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- A New Way to Assess Natural Resource Damages
In the latest episode of Digging Into Land Use Law, Nossaman’s Brian Ferrasci-O'Malley and John O’Meara explore the Department of the Interior’s (Interior) proposed rule to change the way agencies evaluate injuries to natural resources at contaminated sites and how much restoration will cost. They examine Interior’s new “Type A” rule for streamlined natural resource damage assessments, the first changes to that rule in more than 27 years, and discuss who will be affected by the proposed revisions.
Transcript: A New Way to Assess Natural Resource Damages
0:00:00.7 John O'Meara: For the first time in a generation, federal environmental regulators could change the way they evaluate contamination and determine costs for restoration. What prompted this change, and who will be affected?
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0:00:18.4: Welcome to Digging Into Land Use Law, Nossaman's podcast, covering the development of all things in on or above the ground.
0:00:33.6 JO’M: Thank you for joining us for this episode of Digging Into Land Use Law. In this episode, we analyze a proposed rule from the US Department of the Interior that has the potential to speed up the process through which interior restores the public's contaminated natural resources. My name is John O'Meara and I'm an associate attorney in Nossaman's environment and land use group. I counsel clients through complex environmental issues such as contaminated site cleanups, which often require collaborative, creative and cost-effective solutions. Joining me is Brian Ferrasci-O'Malley, a partner in Nossaman's Environment and Land use group. Brian's practice includes both transactional work and litigation and he regularly advises clients across the United States on contaminated site cleanups, energy development projects, and federal wildlife law issues. Brian has particular experience with natural resource damages matters, both at Nossaman and previously as an attorney with the US Department of The Interior's Office of the Solicitor, where he managed a nationwide docket of NRD cases under CERCLA, also known as the Superfund Act, concerning the nation's largest and most complex environmental responses. Enforcement actions and lawsuits concerning natural resource damages, or NRD, can be costly and time-consuming for those accused of releasing hazardous substances that injure the public's natural resources.
0:02:03.8 JO’M: The US Department of the Interior, or simply Interior, recently published a proposed rule that would overhaul the type A rule that Interior uses to perform natural resource damage assessments and evaluate the need for restoration activities following the release of hazardous substances. The proposed revisions would be the first significant changes in more than 27 years to this portion of Interior's natural resource damage assessment regulations. If finalized the proposed rule could provide a more flexible structure for settling natural resource damage claims, allowing Interior to get restoration on the ground more quickly. So Brian, I'd like to turn the conversation over to you now. I'd like to better understand the existing regulatory framework and what some key terms mean. Would you please explain, what are natural resource damages?
0:03:00.2 Brian Ferrasci-O'Malley: Thanks, John. And it's a pleasure to be speaking with you today. Natural Resource Damages refers to a couple of federal laws that allow federal, state and tribal natural resource agencies to evaluate the impacts of oil spills and releases of hazardous substances into the world that affect the public's natural resources, habitats, and the ability for members of the public like you and I to go out and use those natural resources. It's a way to get the public back to where they were before a spill or a release happened.
0:03:40.8 JO’M: And what are the differences between an assessment and a restoration in the NRD context?
0:03:47.9 BFO'M That's a good question. So, it's a two-part process. You have these trustee agencies, federal agencies like Interior or the National Oceanic and Atmospheric Administration, state agencies, departments of marine resources or the like, and Indian tribes are collectively called The Trustees. They're given the role of assessing what type of injury happened, what resources were killed or injured or reduced, and then how do we bring those resources back up to where they were before the incident. So it's a two-part process. There is a assessment process and then the restoration process where projects are undertaken to bring back the resources that were lost.
0:04:40.2 JO’M: And within this framework, what is a type A assessment?
0:04:44.9 BFO'M So within Interior's regulations under the Superfund Act, there are two ways that the government trustees can move forward with assessments. There is the type A rule that is a simplified and meant-to-be-streamlined assessment process. And then there's the type B rule, which is a more site-specific process that is more in-depth and takes a longer time and really looks at just this one case, just this one spill, "How can we figure out what was lost and what we need to get back?" The Type A assessment rules, which is the subject of the current proposed rule from Interior, focuses on "Is there a way to have a simplified assessment where we can use models rather than going out and doing two or three or four more years of studies?"
0:05:46.4 JO’M: And speaking of studies, I'm curious to know, who's involved with studying? Does the Environmental Protection Agency participate in NRD matters?
0:05:54.8 BFO'M The Environmental Protection Agency, or EPA, its main role is really in the cleanup process and the cleanup process and the NRD process have been described sometimes as parallel tracks. Sometimes NRD is considered the tail at the end of a cleanup process. It can change depending on the type of cleanup that's involved or the way in which the various trustee agencies work together. But usually EPA is not terribly involved in the NRD process. If you're running a parallel track, EPA is there consulting, making sure that the trustees, the NRD trustees, are doing their work and kind of not getting in the way of cleanup, because EPA's role is cleanup. They're there to make sure the site is no longer a risk to human health and the environment. Their focus is stop whatever the spill was or the release was, they're not focused on, "And then how do we give back what was taken away?" That's really the role of the NRD trustees. So you will see the state, federal and tribal trustees, NRD trustees, being involved with, "What exactly was injured and how do we restore it?" They're not in that role dealing with cleanup. EPA is dealing with cleanup.
0:07:22.3 JO’M: And I understand you've mentioned that there are federal agencies that participate as trustees. Are there state entities that participate as trustees as well?
0:07:33.4 BFO'M Yes, depending on... And I should say John, that we're talking really about federal NRD actors under Superfund, there are states that have their own NRD statutes, their own ability to litigate natural resource damage claims under state law, New Jersey, Washington State, are just some examples. But at the federal level, you do have this working group of trustees dependent on what was injured and where it's happening. So you will have your federal trustees and those will be the resource agencies that have the legal background to say, "Here... " instead of the public saying, "Oh, I was injured here because of an oil spill," you have... The way the law is set up, it says, "All right, standing in for you, standing in for the public is going to be," again, "At the federal level, Department of the Interior." So that would be the US Fish and Wildlife Service, sometimes it's the National Park Service if it's a spill that happens near or impacting parks, you also have Bureau of Land Management, and others. At the state level, it's usually a resource agency like they're a state Fish and Wildlife Service or a Department of Marine Resources if it's a coastal spill. And then the tribes will have their own way of... Each individual tribe is going to have a setup that will have a similar type of resource-based trustee at the table.
0:08:58.8 JO’M: Now that we have a better understanding of the current law, how does the new type A rule differ from the current rule?
0:09:04.0 BFO'M So the current type A rule, which as I said earlier hasn't been used in decades because it's pretty outdated, is structured that it's only available for cases with $100,000 or less in damages. That in natural resource damages, in the arena there, is virtually nothing. Most cases involve at least 300, 400, 500 thousand dollars of damages and they can go way up from there. You may be familiar with Deepwater Horizon, that was a multi-billion dollar NRD claim. So the current type A rule, if you're over $100,000 in damages, you can't use it. The current rule is also only available in two environments. You either have to be in the Great Lakes region or in a coastal environment. If you're not in one of those regions where the case is, you're not able to use the Type A simplified assessment process. And finally, as I alluded to earlier, you've got to use this static outdated model that's written into the regulations themselves and doesn't allow for anything that has changed since 1997 when these were last updated.
0:10:17.8 BFO'M So the new rule turns all three of those things on their head. First of all, it increases the limit for the size of cases that can be used. So it goes from $100,000 in the current rule, in the proposed rule, it's up to $3 million in damages that can be eligible to use the Type A process, even up to $5 million for certain discreet cases where there's one or two potentially responsible parties, or PRPs. On the geographic side, gone is the restriction that you have to be in one of those two areas. The new type A rule will be able to be used nationwide. And because it's no longer tied to those specific models and the regulations, it allows for a much wider range of models to determine damages. Interior's proposed rule mentions a couple of currently very well-used rules, the Habitat Equivalency Analysis model, the Resource Equivalency Analysis model. Those are both models that have been used in NRD practice for decades and are well established, people on both sides of the coin understand that from the regulators and the regulated community. But the new rule also leaves open that there could be other models in the future.
0:11:33.5 JO’M: You mentioned three new aspects of the proposed rule, and I'm curious to know whether there's any other details that people might find interesting.
0:11:42.9 BFO'M Good question, John. This proposed rule from Interior follows up on an advanced notice that Interior issued about a year ago, where they put some of these ideas out for the first time and asked, not in a proposed rule form, but in sort of a brainstorming session, to say, "What do folks in the natural resource damage field think about these potential changes?" And in addition to the three main changes I talked about earlier, there are some other additional details in the proposed rule that I see really as responses to comments that interior got on that initial query. So for example, all of the trustees, all the trustee agencies at a particular case, state, federal, and tribal, have to agree to use the Type A process in order for it to move forward. And at least one of the potentially responsible parties has to voluntarily agree. In practice that means the government agencies can't force a private party to go forward with a type A, but private parties also can't force the government to move forward.
0:12:49.0 BFO'M It has to be a collaborative process, which in a lot of ways, is what natural resource damage settlements and collaborative assessments are the norm. It's the exception that you end up going to trial on something. As far as... Members of the public might be interested in, the new type A rule has a big focus on public notice and opportunity for comment. There's a, what's going to be called, a Type A report that the trustees will have to publish for public comment before the process is complete that shows the public, "here's why we chose to take the Type A path. Here are the models, the specific models, that we used and how we see this connecting to restoration". Because at the end of the day, the NRD process is all about restoring the public's natural resources. It's about bringing things back up to that baseline where they were before the incident or the spill occurred.
