
Hundreds of thousands of acres of land and millions of square feet of structures
at these bases will be available for development. The facilities include
ports, airports, office buildings, housing, and an incredibly diverse range
of support structures (hangars, dry docks, maintenance and testing facilities,
etc.). These military properties have generally not been subject to state
or local safety or environmental laws and their purchase and development
requires evaluating novel risks.
I. The Base Reuse Process - Transfers Below Market Value
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| "These military properties
have generally not been subject to state or local safety or
environmental laws and their purchase and development requires
evaluating novel risks." |
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The transfer and reuse of closing military properties is accomplished
under the Defense Base Closure and Realignment Act1,
and these properties are referred to as “BRAC” properties. Generally to
receive this property, the community forms a Local Reuse Authority (LRA).
The land is either given to the community for free under the sponsorship
of a federal agency, or sold at below-market value. Recently the military
has begun selling its closing bases directly to private sector developers.
For example, beginning this year 2,000 acres of MCAS El Toro will be auctioned
off by the Navy to the highest bidder.
By statute the military is obligated to conduct necessary remediation
of hazardous materials at BRAC properties; in addition, the military will
indemnify the transferees of BRAC properties from any pre-existing environmental
liability.
However, there are substantial limitations to the military's obligations.
It is imperative that developers of BRAC properties fully understand what
they are buying.
II. Military’s Obligation to Remediate/ Indemnify
Congress recognized that it is unfair to ask local communities to be
responsible for remediation costs and liability caused by the military.
Congress amended the Comprehensive Environmental Response Compensation &
Liability Act of 1980 (CERCLA) to include a covenant whereby the federal
government agrees to be responsible for any contamination it has caused.
In transferring base property, the federal government must promise that
all remedial action necessary to protect health and the environment is,
or will be, in place, and that after transfer, any additional remedial action
necessary will be done by the United States2.
This commitment is sometimes referred to as the “CERCLA covenant.”
In 1992, in order to make contaminated federal property more marketable,
Congress added Section 330 to the 1993 National Defense Authorization Act.
Section 330 contains a promise by the federal government that it will hold
harmless, defend, and indemnify developers of the property and their tenants
from claims that arise from contamination resulting from the activities
of the Department of Defense (DOD).
These statutes indemnify developers and their lessees / transferees
from liability arising from releases of hazardous substances as a result
of DOD activities. At first glance this looks like very good deal from the
only people that can legally print money.
III. Limitations in CERCLA Covenant Disturbing the Contamination
Neither the CERCLA § 120(h) covenant nor § 330 indemnification modify
existing CERCLA liabilities. Significantly, these provisions do not apply
if a developer becomes a “potentially responsible party.” Under CERCLA principles,
anyone who causes or contributes to a release of hazardous material automatically
becomes a potentially responsible party. The military’s position is that
developers that violate environmental restrictions or other “institutional
controls” at BRAC properties, or that cause or contribute to existing contamination,
are potentially responsible parties and will not receive the benefit of
the CERCLA § 120(h) covenant and § 330 indemnification. Readers interested
in a more extensive discussion of these issues are referred to “The Transfer
and Reuse of Contaminated BRAC Property-the Myth of the CERCLA Covenant”
by Gregory F. Hurley, Federal Facilities Environmental Journal, Winter
1997.
Proving who caused the contamination
Although the CERCLA covenant and section 330 indemnifications place responsibility
for pre-existing contamination on the military, questions may arise as to
whether newly discovered contamination was in fact caused by prior military
operations. Often the transfer documents and leases for BRAC property include
language that undercuts these general indemnities. Developers need to carefully
review the language of the transfer documents and especially the deed and
lease restrictions to determine if they improperly limit their entitlement
to indemnity.
Consequential damages for delay
Even if the military agrees to clean up new contamination a developer
could face months or years of business interruption and other consequential
economic losses while the government waits to allocate funds. The Government
has never taken a formal position on whether they will reimburse the community
for these losses, and many of the transfer documents we see attempt to limit
the military's obligations for damages due to delay.
Risks if Use Changes
The military has made it clear that once a remedy has been selected for
contaminated property it will not voluntarily return to conduct further
remediation to accommodate changes in the land use (see, “Responsibility
for Additional Environmental Cleanup After Transfer of Real Property,”
25 July 1997).3
An example of the problems that arise from this policy is the military's
position on landfills at BRAC properties. Many of the landfills on military
bases will be transferred without any sampling and by simply covering with
a native soil cap. The transfer documents will prohibit any use or irrigation
around the landfill. This remedy will severely restrict the development
around the landfill. The military will not conduct further clean up if the
developer needs to excavate or irrigate the area surrounding a landfill.
Developers should confirm with the regulators and the military their
proposed uses, and any construction necessary to accommodate those proposed
uses. All transfer documents must be carefully reviewed to make sure that
the boundaries of any constrained use are well defined and mutually agreed
upon.
