Incentives for Remediation

At one time our “Steel Valley,” was one of the great steel regions ofthe world, hosting mills along the Mahoning River from Warren to thePennsylvania line. Fierce competition from overseas, followed by theclosing of Youngstown Sheet and Tube in the 1970s started a long slidein industrial production in the region. Yes, a few of the old plantshave reopened, but great stretches of industrial land lie fallow, notproducing profits, tax revenues nor jobs.

However, the location and attributes that once made northeastern Ohioattractive for industrial development – interstate highway systems,water transportation via the Great Lakes and Ohio River, naturalresources, skilled workforce and proximity to markets – remain. Theexploration of natural gas and natural gas liquids in the Utica andMarcellus shale formations will incentivize cracker plants and plasticsfactories throughout the Ohio Valley. The Shell cracker plant underconstruction in Monaca, Pa., will not be the first such operation.

Cheap energy and the fact that we are one day’s trucking from themajor markets on the East Coast, as well as Detroit, Chicago and St.Louis, also mean companies are going to be nosing around northeast Ohiofor industrial locations.

What hoops do they have to jump through to acquire an ancientindustrial site? Environmental regulations say someone buying a pollutedbrownfields site is responsible for cleaning it up, if it can be shownthat pollution could be readily detected when the buyer made thepurchase.

One might question the logic and fairness of forcing a new owner tobe responsible for pollution from 100 years ago. Be that as it may,environmental laws have made many old industrial properties taboo. Theywill be the subject of a future article, while today we will focus ontax abatement as a spur to clean up brownfields and redevelop them.

If a company is considering buying an industrial site that is knownto be contaminated, the cost of remediation affects the price it iswilling to offer. It also must take into consideration the effect ofclean-up on future real estate taxes. It is a catch-22. If the companyspends the money to clean the site, the land’s value will rise, causingreal estate taxes to head north, creating a double incentive not toinvest.

Recognizing the dilemma, in 1994 the Ohio Legislature passed ORC 5789.87 and amended the law last year.

Under the law, a landowner can:

• Acquire property and then design and begin a remediation plan.
• Enter into an agreement with the director of the Ohio EPA thatpromises the landowner will not be sued to force remediation as long asthe landowner follows along with its plan.
• Receive a promise from Ohio that the increase in value resultingfrom remediation will not result in increased taxes for 10 years. (If alandowner sells tax-abated property, the buyer will continue to enjoythe abatement for the remainder of the 10 years.)

Obviously, the fair market value of a polluted parcel should be much less than that of similar pristine property.

However, old industrial sites – often owned by defunct entities – aretypically carried on the books by the county auditor at values far inexcess of fair market value. This being the case, an acquirer shouldfight through the reassessment procedure before applying for a taxfreeze under ORC. 5789.87 (otherwise valuation would be frozen at anunrealistically high level).

At a valuation hearing, according to the case law, the cost ofremediation may not simply be deducted dollar for dollar from what wouldbe the fair market value of a non-polluted site. Sophisticatedappraisal testimony will be required.

By using this recently revised statute, industry can breathe new lifeinto old industrial sites, improving local tax bases and creating jobs.