0:13:46.0 JO’M: What are some of the positives of the proposed rule?
0:13:49.8 BFO'M Well, first and foremost, John, it revives the Type A process. It gives parties an opportunity to use a more streamlined, simplified, process for easier, simpler, more run-of-the-mill NRD cases. Right now, if you have what, for all intents and purposes, is a simple case, you still have to go through the complicated long process that you would have to for the most complex case that you could come up with. So, that's a big positive, is reinstating this track to get through quicker. And it's also a positive that private parties have to agree for the government to move forward. It makes it so that there is an element of collaboration there. Other positives include the fact that now there's no geographic restriction. Anyone in the United States, any case can use this and that there's that new limit, so, up to $3 million and it's just more flexible in general. By allowing for new models in the future that might make sense, we won't be in the same situation in 10 or 15 years where, "Wow, we've got a great new model, wouldn't it be nice if we could use it except, oh no, the regulation say that we can't." The proposed rule is smartly drafted to avoid that situation.
0:15:16.0 JO’M: And of course there's no federal regulation that doesn't have some drawbacks. So what are the drawbacks that you've identified in this new type A proposed rule?
0:15:25.0 BFO'M I think the biggest potential drawback is there are no explicit timeframes for how long the type A process should last. And for a pathway that's designed to streamline and get to restoration faster, it's not clear on its face how this rule accomplishes that. So exactly how the new type A rule will result in quicker resolutions of claims, that's to be determined. Another issue, I think, it's a minor one but it could be important, is the fact that the new cap is not indexed in any way to inflation. So if the proposed rule were finalized this year and you had a $3 million case, you could move through, but if in five years your $3 million case, it might be in today's dollars only a two and a half million dollar case. And just because of the passage of time, you wouldn't be able to go through the type A process. So I think I expect Interior's going to hear from a lot of commenters and that'll be one of the points made that "you should at least tie that number, that $3 million to some government index, because otherwise we'll be in a situation like we were with the current rule where $100,000 in 1997 is very different from $100,000 today".
0:16:46.2 JO’M Brian, thanks for explaining all that. What are Interior's next steps with the proposed rule?
0:16:54.1 BFO'M As I mentioned earlier, Interior extended the comment period deadlines. So they could host a number of tribal listening sessions to get specifically tribal perspectives on the proposed rule. Those should be wrapping up this month. And comments are due on April 5th of this year, 2024. Once Interior receives those comments, they'll take them in, they'll review them and they'll decide A; whether to move forward and produce a final rule, and B; if they're going to do so, what changes they'll make from the proposed rule.
0:17:30.8 JO’M When would we expect to see this finalized rule?
0:17:33.9 BFO'M Late last year Interior was still talking about getting a final rule out by late spring of 2024 and having that be effective in summer of 2024. When they extended the comment period a month that necessarily is likely to push out the timeline a little bit. There is the small concern that eventually you start running into the Congressional Review Act timeline, which is a topic for a whole other podcast. But suffice to say for here, is the period at the end of a legislative session wherein the next Congress can take a look back at particular regulations, proposed rules or finalized rules and essentially wipe them out if they were at the very end of a presidential term. That's a possibility anytime you have an election coming up, and so you see agencies like Interior try to push through regulations that might be politically charged before that timeline comes into effect.
0:18:40.6 BFO'M I don't think that the NRD changes here, the type A rule, is particularly problematic. It's not overtly politically sensitive, so it may not come into play and that as a result may mean it waits a little bit while Interior tries to get some more of its additional rules and regulations out. But that's the complicated answer. I think the short answer is we should expect to see a final rule in late summer, maybe early fall with an effective date that would be 30 days after. And once effective, all of a sudden that process would be open and I think you would end up seeing a lot more cases take the simplified pathway to try and streamline and smooth through their process. Because from the private party perspective, you want to find out what you're liable for and get out and move on as fast as you can. And from the government's perspective, you want to figure out what the damage was and get it restored as soon as possible. So there really are benefits for both sides to finalizing this new type A rule and reestablishing a streamlined pathway for getting through NRD assessments.
0:19:52.6 JO’M Thank you Brian for talking with us today about the proposed new type A rule for natural resource damages matters. And thank you to our listeners for joining us for this episode of Digging Into Land Use Law. For additional information on this topic or other environmental and land use matters, please visit our website at nossaman.com. And don't forget to subscribe to Digging Into Land Use Law wherever you listen to podcasts so that you don't miss an episode. Until next time.
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0:20:25.7: Digging Into Land Use Law is presented by Nossaman LLP and cannot be copied or rebroadcast without consent. Content reflects the personal views and opinions of the participants. The information provided in this podcast is for informational purposes only, is not intended as legal advice and does not create an attorney-client relationship. Listeners should not act solely upon this information without seeking professional legal counsel.
- Planning and Funding Climate Resilient California Coastal Infrastructure
According to California’s projections, the miles of highways susceptible to coastal flooding in a 100-year storm event will triple from current levels to 370 miles by 2100, with more than 3,750 miles exposed to temporary flooding. Coastal erosion and flooding also threatens California’s rail system and utility infrastructure. In this episode of Digging Into Land Use Law, Nossaman’s Shant Boyajian, Liz Klebaner, Ben Rubin and Mary Lynn Coffee discuss state climate resiliency and environmental justice policies relating to coastal transportation and water infrastructure projects and available funding for such projects under the Inflation Reduction Act of 2022.
Transcript: Planning and Funding Climate Resilient California Coastal Infrastructure
0:00:01.0 Mary Lynn Coffee: California has more linear miles of coastline than most other US states and territories except for Alaska and Florida. Over the course of this century, the effects of sea level rise will be felt by thousands of coastal residents and businesses. Public infrastructure will also be impacted.
0:00:21.6 Speaker 2: Welcome to Digging Into Land Use Law, Nossaman's podcast covering the development of all things in, on, or above the ground.
0:00:38.1 MC: Welcome. Thank you for joining us today. I'm Mary Lynn Coffee and I'm an environmental and land use partner here at Nossaman. I work with clients to comply with and obtain permits for infrastructure projects under state and federal environmental laws such as the endangered species permits, wetlands, water quality, and other natural resource protection law permits. We've invited you today to discuss climate resiliency in California. The state's committed to preventing climate change as a first priority, but also recognizes the inevitable challenges for infrastructure associated with climate change that are imminent. By way of example, the legislature has acted on this understanding by mandating that the Natural Resources Agency here in California should develop and update every three years a statewide climate adaptation strategy. That strategy sets policies and implementing actions for climate resilience across industry sectors, including for all infrastructure.
0:01:38.6 MC: In 2020, Governor Newsom signed his executive order number N82-20, which directed state agencies to build resilience across the state, including undertaking climate smart land management practices. The executive order in relevant part declares that climate crisis is happening now and orders state agencies to conserve the coastline, safeguard economic stability, build climate resiliency against extreme climate events, and expand equitable outdoor access and recreation for all Californians.
0:02:12.0 MC: In 2021, the state climate adaptation strategy indicates how we're going to do all those things. That strategy notes the sea level rise is accelerating, increasing flood impacts and erosion and raising groundwater tables. The strategy also projects that 31% to 67%, think about that, one third to two thirds of Southern California beaches could be lost by the end of this century in the absence of adaptation strategies. The strategy identifies the California Coastal Commission and local governments among key implementing agencies with respect to coastal resilience planning and with respect to sea level rise adaptation.
0:02:53.4 MC: So today's panel features three top legal experts in the area of infrastructure resiliency. They are going to focus on design, permitting and financing challenges for coastal infrastructure projects in light of this adaptation necessity. Our panelists are first, we have Liz Klebaner. This is an environmental partner here at Nossaman. She advises private and public agency clients on a variety of complex land use and environmental matters, including permitting of infrastructure projects under and compliance of projects with CEQA, the California Environmental Quality Act, NEPA, the National Environmental Policy Act and the California Coastal Act. She also litigates in state court to defend and obtain infrastructure project approvals.
0:03:40.1 MC: Liz has worked with the California Legislature and public agency clients in the development of streamlining legislation for CEQA. Ben Rubin is also with us today. Ben is an environmental and land use partner here at Nossaman. He counsels developers, public agencies, landowners and corporate clients in permitting approvals and court litigation matters dealing with the federal and state Endangered Species Act, NEPA, CEQA, the California Coastal Act, the California Permit Streamlining Act and the federal and state constitutions, mostly with respect to private property rights and acquisitions. Typical matters that Ben assists with would involve federal and state permitting issues, local zoning issues and variances, environmental planning and compliance and right to take challenges and valuation of property interest.
0:04:29.6 MC: And finally, our partner, Shant Boyajian. Shant is a partner in Nossaman's Infrastructure Contracting and Procurement Practice Group. He's also a leader in the firm's Governmental Relations and Regulation Group. He advises public agencies on a wide range of innovative methods to procure and deliver the nation's largest, most complex infrastructure projects. At the same time, Shant remains abreast of all federal funding legislation and federal agency and policy initiatives that affect public agency planning, designing, permitting and funding infrastructure projects.
