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GT Alert

Buying Closing Military Bases

September 2004
By Gregory F. Hurley, Esq. R.E.A., Greenberg Traurig, Orange County Office

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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

Gregory F. Hurley
"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."

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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This GT ALERT is issued for informational purposes only and is not intended to be construed or used as general legal advice. Greenberg Traurig attorneys provide practical, result-oriented strategies and solutions tailored to meet our clients’ individual legal needs.