Before leasing land, it is important for developers to understand the benefits of using a lease-option structure instead of jumping straight into a leasehold. By deliberately separating and sequencing the grant of rights from a landowner to a developer, parties can better manage potential reporting obligations under the Agricultural Foreign Investment Disclosure Act (AFIDA) and environmental liability under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA).

Understanding lease options vs. leaseholds

A “lease option” agreement can give you the right, but not the obligation, to lease real property in the future. A lease option is generally considered to be a contractual, personal property right. On the other hand, a “true lease” agreement creates a leasehold estate once the agreement is signed. Leaseholds generally give rise to contractual, real property rights. By using a lease option or structuring a lease to function like a lease option, you can better control when real property rights are created, and by extension, when certain legal obligations/implications take effect.

Why this matters: AFIDA

AFIDA is a federal law that requires foreign persons (including entities organized or formed under the laws of foreign governments and domestic entities that are substantially controlled by foreign persons) to file a report with the USDA within 90 days of acquiring or transferring “any interest” in agricultural land. Leasehold interests of more than 10 years trigger an AFIDA filing requirement, as “any interest” is defined broadly. However, certain types of interests are excluded from the filing requirement, including “contingent future interests.”

If your lease has a term of longer than 10 years, you might need to make an AFIDA filing with the USDA. However, the USDA appears to interpret the “contingent future interest” exception to mean that lease options are not reportable interests because options do not effectively convey an ownership interest in agricultural land. The USDA’s Handbook on Foreign Investment Disclosure explicitly states that “options are considered future interests” and are not reportable. Some developers rely on this safe harbor to delay AFIDA filings after lease execution, arguing that the development period under a lease is functionally equivalent to an option period, with the AFIDA filing requirement triggered by the shift from the development period into the operations period of the lease.

While the clearest way for a developer to avoid triggering an AFIDA filing requirement would be to use a true option agreement with a lease attached as an exhibit, many developers favor a more streamlined document put in front of landowners. Thus, some agreements maintain the look and feel of a lease while making the distinction that the developer’s real property rights under the agreement are “contingent future interests” vesting upon a defined commencement date, not the agreement effective date. The developer can then treat that commencement date as the trigger for the 90-day AFIDA filing window.

Why this matters: CERCLA

CERCLA, on the other hand, is a federal law that deals with environmental liability. CERCLA creates a defense to liability a tenant can preserve by conducting all appropriate inquiries (AAI) before it acquires a leasehold interest in the facility. One of the key steps in a tenant’s AAI is obtaining a proper Phase I environmental site assessment within 180 days before the creation of the tenant’s leasehold estate.

While there is not much case law on point, courts deciding questions of tenant liability under CERCLA seem mostly concerned with the level of control the tenant had over the subject property. We are not aware of any case law interpreting whether a tenant under a lease could preserve a defense to CERCLA liability by arguing that it conducted AAI before it exercised exclusive control over, or earth-moving activities on, the subject property. Still, a tenant would be in a better position to argue for that defense if the lease itself only creates a leasehold estate in favor of the tenant upon a defined commencement date (e.g., the start of construction), not the agreement effective date.

How to structure your agreement

Ultimately, a developer’s ability to designate when its real property rights vest allows for greater control over timing for (1) the trigger date for the AFIDA filing requirement and (2) the receipt of a Phase I ESA to preserve a defense to liability under CERCLA.

There are two approaches to address these concerns: (A) using a true option agreement with an agreed-upon form of lease attached as an exhibit; and (B) using a nuanced lease agreement that makes the distinction between the grantee’s rights during a development period (e.g., a license for site access and inspection only; no possessory interest) and the grantee’s real property rights (e.g., leasehold and easement rights; possession and right of use) vesting upon a defined commencement date, not the agreement effective date.

By using either of these strategies, you can better manage reporting obligations under AFIDA and/or environmental liability under CERCLA, providing important flexibility as you plan and develop your projects.

Chris Criglow is a Stoel Rives LLP partner. He practices in the real estate, development and construction group. Contact him at 503-294-9267 or chris.criglow@stoel.com.

Ben Criswell is a Stoel Rives LLP associate. He practices in the real estate, development and construction group. Contact him at 503-294-9531 or ben.criswell@stoel.com.

The opinions, beliefs and viewpoints expressed in the preceding commentary are those of the authors and do not necessarily reflect the opinions, beliefs and viewpoints of the Daily Journal of Commerce or its editors. Neither author nor the 91��Ƶ guarantees the accuracy or completeness of any information published herein.