0:05:03.3 MC: Before joining, Shant, he had an illustrious career. He was senior counsel to the US Senate Committee on Environment and Public Works, where he led the development of FAST, Fixing America's Surface Transportation Act. And he also served prior to that as counsel to the US Subcommittee on Highways and Transit, where he helped negotiate and draft MAP-21 for fiscal years 2013 and 2014. So with that, let's get started as we move on to our first question for our panel. What are some important planning considerations for infrastructure or other projects located or proposed in the coastal zone? And if you could please pinpoint your advice as to what our listeners should be thinking about when they design projects. Liz, do you want to jump into that first? And then maybe we'll have some comments as well from Ben.
0:05:55.8 Liz Klebaner: Sure. Thanks for that question, Mary Lynn. I think there are three important considerations as you're thinking about your project, whatever it is, whether it's a public infrastructure project or even a private development. First, the Coastal Commission will be looking at sea level rise impacts over the course of the project's useful life. So it will be important to develop a range of project alternatives that allow the decision maker, if it's the commission or the local jurisdiction, as well as the public, to weigh the costs and the benefits of landward realignment or other mitigating strategies against the cost of and benefits of hardening or armoring.
0:06:36.8 LK: And the second consideration, and this is true for probably every single major infrastructure project in California as well as every single project proposed in the coastal zone, is think about stakeholder engagement. Projects proposed in the coastal zone often impact iconic beaches and scenic and recreational opportunities that are really important to local communities. And early coordination with stakeholders in the development of alternatives and mitigation measures is really essential to your success. And this could be accomplished through sustained stakeholder engagement throughout project development, through public meetings and open houses and other opportunities for public comment.
0:07:18.1 LK: Then, take that information and let it inform the project design and whether and when it's appropriate to offer ecological and public access benefits. For linear projects like roads, for instance, some examples could include trails or other amenities in the prior road right of way, widening of shoulders to allow for bicycle and pedestrian use and access to coastal resources. So other examples could include engineering solutions that are intended to avoid or minimize impacts to Ecologically Sensitive Habitat Areas or ESHA.
0:07:54.6 LK: And then lastly, since I'm a CEQA lawyer, I have to talk about CEQA. CEQA requires an analysis of impacts on coastal resources. So don't wait until the commission's review of the coastal development permit or the local coastal program, whatever the project that issue is to start those discussions with the commission staff. And this important point was actually addressed in the California Supreme Court decision, 2017 decision in Banning Ranch Conservancy v. City of Newport Beach. In that decision, the court held that an EIR for a mixed use development was inadequate because it failed to identify and address impacts to ESHA. And also the record didn't reflect that there had been substantial consultation with the commission staff in the development of the project.
0:08:42.4 LK: So also from a planning perspective, it makes a lot of sense to try to align the CEQA document with the terms of future coastal permits or approvals. I also wanted to mention one successful example of stakeholder coordination in the Gleason Beach Highway realignment project that was undertaken by Caltrans. There, Caltrans determined to relocate a portion of Highway 1 landward in Sonoma after finding that continued hardening of the coast was just infeasible. And the ultimate project that obtained a CDP addressed local concerns by incorporating ecological public access and other visual benefits that were important to the local community.
0:09:25.3 Ben Rubin: And sort of building off of what you're saying Liz, there's really a requirement, as you are thinking about the project to build in time to deal with your coastal development permit or your local coastal program. A lot of... With major public infrastructure projects, those are going to require a permit from the commission, and they also might require permits from the local jurisdictions that they have a certified local coastal program. There's a public works plan that you can try to take advantage of for large projects that deal with multiple jurisdictions. The trick there is that these plans require consistency across the local coastal program.
0:10:01.5 BR: So if you're touching five or six different jurisdictions, then you need to make sure everything lines up. If you're touching a jurisdiction that doesn't have a certified LCP, which is still true in some jurisdictions along the coast, then you need to comply with the Chapter 3 policies. It's a bit of a mishmash. It can take time to get those LCPs approved because any amendment to an LCP has to go to the Coastal Commission after it's approved by the local jurisdiction. So it's a long process. It's been successfully utilized by San Diego at the Low Sand Corridor, so there are examples of it working.
0:10:37.3 BR: However, again, it's a very long process. You have to take that into account when looking at what are all the permits you're going to need. If there's a coastal approval, are you going to need that? There's also the Coastal Zone Management Act that can overlay with all this if you need a federal approval. And then just with planning your projects, you have to deal with sea level rise. It's happening. The commission is taking a very aggressive stance with it. They have what they use the H++ scenario, which means that you have to plan for depending upon the life of your project, dealing with infrastructure projects. We're talking about transit. If we're talking about roads, the life of those projects are usually out to 2100. That means a 10-foot sea level rise that you have to deal with as far as project requirements and mitigation.
0:11:22.8 BR: And when you deal with things like that, the commission is also going to look at not only are you mitigating for the potential environmental impacts, but are you also mitigating for environmental justice concerns? So you can't just, for example, build a road that will take public access or that will impact low-cost recreational opportunities. Those are things the Coastal Commission is keeping a very close eye on these days and making sure that projects don't have those impacts. So those are just sort of an overview of things to add on to what Liz already said.
0:11:54.5 MC: Just a couple of follow-ups. Liz, we often advise clients to make sure that there's consistency in their CEQA document and in their state and federal permits, including what they think their Coastal Act permit is going to look like. Can you just give a quick summary of the risks involved when clients don't do that? Because it does take extra effort, work, money, consultant time, et cetera, to make them consistent.
0:12:17.1 LK: So one risk is you're going to have to recirculate your CEQA document. The law requires recirculation if there's evidence that's been added to the EIR that there's a new or more severe impact than was previously disclosed. So once you start talking to Coastal Commission staff and going through that process, you might get some additional information or opinions that weren't fleshed out in the record during the CEQA process that might cause you to have to go back and redo your document circulated for further public comment. So that's one major risk. And then the other major risk is if there is the possibility of third-party litigation, there are implications for the defensibility of the document if there are inconsistencies between your CEQA document and your later Coastal Commission approvals.
0:13:08.3 LK: These are issues that come up a lot, and anyone developing a project or reviewing a project should think about the long-term record development and the risk of litigation and how to mitigate it.
0:13:17.9 MC: You mentioned, Ben, the H++ sea level rise analysis, which is, as you said, aggressive. Some people say conservative, but it certainly anticipates a great deal of sea level rise in a fairly short period of time. And the question was raised, is there a policy or guidance memo from the CCC suggesting that they should be using the H++ scenario? So where is the requirement for using that come from?
0:13:43.9 BR: There is a commission policy on that. It's the state Sea-Level Rise Guidance Document. We'll talk about it a little bit later. There's also a Draft Infrastructure Guidance Document that was issued earlier in 2021. If you just deal with the commission, private development or public development, you're seeing it in real time that that's what they're requiring. It's a policy that's being implemented on a regular basis.
0:14:11.9 MC: Shant, tell us before we move on to more questions about these policies and how they affect the design. I wanted to ask you, what should we be considering? What kind of federal considerations do we need to be taking into account and addressing as we're planning this infrastructure? If we want to make sure that the infrastructure has been designed in a way that we can get federal funding for implementing resiliency policies.
0:14:40.2 Shant Boyajian: Absolutely. Thanks, Mary Lynn. And there are obviously a lot of different considerations whenever you're trying to prepare a project to be successful for federal funding. But there's one in particular that I want to talk about because it's obviously important and relevant, especially recently in the evaluation of federal funding opportunities. And that is this administration's Justice40 Initiative. This is an administration led priority with the goal of directing 40% of the overall benefits of certain federal investments towards disadvantaged communities. And the way that this is being implemented is that the administration has issued an executive order applicable to federal agencies that provide funding opportunities for these types of projects.
0:15:26.7 SB: And then it's up to each agency, each department or modal administration to individually implement the Justice40 requirements for that particular funding stream that that agency will manage. And so it is still being implemented, but it's incredibly important that projects, especially those related to climate change, very actively consider the impacts of the project on disadvantaged communities and the planning process. I was recently sitting in on a debrief with a large transportation agency that was unsuccessful in a recent federal funding application. And a large part of the reason that they did not receive a selection for that funding is because they did not adequately address the impacts of the project on disadvantaged communities and provide evidence for how that was going to be for not only what they had done to design the project in a way that would benefit disadvantaged communities, but also quantify the benefit that that would have after the project was in implementation.
0:16:28.5 SB: And so that's just one practical example of how important this is. One other specific thing I want to mention on this point, and we'll talk about this specific funding program later on. But the RAISE program, which the US Department of Transportation administers, it's a very flexible funding pot. This year, the RAISE Notice of Funding Opportunity actually articulates specific requirements that each project need to exhibit in order to meet the administration's Justice40 Initiative. And that is all about how the project is being planned. And one example from the RAISE NOFO is that the projects need to complete an equity impact analysis. The projects need to adopt an equity inclusion program and other design features the project actually need to specifically look at how past barriers and some of these disadvantaged communities are going to be redressed.
0:17:23.5 SB: And so, again, each actual funding program may have different specific ways that Justice40 priorities need to be addressed. But the overall point is that this is a really important issue that needs to be taken into account at the planning stages of these projects, especially if you want to position yourself for federal funding.
0:17:45.7 MC: Let's delve back into a little bit more of the state requirements with respect to infrastructure resiliency. And I again want to turn back to Liz and Ben and ask, when is it appropriate to consider revetments or seawalls in lieu of nature-based adaptation strategies when designing coastal infrastructure projects?