IV. Unique Aspects of Closing Bases
Most prudent developers have recognized that they must undertake their
own evaluation of risks from contamination. Military bases are unique operations
very different from civilian properties. There are a new set of risks that
developers must consider.
Risks from Unique Military Operations
| "Military structures and
utilities at closed bases are generally transferred “as is,
where is” and will have to be cleaned if they are renovated or
demolished by the developer." |
|
Unlike commercial facilities, which were run for a profit and had an
economic incentive to keep records of material used and waste generated,
military operations were often conducted under strict secrecy, with no records
of hazardous materials used or disposed of. A good example of the effect
of military secrecy is a base that, after completing a comprehensive records
review, announced that radioactive material had never been used on base
and that a survey for radioactive waste would not be needed. However, retired
military personnel independently recalled using radium to paint instrument
controls for bombers during the war. No records were kept of how or where
this radioactive material was stored or disposed of. We later confirmed
the presence of radioactive materials in the base’s landfills.
Risks from Incomplete Surveys
Before transfer, BRAC properties undergo an Environmental Baseline Survey.
These surveys identify contaminated or potentially contaminated property
at the base. While these surveys are similar to the Phase I and Phase II
environmental audits at nonmilitary properties, there are significant differences.
Generally, in the survey process the only portions of the base that undergo
sampling are the areas where there is a documented history of the release
of contaminants or evidence of contaminants. If there is no evidence of
the release of contaminants in an area, that area is not sampled. Consequentially
the survey does not provide a comprehensive picture of all contamination
on the base.
Several commentators have criticized the military EBS procedures because
they fail to follow guidance developed by professional societies for assessing
the condition of property, and often fail to identify migration pathways.
(See DOD Environmental Baseline Survey and Non-Military Environmental
Assessment Standards NAID-NEWS March/April 1996.)
Hazardous Materials within Structures and Utilities
BRAC structures and utilities were often constructed without the oversight
of state and local agencies. Buildings may contain encapsulated asbestos
or lead-based paint, and utility systems may have PCBs, creosote, and other
hazardous materials. Military structures and utilities at closed bases are
generally transferred “as is, where is” and will have to be cleaned if they
are renovated or demolished by the developer. In general, hazardous materials
that are incorporated into structures or utilities currently in use will
not be remediated by the military.4
There is currently a dispute between the California regulators and the
Department of Defense regarding the military's obligation to remediate lead-based
paint that has flaked off non residential buildings and into the soil. The
State maintains that this is a “release” of contaminants under CERCLA, and
must be remediated by the military; the military doesn't agree with this
position.
V. Tips for Buying Closing Bases
Using the RAB
Developers should carefully review all site investigation reports for
gaps. Because of the massive volume of reports for closing bases, crucial
reports often do not get disclosed in the due diligence process. Developers
and communities can also become involved in the environmental survey process
during the military’s initial investigation, and can try to steer
the investigation to meet their needs.
One way to become involved in these environmental studies is to participate
in the Restoration Advisory Board for the base. The RAB acts as a liaison
between the community, the regulators, and the military. The RAB’s records
show the history of the investigation and can provide information on the
regulator’s concerns and the assumptions that may not be stated in the final
reports.
Transferring or Insuring the Risk
The insurance market has recently begun offering environmental liability
coverage for BRAC properties. This coverage can include protection from
consequential damages. A complete discussion of insurance for BRAC properties
is beyond the scope of this article, and interested readers should review
“Using Finite Insurance Policies to Cover Environmental Exposures”
October 1996, by Mr. Hurley in Risk Financing.
Managing activities after development
The Department of Defense has made it clear that it will not indemnify
the community if there is a violation of a deed or lease restriction on
the property. The DOD's position makes it imperative that the community
and developer closely monitor the actual use of BRAC properties. Developers
must retain the ability to enforce these environmental restrictions, through
providing for the developer’s right of immediate entry, appropriate signs,
structural barriers, etc. To the extent that tenants will be utilizing products
similar to the preexisting contamination, tenants should chemically tag
those products so they can be distinguished from pre-existing military contamination.
VI. Conclusion
The development of closing military bases is an intimidating process.
It requires developers to master a complex maze of federal laws, military
regulations, and environmental statutes. However, with enough information
and the proper tools, risks at these BRAC properties can be safely and economically
managed. There is no doubt that these bases present incredible opportunities
at greatly discounted prices.
Footnotes
1 10 U.S.C. § 2095; 32 C.F.R. 91
2 42 U.S.C. § 9620(h).
3 See, e.g., Dep’t of Navy Policy
Memo no. 95-02
4 See 41 C.F.R. Part 101-47, Section
101-47, 304-13 and DOD Base Reuse Implementation Manual, § 6.5.1, and app.
F.
© 2004 Greenberg Traurig
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