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Owning or developing a parcel of contaminated real property, or a “brownfield,” has historically been a risky endeavor. But brownfields are abundant in the United States, and there are several incentives available to those who develop clean energy facilities on a dirty project site (e.g., building a solar array on a dormant industrial yard, or an electric vehicle charging station on an abandoned gas station). We use the term “clean energy” broadly in this article to include facilities that further electrification and/or reduce carbon emissions. In many cases, these incentives can help clean energy investments on brownfields pencil out.

Brownfield remediation programs have existed for decades and vary state to state. But recent legislative developments have added pools of funding and tax credit incentives that may tip the scales on making the benefits of brownfield development outweigh the risks. Here are some of the top deal sweeteners for clean energy developers building on a brownfield site in Oregon:

Oregon Brownfields Properties Revitalization Fund (BPRF)

In 2021, the Oregon Legislature passed HB 2518, which created the BPRF. This forgivable loan program works to reimburse private owners or operators for up to $250,000 incurred during brownfield remediation on eligible projects, including electric vehicle charging stations.

Oregon Brownfields Redevelopment Fund (BRF) and Brownfields Cleanup Fund (BCF)

The Oregon Business Development Department also administers funds to the BRF. This direct loan and grant financing program helps private property owners conduct environmental due diligence and cleanup on brownfields. Funding is available for projects with a “substantial public benefit,” such as the productive reuse of a vacant industrial or commercial facility. In addition, the BCF is a low-interest loan and grant financing option for cleanup projects on brownfield sites where remediation is necessary prior to redevelopment.

State tax incentives

The state of Oregon also offers several tax incentives for brownfield development, including property tax abatements, tax credits for environmental cleanup, or credits for creating new jobs. These incentives may be available in connection with a voluntary cleanup program or brownfield cleanup agreement with the Oregon Department of Environmental Quality.

Federal brownfields program

The U.S. Environmental Protection Agency (EPA) provides brownfield developer support via assessment, cleanup, multipurpose, revolving loan fund, and job training grants. In addition, participants can benefit from agency expertise through technical assistance and targeted brownfield assessments. The Infrastructure Investment and Jobs Act of 2021 directed an influx of funding to the Brownfields and Land Revitalization Program – Congress appropriated $300 million per year for five years ($1.5 billion total), which exceeds the former statutory cap of $200 million per year (which Congress had never funded in full). The $1.5 billion consists of $1.2 billion for brownfield competitive grants and $300 million for brownfield categorical grants. In addition to the increased annual funding, the EPA can now provide larger grants and may not require state matching contributions.

Federal tax incentives

The Inflation Reduction Act of 2022 (IRA) also provides a host of new or modified incentives applicable to renewable energy development on brownfields. Generally, the IRA contains (i) the new ability for certain entities to either transfer tax credits to third parties or claim the tax credits as refunds; (ii) the extension, modification, and addition of tax credits; and (iii) new “base and bonus rate” tiers and opportunities to increase those rates with so-called “adders.” Specifically, the IRA created a 10 percent adder for Business Energy Investment Tax Credit (ITC) and Renewable Electricity Production Tax Credit (PTC) projects located in an “energy community” (including brownfield sites).

While additional guidance is forthcoming, existing resources shed light on areas that might constitute “energy communities” under the IRA. First, the EPA has screened more than 130,000 potentially contaminated sites and solid waste landfills covering nearly 43 million acres across the U.S. for suitability for renewable energy generation facilities. The RE-Powering Mapper provides locations of these sites, as well as map layers with information about their potential for supporting renewable energy generation. In addition, the EPA maintains a Cleanups in My Community platform to track past and ongoing cleanups funded by its brownfields program.

Finally, brownfield incentives vary, but most states complement such incentives with some version of a voluntary cleanup program involving expedited project permitting. And in some states, voluntary cleanup releases the owner from future liability to the state for the cleanup of preexisting contamination. Further, an agreement with the state also may provide some protection from liability under federal law. Anyone considering whether to buy or develop brownfield property should contact the relevant federal, state, and local regulatory agencies for detailed information regarding site-specific incentives and protections.

Chris Criglow is a Stoel Rives LLP partner. He practices in the real estate, development and construction group. Contact him at 503-294-9267 or chris.criglow@stoel.com.

Ben Criswell is a Stoel Rives LLP associate. He practices in the real estate, development and construction group. Contact him at 503-294-9531 or ben.criswell@stoel.com.

The opinions, beliefs and viewpoints expressed in the preceding commentary are those of the authors and do not necessarily reflect the opinions, beliefs and viewpoints of the Daily Journal of Commerce or its editors. Neither author nor the 91��Ƶ guarantees the accuracy or completeness of any information published herein.

The post Deal sweeteners for clean energy development on brownfield sites | OP-ED appeared first on Daily Journal of Commerce.