0:18:08.2 BR: I think the Commission always has a preference for nature-based adaptation strategies. So, if that's something that's a possibility and it's economically feasible, that's something you should look at. As a policy, the Commission is generally opposed to shoreline protective devices. That's one of the big fights we're seeing with private development up and down the coast is, that right over the private property owner's use of a shoreline protective device for a pre-1976 development versus something post that date. However, it's a little bit of a different calculus when dealing with public projects because you're not dealing with just a private developer versus a public use, which is the public beach. And there's a belief that shoreline protective devices result in a reduction in beach, which is lack of beach access, reduction in beach access.
0:18:57.0 BR: On the public project front, what they'll actually do is they'll look and see it's more of a public benefit. What is the transportation project? Is it providing access to the coast in and of itself, which is a public benefit for coastal resources? And what they've done is, when doing that balancing, the Commission will allow new shoreline protective devices for an interim period of time, a sort of phasing. It won't allow it long-term because even with those public projects, it does not consider shoreline protective devices a long-term solution to sea level rise. But it will allow for a short-term solution and condition the project on coming up with a longer-term solution such as either maybe relocation, such as maybe raising the height of that bridge or maybe they'll try to impose those natural adaptation strategies. So it's a little bit more of a leeway with public projects than with private.
0:19:57.7 LK: I'll just add to the points that Ben has already made, and the focus of today is really on public infrastructure. So some of these recommendations may differ with respect to privately advanced developments. You really have to look at the terms of the LCP. That applies to you if there is one, and how it deals with hardening of the coast, as well as seawalls and revetments to protect private property. But with respect to public projects, as Ben already mentioned, the state is really favoring nature-based adaptation strategies over revetments. But there are certain caveats to that, and phasing has something to do with it.
0:20:36.3 LK: Project design measures aimed at ensuring safe structures should be scrutinized through the lens of CEQA project alternatives analysis, if you're designing a public infrastructure project. And again, not to harp on this, but Banning Ranch tells us that CEQA impacts include impacts to ecological, recreational, and visual values that are protected by the Coastal Act. So if the project results in such impacts, then you have to take a look at project design measures that can reduce those impacts. That could be nature-based solutions, but CEQA also says that an alternative can be eliminated if it fails to achieve the majority of the project's objectives or if it's infeasible.
0:21:19.8 LK: The law defines infeasibility to take into account a number of different considerations, including policy considerations, timing, technological constraints, as well as financial constraints. One project that I think might be of interest to folks joining us today that involves nature-based solutions is just getting off the ground in the city of San Diego. That's the De Anza Cove amendment to the Mission Bay Park Master Plan. And in that planning document, the city is considering expansion of wetland habitat as well as the development of an oyster reef as potential solutions to mitigate the impacts of sea level rise and increased tidal action on communities right by the coast there. So that is one to watch to see how the city handles the question of whether nature-based solutions are effective and how they should be implemented and under what circumstances.
0:22:16.0 MC: So is your point then that you would have an infeasibility analysis to go through and CEQA if you're not going to use the nature-based solutions?
0:22:24.4 LK: I would say so, and it's because, chiefly because of the point that Ben has already made, and that is the state is really favoring nature-based solutions to mitigate the effects of sea level rise.
0:22:38.9 MC: Okay. And there was a... Well, we've all heard in the press discussion of managed retreat, and there was some mention in your discussion, both Ben and Liz, about the idea of phasing. So given, the sort of ultimate managed retreat approach and this idea that nature-based solutions are favored, is the state essentially requiring relocation of coastal infrastructure? Or can you shore it up and keep it where it is?
0:23:10.0 LK: Well, I have some thoughts on this and I'm sure Ben does too. So we are certainly seeing situations where the state has required relocation of infrastructure and one example that predates even the current sea level rise guidance that the commission has put out is the Morro Bay Treatment Plant, where in that case the city initially proposed to renovate, retrofit the plant, rebuild it in its original location, which is on the coast in a low-lying area near where Morro Creek meets the Pacific Ocean. And the CDP was approved at the local level and then it was appealed. And on appeal, the commission granted the appeals and denied the CDP and listed a number of considerations, including the potential for flooding due to sea level rise.
0:24:01.0 LK: And so then the project came back in a new form and was proposed inland, essentially relocated. So we're seeing that happen up and down the coast. I'll just say that the commission's more recent critical infrastructure, sea level rise guidance, includes the concept of phased adaptation, which I think Mary Lynn is what you were alluding to with your question. And this concept recognizes relocation as an eventual solution once certain sea level rise triggers are met. And the concept of phased adaptation allows for less radical design and engineering solutions than just outright decommissioning and relocation. And this is accomplished through sequencing. So the initial phases could include hardening and elevation of certain project elements to mitigate the effects of sea level rise or flooding.
0:24:55.0 LK: Whether phased adaptation makes sense and how it should be implemented depends on the facts of each project. This approach could alleviate some of the hardship associated with Coastal Act compliance when retrofitting or upgrading existing infrastructure. It can also allow public agencies time to identify funding sources for the eventual relocation of aging infrastructure.
0:25:20.5 BR: Yeah, and on that front, when looking at the life of the infrastructure, that sort of tells you what the commission is going to say as far as, do you need to go to 2.7 feet for 2050? Do you need to go to 6.6 feet for 2080? Are they looking for, you know, 2100 and bond where it's, you know, 10.2 feet? So the adaptation you're looking at is going to depend upon the life of the infrastructure you're proposing. If it's existing infrastructure, its lifespan may not be until 2100, maybe less than that. And so the adaptation you have to do may not be as significant. Again, when talking about public projects, there is shoreline hardening that the commission will consider much more readily than with the private projects. And so there's that opportunity, but they do look at it. If you're looking at setting a new infrastructure, they are looking at sea level rise very aggressively. And when talking about things like state projects, you know, Caltrans projects, they're expecting the state to follow their H++ because it's a state number that they've come up with. And so it's, you know, when you're talking about, you know, transmission lines, maybe there's a little bit more leeway.
0:26:26.7 Speaker 2: Maybe you're trying to make an argument that the state itself will not make. And so those are sort of things to consider as well.
0:26:34.1 MC: In your opinion and knowing your coastal climate communities, do you think there may be a tipping point when some of these communities may support a voluntary managed retreat option for property owners, such as the bill proposed by Senator Ben Allen?
0:26:49.3 BR: Yeah, I think so for sure. The Allen Bill was an interesting idea to try to incentivize the managed retreat. The commission itself has gone away from managed retreat. It doesn't like that term anymore because it felt like it's got a negative connotation. So it's an adaptive strategy is what they talk about now. The Allen Bill, though, was looking at what they would do is they would actually acquire the property, pay fair market value for the property. Then the public agency, if it was a rentable location, would rent it out for what they thought was a safety life. And then when sea level rise impacts came, they would just let nature take its course.
0:27:29.3 BR: And so the Allen Bill didn't get out of the legislature, but it's something that's come up again and again. And I do anticipate that state resources will be necessary as well as federal that the shan't will talk about to utilize that going forward. Because when looking at environmental justice concerns, you can't have just the wealthy public take on all the responsibility or to allow them to adapt and not let the lower income residents have that same option. And so that's really where I see this. And not only will be the Allen Bill, I think it will be a preference for environmental justice communities where that will actually be the first in road.
0:28:12.9 MC: Which is an important topic that we need to also explore here because it's not just sea level rise policies that need to be taken into account. As we pointed out earlier, we really need to take into account environmental justice as well and designing and moving forward with infrastructure projects. So does the Coastal Act mandate that public agencies evaluate environmental justice when considering infrastructure projects? And if so, how does sea level rise factor into that? That sounds like a very complex analysis.
0:28:41.9 BR: It does both directly and indirectly. So there's an express requirement now. In 2016, the Coastal Act was amended to allow local agencies as well as the Commission on Appeal to consider environmental justice expressly. That wasn't in existence, but that doesn't mean environmental justice concerns weren't considered. There is a preference in the Coastal Act for low-income resources or affordable resources, recreational resources, and maintaining that. Public access is something that's very big. It's gone all the way to the US Supreme Court, mandating public access. When does that actually satisfy the Nollan-Dolan test? When does it not?
0:29:20.8 BR: So you always had these sort of public overall environmental justice concerns incorporated into it, but in 2016 it's now expressed. In addition to that, we now have the Commission has adopted an environmental justice policy in 2018. And so it's something that they look at with infrastructure projects. Again, that 2021 draft infrastructure guidance document puts heavily from that environmental justice document, and it's something it considers. So it is something that we do have to look at. And again, when you're talking about infrastructure projects funded by the state or actually taken on by the state, it's something that they are taking a particular notice of. So again, it's concerns the Commission will look at for sure. It's now one of the priorities, and so it's something you need to take into account when you're looking at your coastal approvals.
0:30:14.6 LK: I'll just jump in real quick and just add, it's not just the Coastal Act now, but state planning and zoning law includes considerations of environmental justice where certain jurisdictions that have environmental justice communities are required to develop an environmental justice element for inclusion in their general plan. So you might have local policies that you have to consider as you're planning your project on top of whatever is being mandated by the Coastal Commission.
0:30:41.4 MC: Can you give a quick example of how environmental justice gets raised essentially? Give us an example of an issue of an environmental justice issue in siting and planning infrastructure.
0:30:53.2 LK: Well, I think one obvious one I think that Ben has already mentioned is if you're impacting access to certain communities, to the beach, like low cost campgrounds or low cost hotels, that's one issue that comes up.
0:31:07.3 BR: Yeah, you have saltwater intrusion is now a big issue for water infrastructure and is that being taken care of? You have increased flooding events with tidal action as it moves inward. So when they're looking at improvements that are being made, they're making sure, is it actually applying to all the different jurisdictions? And again, this gets back to that Allen idea of providing incentives to make sure that you are doing not just coastal armoring, but replacement and improvement of an infrastructure to deal with that increased sea level rise. And that's that overlay the environmental justice where it's not impacting just roads, not impacting just rail. It's our water infrastructure as well. You have all these different aspects. Again, the things that the commission will look at to see is this actually an improvement or is this something that for the life of the project will actually result in it may be harm down the road.
0:32:03.0 MC: So you've talked a lot about the tools available to the commission to address EJ, environmental justice and sea level rise when reviewing infrastructure projects. If you could just give us kind of a bullet point list of those key mandates and policies, does it matter if it's a guideline or a policy and how do those get adopted? Maybe a bullet point list of what people need to consider when they're designing their infrastructure projects from a resiliency perspective.
0:32:29.9 BR: Yeah, I think you start with a state climate adaptation strategy. It's the guiding document for the state, and it's something that's used by the commission and the state lands commission. You also have the commission's 2021 Draft Critical Infrastructure, Sea-Level Rise Guidance Document. We've referred to that a couple of times. It's a draft document right now. It hasn't gone final. There was a comment period. Again, it hasn't gone final, so you can still submit comments. The commission's 2018 Sea-Level Rise Guidance Document again, built off that state climate adaptation strategy.
0:33:05.2 BR: The commission's 2019 environmental justice policy and a companion to that is the state lands commission's environmental justice policy. We had this year the commission's 2022 draft public trust guidance, and that gets into that mean high timeline and how does the commission believe private property rights interact with that mean high timeline, which is where they demarcate the public's access rights. And then finally, we have the Assembly Bill 2016, which added that environmental justice component to the Coastal Act itself. It also mandated a couple other things, required one of the governor's appointees to also be from an environmental justice community.
0:33:46.3 BR: So again, emphasize the environmental justice component of the Coastal Act. And as far as how do you get these guidance documents, how are they utilized? What the commission does is it uses its best available science when it makes these determinations. It's what it determines to be the best available science. There's been some pushback. We've talked about H++, that 10 foot and 2100 rule. There have been private projects are pushing back on that saying the best available science is actually something less than that. But again, when you're dealing with public infrastructure projects, things that are funded by the state or things that are actually built by the state, they are hand in hand with that H++ guidance document.
0:34:27.9 BR: And so that's what you're going to be utilizing. Private development, you try to make the arguments again. There have been local agencies that have pushed back on that when you deal with local coastal program amendments. Those have ended up really just the agencies have pulled back their amendments and they just haven't gone forward with those when there is pushback from the commission. Public projects, you've had people have that fight with commission and they've lost.
0:34:56.2 BR: Frankly, in California courts, there isn't, I think, a lot of success that we're going to see when that actually gets moved to the courts itself. We've seen now in the Endangered Species Act context where you have climate change being utilized for something where you have a vibrant population. But looking at climate change in the 100-year timeframe. The courts have said that that's acceptable. And you can use scenarios to come to that conclusion that there might be impacts to that species. Given that, I think the courts are going to be very deferential to the commission and its use of that H++ scenario.
0:35:33.9 BR: So that's why you got to really pay attention to, what does the LCP itself say? And is there a way to utilize that to try to avoid that type of impact if you're talking about a private development public? I think you're most likely stuck with that H++.
0:35:52.0 MC: Thank you, Ben, for that great summary because I want to make sure we get to the topic of the types of federal funding programs available to address these climate change resiliency and environmental justice features particularly. And then a little bit of an overview as to what will be required of projects and who's eligible to receive the funding. I know it's been expanded, but I don't know how. And so it would be great if you could weigh in on that. Shant?
0:36:22.1 SB: Absolutely, Mary Lynn, thank you. At the very highest level, there's basically two different types of buckets of funding available from the federal government related to this issue. The first is funding for resilient infrastructure specifically or infrastructure that will indirectly improve resiliency, even if the infrastructure itself is not technically resilient infrastructure. And that type of funding is generally distributed via direct funding. I'm happy to get into more details with regards to certain specific programs that might fall into this category. But the other category of funding, and this we really saw under the Inflation Reduction Act, which I'll talk about in a second, is funding specifically for the purpose of reducing emissions, greenhouse gas emissions specifically, but also improving transportation efficiency.
0:37:11.2 SB: And by doing that, you are specifically looking at funding for reducing emissions from the transportation sector. It's one of the highest emitting sectors in the economy. And so Congress really looked at providing for the first time, both direct funding for this purpose, as well as a couple dozen different types of tax credits, specifically to incentivize clean energy production and transmission, as well as adoption of electric vehicles. Again, all for the purpose of specifically trying to reduce GHG emissions and GHG emissions from the transportation sector.
0:37:47.8 MC: So what are some specific pieces of legislation in these two categories that provide funding and what's their current status in terms of implementation?
0:37:57.0 SB: Sure. So the first is the Infrastructure Investment and Jobs Act, also known as the Bipartisan Infrastructure Law. This was enacted just over a year ago in November of 2021. This was the big infrastructure legislation that Congress and the President have been working together on for years. It provided in total over a trillion dollars in direct federal funding for fiscal years 2022 through 2026. Now, it was a unique piece of legislation. We're not going to get into all the details, but roughly half of that, $1.2 trillion was actually in the form of a one time direct appropriation. So the moment it was enacted, roughly half of that, $560 odd billion was available immediately for the federal government to distribute. The remainder of that was spread across the five fiscal years that are subject to the authorization of this bill.
0:38:48.4 SB: And to date, about a year in, the federal government has obligated about $180 billion. So it's a lot of money in the first year of enactment of this legislation that's gone out the door for a variety of purposes, including those that we're talking about today. The second main piece of legislation is the Inflation Reduction Act. This was enacted in August of this year. It provides about $370 billion specifically towards federal programs that will reduce greenhouse gas emissions like those that I mentioned. Because it's just been enacted earlier this year, implementation is fairly early on. None of the funding has started to flow yet, but the implementing agencies across the federal government have conducted and are continuing to conduct several listening sessions. But to date, there's no formal guidance or funding that have been released yet. So still early in implementation, but obviously an important piece of legislation specifically for the specific purpose of addressing climate change.
0:39:45.9 SB: And so the final just general note that I want to make, though, on this topic is that, in the wake of climate emergencies, natural disasters like floods or fires or other things that we're all too familiar with, it's typical that Congress will pass a supplemental appropriations bill specifically designed to address and remedy the harm from that natural disaster. And over the last several years, Congress has taken more and more of an emphasis in these supplemental appropriations bills to really focus on resilient infrastructure, essentially under the rationale that we don't want to just rebuild something that just flooded so that it can flood again next year. But really to think about how to build things in a way that will withstand climate change, and also site the facilities and locations like we've been talking about, where they will not be as subject to the impacts of climate change.
0:40:41.4 MC: It may be too early to know, Shant, but are you seeing any of this idea of being able to phase in more natural solutions in the context of responding to these emergencies?
0:40:54.0 SB: Yeah, absolutely, from a federal perspective, that issue has been most prevalent when you're looking at flood control and levies and other types of projects that the US Army Corps of Engineers sponsors or provides funding for. But really under the IIJA, the bipartisan infrastructure law, we're actually starting to see more emphasis on natural infrastructure in this regime.
0:41:18.8 MC: And is phasing okay or do they want to see the natural infrastructure right now?
0:41:23.3 SB: As long as it's part of the project plan, it doesn't have to be implemented immediately. But to be eligible for some of these funding, you would need to demonstrate that the project would include these elements.
0:41:35.8 MC: Excellent. Thank you. I'm going to shift gears in a moment, but I also want to ask this one question of the panel and probably primarily Liz and Ben before we move on. And that is, have you seen any requirements or preferences to use certain sea level rise modeling systems? They can all be very different. And COSMOS seems to be the standard so far. I'm sure that that's lovingly known as COSMOS. What do you know about sea level rise models and what is preferred?
0:42:06.1 BR: It depends upon the consultant you go to for these projects. Again, it also for the private development, you have some who want to push back on these models. They have their own that they prefer. There's NOAA Sea Level Rise, our COSTAR Future has a model that's used for that H++. COSMOS is another one. From the public side and from the private side, I haven't seen them agree that this is the one model you should use. And that's not surprising.
0:42:38.0 LK: Yeah, and this is really something that's slightly outside of our wheelhouse. You should work with your technical consultant and of course, they will have a recommendation for what's optimal for your project. Also, keep in mind your audience, who you're developing the data for. If it's the commission, you want to go with something the commission will have a chance of accepting.
0:43:00.5 MC: So let's take a little bit of a diversion here and talk for a moment about rail. And for a moment, Liz and Ben, can you tell us a little bit about rail and whether the state has the authority to condition rail projects to address sea level rise and EJ impacts and to implement the guidance we've been talking about today?
0:43:18.7 LK: Well, I'll just jump in here. And this is the answer that lawyers love to give. And the answer is it depends on the conditioning question. So under the Interstate Commerce Commission Termination Act, or when we love when we call ICCTA, the surface transportation board jurisdiction of rail project preempts local regulation of transportation by rail and ICCTA applies to rail carriers and entities that operate under the auspices of a rail carrier.
0:43:49.2 LK: That being said, about local regulation, it's a preemption is not absolute. So if the local condition does not unreasonably burden transportation by rail, it can be allowed to stand and in fact the surface transportation board has upheld local regulations and conditions that have only an incidental effect on rail transport. And you can see some of some examples in prior decisions of the surface transportation board, but in a some I can just reference now our conditions requiring the sharing of information with local jurisdictions about the project and interagency coordination. Even if federal preemption applies, it's important to remember that the Coastal Commission unusually has concurrent jurisdiction under federal law to ensure consistency with our state's coastal program under another federal statute, the Coastal Zone Management Act.
0:44:41.8 LK: So if your project requires a federal license or is a federal project that impacts the coastal zone then you'll need a consistency determination or consistency certification from the commission so you might be seeing some of the sea level rise and environmental justice considerations come to the fore through that channel. And in California, as I'm sure a lot of you are already aware, the California Supreme Court has severely limited the scope of federal preemption, as it to state agencies and to agencies that can be categorized as arms of the state.
0:45:19.3 LK: Friends of the Eel River v. North Coast Railroad Authority case, that's several years old now. The Supreme Court developed what is called a self-governance exception for CEQA to ICCTA, pardon all the acronyms. The court explained that ICCTA allows private rail carriers to have their own internal corporate policies and the court analogized CEQA to such a policy when it comes to the state. So a similar argument could be made about the Coastal Act. The court reaffirmed the self-governance exception earlier this year, again, in the County of Butte, the Department of Water Resources case, that one involved question of whether CEQA is preempted by a different federal statute, the Federal Power Act, which actually has a very clear statement of federal preemption.
0:46:04.9 LK: And the court found that CEQA, the exception to federal preemption operates with respect to the state project, that the state can implement its CEQA policies to inform its own decision-making. Also as a practical matter, if your project requires a state approval or if it's a state project, you're going to want to uphold that and give effect to the state's policies and laws intended to ensure climate resiliency and avoid impacts to environmental justice communities.
0:46:36.2 MC: That makes sense. And I do think it does apply equally, as you noted, to projects that, for example, might be conducted for water projects that might have a FERC-regulated dam. There are potential for preemption, but FERC itself, and the case law upholds this, really views its role as being one that would coordinate and allow implementation of all state and federal laws and policies. And so they will be very reluctant to preempt environmental requirements, particularly those in the Coastal Act. And then in addition, that you do have the federal hook through the Coastal Zone, as well as the state's ability to use CEQA to inform outcomes. So a very similar situation for water infrastructure. There is some preemption there, but probably not useful in terms of designing and moving forward with projects. I think let's take a minute and hear from Shant again about particular resilient infrastructure funding programs.
0:47:41.9 SB: Yeah, absolutely. I'll run through this fairly quickly. Obviously, and this goes for any question, we're all available to be contacted if you want to follow up on any of these issues. But in general, and I apologize for those listening in who are from a private entity or have a more private development-related interest, because typically for federal funding, the opportunities are going to run to those public agencies, like a state or local governmental entity, a metropolitan planning organization, tribe. Those are the typical types of entities that are eligible to apply for federal funds.
0:48:15.0 SB: Private entities are usually not eligible to apply on their own, but often can in partnership along with an eligible public recipient. So just one thing to keep in mind. The four particular programs that I just want to run through really briefly. The first is the PROTECT grant program. This is otherwise known as the Promoting Resilient Operations for Transformative, Efficient, and Cost-Saving Transportation. It's a wonderful name. A lot of thought went into that. This is under the IIJA, a new program that is roughly $9 billion in total funding, but about $7 billion of that is distributed and allocated by formula program to state DOTs.
0:48:58.4 SB: The remainder is a competitively available program that is administered by the Federal Highway Administration. And specifically, under this program, eligible projects include natural infrastructure, as well as highways, transit, inner city passenger rail, port infrastructure, and other types of coastal infrastructure. So that is one federal funding stream that's very relevant to what we've been discussing. The other one, I should say another one, is the RAISE program that I mentioned earlier. This is the Rebuilding American Infrastructure with Sustainability and Equity program. This is administered by the Secretary's Office at the US Department of Transportation, also authorized under the IIJA, although this is now the third name for the program that was originally the TIGER program created under the Recovery Act in 2009.
0:49:45.2 SB: It's a competitive grant program with very broad eligibility, including projects which "strengthen infrastructure resilience to all hazards, including climate change." So again, very, very broad. If you can kind of connect it to that overall climate change hook, then chances are you can look to this program for federal funding. Again, it's competitive. A lot of funding is available. Whether or not it's actually enough and whether or not it's accessible is a separate issue.
0:50:14.7 SB: The Clean Ports program, this is a new program under the Inflation Reduction Act that provides $3 billion specifically to fund zero emission port equipment and technology, and to help ports develop climate action plans to reduce air pollutants. The final program is a little bit smaller. It's $100 million annually. And this is the Emergency Relief Program administered by FHWA, the Federal Highway Administration, specifically on using resilient infrastructure to rebuild in the wake of emergencies. And so, this is specific to highway infrastructure, but nonetheless relevant to the discussion we've had today.
0:50:53.0 MC: What are the plans to preserve our coastline with the rise of sea level?
0:50:58.1 LK: That's an excellent question. And I think that many of us have already touched on this. The key, the blueprint for the plan is the climate adaptation strategy as well as the executive order that was mentioned earlier in the hour, Executive Order N-82-20, which recognizes that we might lose, I think, Mary Lynn quoted 30% to 60% of our beaches in Southern California. So, those are the overarching mandates. You will see that efforts to save or address the impacts of sea level rise on our beaches are being implemented at the local level. So jurisdiction by jurisdiction, you're looking at local coastal programs that have policies intended to mitigate loss of public beaches. And of course, the sea level rise policy that was mentioned earlier that the commission has put out includes model policies aimed at this particular problem.
0:51:56.9 BR: And just to add on that, there's the Commission's Public Trust Guidance document, which it issued earlier this year, which again, it's interpretation as the mean high tide line moves forward, so as we lose our public beaches, and that mean high tide line creeps towards what was previously private property, there's an interpretation that that private property is transmuted into new public beach. So, that is going to be a big fight in California as our coast, what is private property, what is a public beach, and how does that mean high tide line and sea level rise determine that?
0:52:33.9 MC: Long been an issue under our Coastal Act. So, for major public infrastructure projects near the coastal shoreline where sea level rises may be putting these facilities at risk, what green/gray and green solutions do you think that are actually feasible is the Coastal Commission favoring at this time? What are you seeing in practice?
0:52:54.3 LK: Well, I think the Commission wants to see a retreat, frankly. So, if you're charting a project's life, which just goes out to 2100 or beyond that, and the Commission's modeling shows that the facility will be impacted by sea level rise or in that timeframe, they really want you to redesign it and move it away from the area of impact.
0:53:16.6 MC: You mentioned a few examples, Liz, but I guess you don't have feedback on those yet. You mentioned the oyster beds and...
0:53:23.0 LK: Yeah, we don't have feedback and expanding wetlands, they work as a sponge, right? That's the idea. I think that's something that the state has put its weight behind. So it's a measure that might be favored by the Commission as well on a particular project. Oyster beds, right? Calc beds. Those are specifically mentioned in the climate adaptation strategy. I haven't personally seen those implemented on a project, but it's a potential measure to investigate.
0:53:55.1 MC: Okay.
0:53:55.2 BR: And again, I think it depends upon the life of the project you're talking about. Calc beds, those types of things probably aren't going to be able to handle a 10 plus increase in sea level rise.
0:54:05.5 MC: Right, right.
0:54:06.2 BR: So those are more tidle action stuff. So, it might get you to, hopefully it gets you to 2080, possibly not even that, maybe that's more of a 2050-type of thing. And then you are looking at relocation or raising or something else. So, it's very project dependent as to what the Commission will consider and you need to be able to demonstrate that green or green-gray mediation measure would actually accommodate all the potential sea level rise impacts associated with it.
0:54:37.7 MC: How about from your perspective, Shant, are you seeing something that the Feds like to fund in terms of these kinds of resiliency features?
0:54:46.8 SB: A lot of the funding programs that are eligible specifically for this type of infrastructure are very new, like a year or less old. And so, I don't think we have enough information yet to extrapolate any specific type of preference. The one thing that I will just come back to is, I think for federal funding purposes, understanding the goals of the administration to reduce the impact on the climate and to respond directly to climate change through the development that you're doing is the key. And so, if you can hit that and describe in a compelling way, how your project is actually going to address those impacts and be constructed and designed in a way that shows that you have thoughtfully planned about the impacts to disadvantaged communities and the resilience of the project, I think that is really what the federal government is looking for specifically.
0:55:44.6 MC: I think it's been a tremendous pleasure to get to talk with you guys about the projects you're working on and to share with you what we're seeing in terms of resiliency policies and their implementation in California.
0:55:57.2 MC: Thank you to our listeners for joining us for this episode of Digging Into Land Use Law. For additional information on this topic or other environmental and land use matters, please visit our website at Nossaman.com. And don't forget to subscribe to Digging Into Land Use Law wherever you listen to podcasts so that you don't miss an episode. Until next time.
0:56:22.8 S2: Digging Into Land Use Law is presented by Nossaman LLP and cannot be copied or re-broadcast without consent. Content reflects the personal views and opinions of the participants. The information provided in this podcast is for informational purposes only, is not intended as legal advice and does not create an attorney-client relationship. Listeners should not act solely upon this information without seeking professional legal counsel.
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- Southern California Steelhead Trout: Potential Endangered Species Listing Opening Up a Big Can of Worms
Notwithstanding its protected status as a listed species under the federal Endangered Species Act, the Southern California steelhead population is proposed for listing under the California Endangered Species Act. During a time of unprecedented drought and storm activity resulting from climate change, this move to list the species in California is likely to have major impacts on the provision of water and recycled water supply, flood control and storm water treatment and management. In the latest episode of Digging Into Land Use Law, Nossaman Environment & Land Use partner Mary Lynn Coffee and Water partner Lori Anne Dolqueist discuss the California Endangered Species Act listing process, the potential effects of a listing on public health and safety activities and regulatory tools available to streamline approvals for such activities if a listing is adopted.
Transcript: Southern California Steelhead Trout: Potential Endangered Species Listing Opening Up a Big Can of Worms
0:00:00.7 Lori Anne Dolqueist: Not withstanding its protected status as a list species under the Federal Endangered Species Act, the Southern California steelhead population is proposed for listing under the California Endangered Species Act, which is likely to have major impacts during a time of unprecedented drought and storm activity resulting from climate change. On the provision of water and recycled water supply, flood control, storm water treatment and management.
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0:00:33.0 Speaker 2: Welcome to Digging Into Land Use Law. Nossaman's podcast covering the development of all things in on or above the ground.
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0:00:50.1 LD: Welcome to Digging Into Land Use Law. I'm Lori Anne Dolqueist a partner in Nossaman's Water Group. My practice focuses on California utility regulatory matters with a particular focus on matters involving water utilities, and I have with me today my colleague, Mary Lynn Coffee. Mary Lynn is a partner in Nossaman's Environment & Land Use Group, and she has extensive experience providing legal and regulatory advice with respect to state and federal water quality, wetlands, endangered species and other natural resource protection laws. Mary Lynn's work brings her into contact with a variety of stakeholders, regulators, environmental groups, public agencies and private entities, so she always has her finger on the pulse of what is going on with respect to environmental and water issues in California.
0:01:38.1 LD: I'm delighted to have the opportunity to chat with her today about the proposal to list the Southern California steelhead population under the California endangered species act. Hi Mary Lynn.
0:01:49.8 Mary Lynn Coffee: Hi. Good afternoon.
0:01:52.8 LD: Good afternoon. Mary Lynn, maybe you can start with just giving us an overview of the issue and then you and I can get into some of the details.
0:02:00.3 MC: Sure, so what happened is that Cal Trout, which is a environmental group here in California, dedicated to the protection of aquatic species, and particularly fish and trout, has submitted a petition to list the California steelhead–in particularly the Southern California population of steelhead–as endangered. They submitted that petition in June of 2021 to the Fish and Game Commission here in California, and it has been under consideration and the outcome of that listing process under the California Endangered Species Act would be listing the species for protection, and the moment that it becomes listed for protection, even as a candidate species, all take of that species is prohibited.
0:02:56.1 MC: And take is defined in California as anything that would kill or injure the species and has also been more broadly interpreted to include indirect methods of harming the species, those types of activities are prohibited and punishable by fines and criminal penalties, even when they're unintentional. This has a separate significant state layer of regulation for the species that duplicates, but often is different than the regulation under federal law. We do have federal protections in place, but often the California Department of Fish and Wildlife determines different conservation measures and different ways of protecting the species are required under state law, and those are not just supplemental, but often quite different than what the National Marine Fishery Service would require under federal law.
0:03:53.8 LD: You mentioned that this had already been listed at the federal level, do you know what prompted the movement to get it listed at the state level?
0:04:02.9 MC: The Cal Trout petition lays out a lot of scientific information and factors, most of it directed to the absence of recovery, but their primary point is that recovery of this species is not occurring at the speed or rate that they would expect given the federal listing, and therefore the state listing, the supplemental protections provided by that state listing are warranted for this species, and they carefully determine that the state protections are only needed for what they call the Southern California distinct population segment, and there is an issue actually under California law whether you can list the distinct population segment, but setting that aside and just thinking about the science for a moment, they say that it's just the southern population segment that must be protected, but it's important for our listeners to know that the way they define the southern population segment is all the fish that would occupy any of the rivers that outlet to the ocean, creeks, tributaries, etcetera from Santa Maria, California to Tijuana. It's not really limited to Southern California. We really are talking about the population of fish that extends well into the Central Coast.
0:05:20.8 LD: So, you mentioned some differences between the federal regulation and what could end up as state level regulation, can you talk a little bit about the differences between those or how they interact or possibly conflict?
0:05:34.4 MC: Sure, so as I mentioned, we do have the Federal listing in place, and as a result of that, there are a number of restoration projects, physical solutions, restoring more natural hydrograph in certain areas, and these projects have been going on for some time under the auspices of the Federal Endangered Species Act. One of the first places that we're seeing the overlap and its potential regulation at this point, because the species isn't listed under state law yet, but we're already seeing California Department of Fish and Wildlife weigh in on these restoration projects, and they're not weighing in with just supplemental conservation measures, they are actually weighing in with conservation measures that conflict with the conservation measures already identified for a number of these projects, and that makes for a very difficult permitting process.
0:06:29.3 MC: When the species is listed, an individual take permit would be needed even for incidental take associated with these restoration projects, and if California Department of Fish and Wildlife on one hand is recommending a certain set of measures and those measures are different than and in addition to the measures recommended by NIMS now we've got both supplemental mitigation costs as well as conflicts in how they implement the conservation measure.
0:06:58.3 MC: One example of that, just to give you a flavor of it, that I'm personally aware of, is a project designed to change hydrology so that a more natural, very southern California, typical flashy hydrology is restored. Reductions in fresh water, increases in more saline water because this particular fish spends part of its life cycle in the ocean and needs to migrate to saline water for a life stage, and so the project required more salinity and more flashier flows, and that was reducing fresh water and open water habitat, the conservation measures were all geared to benefiting the flashy flows and the natural hydrology, and CDFW has now weighed in to say, We not only need that, but we need to replace the open water, and the whole purpose of the project was to get rid of the open fresh water. If we put that somewhere else, now we're going to have more mitigation at least from NIMS and possibly from CDFW for that new open water. So that's an example of the kind of conflicts that can arise when you have a species that's double regulated at both the federal and the state level.
0:08:14.8 LD: Mary Lynn, can you tell me a little bit about the process involved with getting it listed at the state level?
0:08:21.0 MC: Sure. So that process is well under way, which is why you and I are talking today because engagement is timely, as I mentioned, Cal Trout submitted the petition to list to the Commission in June of 2021, and the next step that happens in the process under statute, and this is all in the fish and game code, is that the Commission has to formally accept the petition, which they did on July 2nd of 2021. From that point, then the Department of Fish and Wildlife, which is separate from the commission, but in this circumstance acts a lot like staff for the commission. Then the department, upon acceptance of a petition undertakes what they call a 90-day evaluation, it can take a little longer, in this case it did, but the department evaluates whether or not the petition sets forth information that indicates that the listing is warranted. And then they have to present that report, that evaluation to the commission when it's completed. That report was just completed, I believe about November 28th, and it did go back to the Commission on November 28th, and the next step is that the commission will notice acceptance of the department's report, that will happen at the upcoming December 15, 16 commission hearing. And then from there, there will be another 30-day review process for the public to get to review the department's evaluation.
0:09:58.1 MC: And then in February, at the February 16 and 17 2022 meeting of the Commission, the Commission will consider the department's evaluation, they'll consider any public comments submitted during that 30-day public notice period, and they'll determine based on the factors in statute whether or not they agree with the department and whether or not the listing is warranted. Now, if they determine the listing is warranted, which I think we all anticipate that they will, because the department's evaluation says it's warranted, then at that point the species actually becomes protected as if it were already listed and as endangered or threatened.
0:10:38.7 MC: And when we have that may be warranted finding and we call the species a candidate species, and under the California Fish and Game Code, all candidate species are protected and the take prohibition, not just intentional, but remember any incidental take that might occur when you're doing your otherwise lawful public health and safety activities, that prohibition applies, and therefore, if you're going to undertake any activity that could take a species, you have to get an individual Take Permit first and that those permits are also called 281 permits it's fish and game code section 2081 pursuant to which those are issued. So that process is about to unfold, and I think we can all anticipate that by February, those 2081 permits will be needed for any public health and safety, water supply, flood control type of activities that could result in the incidental take of the steelhead.
0:11:37.5 LD: So, Mary Lynn, what are the factors or issues or information that's considered as part of this process of evaluation?
0:11:46.0 MC: The factors that are considered in determining whether to list a species are all set both in the Fish and Game Code at Section 2073 of the Fish and Game Code, and they're all scientific factors, and they're all factors that are really related to determining whether or not there might be jeopardy for the species, so they will consider the information presented in the petition regarding population trends, the range of the species, where the species are located, how many of them there are, what are their life history needs, what's the ability essentially of the population to survive and reproduce and all of that's really getting to what chance does this species have to thrive and recover or is the species really in jeopardy warranting this type of listing for special protection.
0:12:40.3 MC: Those factors are largely... Well, they're entirely really scientific. There is some ability to consider ongoing management efforts like the restoration efforts I was referring to before to determine whether or not those are assisting in the survival and recovery of the species, but the inquiry is limited, there is no ability to do a cost-benefit type of analysis, the economics of some of these conservation measures are not taken into account, and frankly, the types of activities that could be adversely affected are not taken into account, even if those are public health and safety activities.
0:13:22.8 MC: I often hear a lot of folks argue that there should be the ability to take into account the effects on public health and safety for people when you're listing a species, but that is not the way the state law is written, it's not the way the federal law is written either, but it's not the way the state laws is written, so the commission cannot consider those types of activities and those types of effects in the listing decision itself, those types of considerations really only play a part in the permitting process after the listing already occurs.
0:13:57.8 LD: Well, that's... Leads me to my next question actually, Mary Lynn, can you talk a little bit about the permitting process and give us a flavor of how the permitting process might be longer or more challenging with this listing.
0:14:11.0 MC: Sure. So, when a species is listed, as I mentioned, take is prohibited, even if the take is just incidental to an unintended consequence of performing other activities, and for the clients, you and I deal with, those are all public health and safety activities, water supply, flood control, water recharge, ground water recharge, some diversions particularly for water quality management, we do a lot of storm water diversion for water quality management try to infiltrate that instead of having it run off. And if there's any take of the species incidental to those otherwise public health and safety activities that take is prohibited, and to make sure that you're not criminally or civilly liable for it, then the agency undertaking those activities needs to get a permit to allow for the incidental take. Those permits under state law are called 2081 permits, and those permits are essentially based upon habitat management plans, so the permitee develops a habitat management plan incorporates a number of conservation measures that are devised to avoid, minimize and mitigate the effects of the project and the take associated with the project. And once the Department accepts your habitat management plan, also called a Habitat Conservation Plan, then once the department approves of that, they will make findings that your particular activity won't jeopardize the species, and then the activity can go forward under an individual 2081 permit.
0:15:50.3 MC: That's the typical route, and those permits take a really long time to develop, the technical information involved, the difficulty in putting together the habitat management plan, the difficulty in finding a package of conservation measures that can justify in the department view, a no jeopardy finding. I've never seen a 2081 permit issued in less than a year, and that was for a very small project, more typically, the process is between five and seven years to get that type of permit. Obviously, when you're dealing with an emergency flood or you're dealing with a drought and you need to get water supply from one place to another, five to seven years is not a typical process.
0:16:33.6 MC: There are some possibilities for streamlining take, and there have been precedent for streamlining take permits using Section 2084a for species when they're in the candidacy, and then using Section 2081 for species after they are listed as endangered or threatened, the streamlining essentially takes the approach that there can be permitting by rule, so you can identify in the rule particular conservation measures that must be implemented, and then so long as the projects implement those conservation measures, their activities can be permitted, it gives a more streamlined way to conduct particularly appropriately, I think health and safety activities related to water supply and flood control, although they've also been used for other types of activities, the most recent 2084 rule was a Joshua tree rule issued to developers, but essentially it allows some certainty for permittees, they know if they implement the suite of conservation measures specified in their rule, then their incidental Take is permitted and they can continue with their activities, that is a place...
0:17:48.6 MC: Under those 2084 and 2081 rules, that is a place that the department and the Commission can consider, not really cost-benefit, but can consider the importance, urgency type of activities that are going on, and then can provide some certainty as to those types of conservation measures that will address what's anticipated to be the adverse effects of those activities on the particular listed species, that's where that comes in, not during the listing phase.
0:18:20.0 LD: Now, Mary Lynn, you mentioned some of the uses or entities who might be affected by that, but maybe give me a little bit more detail on that, who among our listeners or not listeners who should be recommended to listen to this could be affected by this?
0:18:34.0 MC: Really anyone who is doing anything that could affect the streams that are occupied by the steelhead or that could affect the flow in the stream occupied by the steelhead. There's four main areas where clients like yours and mine, who are typically involved in water supply, flood control types of activities, there's really four main areas that they will see an effect of these duplicative, sometimes conflicting regulations at the state and federal level.
0:19:06.8 MC: The first area I gave you an example of before, it's when you're doing a restoration project or a physical solution of some sort that allocates water to various uses, and the primary conservation measure recommended by CDFW and all other regulatory agencies, the primary management measure for these species is to mandate certain levels of in-stream flow at certain depths, at certain velocities during migratory periods and at certain temperatures, and those temperatures are very low because they're temperatures that were developed based on studies done in Washington and Oregon, where the climate and the stream temperatures are much colder. So if you're mandating certain levels of flow in a surface water, you can anticipate that activities that would allocate that flow to things like water supply or to things like groundwater recharge, where you're actually infiltrating water instead of letting it flow down the stream, things that would detain flow like reservoirs and dams, all of those types of activities affecting flow will be impacted by the listing.
0:20:20.6 MC: A second area that's a little bit more esoteric, but also will be greatly affected is the area of re-use of recycled water. Many agencies right now discharge recycled water to surface waters, and there is a process anytime you're going to change the location of that discharge or you're going to change the discharge and use the water beneficial for potable reuse, that process is called the Water Code Section 1211 process, and the California Department of Fish and Wildlife comments on any application to stop discharging recycled water to a surface water and instead to potably reuse that water, which is required by the State Water Board's recycled water policy. We're already seeing in many instances that the California Department of Fish and Wildlife comments negatively on the ability to reduce discharges to surface waters in order to increase potable reuse, and they're doing that on the basis of the need for in-stream flow to support groundwater-dependent ecosystems and fish like the steelhead. So, with the listing, obviously in-stream flows, mandates will make their way into any kind of section 1211 application and will reduce the ability to recharge groundwater and to re-use recycled water.
0:21:43.0 MC: I think the third area that we would really anticipate seeing a good deal of effect really deals with diversions and discharges, so if you're going to discharge in your sanitation district or you have a municipal storm water sewer system and you have an MS4 and PDS permit that governs discharges from that sewer system, and then you want to continue those discharges, but there's something in the discharge or there's a diversion of the discharge to infiltration that would affect in-stream flow, you'll now see your NPDS permits carrying new conditions. And the final area that will be affecting all of our clients is actual physical alterations to these surface waters themselves, any alteration to the bed or bank of a surface water requires a 1600 agreement from the California Department of Fish and Wildlife, these would be any types of alterations related to a new outlet structure or a bridge or a diversion, or simply maintaining a Flood Control channel, trimming vegetation, removing sediment, all of these require 1600 agreements, and those 1600 agreements will need to post-listing carry new conservation measures for the steelhead, so really very far reaching in terms of the new regulation and new conservation measure mandates associated with both capital activities as well as just ongoing every day operation and maintenance activities.
0:23:19.3 LD: Alright, well, that certainly is a lot. One thing I wanted to get your take on Mary Lynn, is the state of California is currently yet again in a state of extreme drought, and how would this listing affect sort of the challenge is created by drought or efforts to address drought issues.
0:23:39.5 MC: I think we can already see that because we have several listed fish in the Central Valley, and there have been battles that date back far before even you and I were lawyers. Which seems like forever ago. The thing is that any surface water may have multiple beneficial uses and that water may need to go for water supply for people or water supply for irrigation, or it may need to stay in the stream for fish, and as I mentioned, the primary conservation measure here for steelhead will be to mandate in stream flow for fish, and if it has to stay in the stream, it cannot be taken out and used for people or used for irrigation, we are already seeing the effects of that in multiple ways, we saw the voluntary agreements. Well, first we saw the state water board mandate curtailments and then the voluntary agreements to try to get more balance into that process. We've seen Northern California curtailments issued this year, those have just been extended, so that literally there's a curtailment from taking any water out of certain rivers and streams, and so when the water has to stay in for the fish, then it can't be used for water supply or irrigation needs or ground water recharge or some of the other beneficial uses, so there will be a direct effect and there will be very difficult beneficial use decisions that will have to be made as a result of this listing.
0:25:08.7 LD: Always interesting times when you're working with California and water issues. That's for sure. [chuckle]
0:25:13.4 MC: Always.
0:25:14.4 LD: Mary Lynn, what can people do and when who are concerned about this or want to have some input into the process?
0:25:23.4 MC: Well, as I mentioned, because the commission is going to be considering this in February of 2022, now is the time to engage if your operations will be affected, and frankly, not just because they're our clients, but I think it's particularly important for Public Health and Safety Agencies to engage, because there will be conflicts. There will be a 30-day notice period and that notice period is intended to allow for members of the public, clients, etcetera, to submit comments, and I really encourage comments on the effects of this listing on ongoing operations. Now, as you may remember, I said that really the listing decision itself, which is the only decision that the commission's right now teed up to make in February, only considers science. There are a lot of scientific arguments as to why this particular group of fish is not listable population, also a lot of additional science that might be considered as to whether or not the fish is recovering or whether the fish is jeopardized. So that's certainly one avenue. In addition, however, as I noted, because that is all a consideration based on best available science, it doesn't allow for consideration of the types of activities that need to be ongoing, particularly to address climate change and drought and unusual storm.
0:26:54.2 MC: My recommendation for folks I'm working with is that they also need to request the Commission take another action, and my recommendation is that they would ask for that 2084a rule that I was talking about, which is a streamlined rule for permitting particular types of activities based on a specified set of conservation measures that appears in the rule. In the context of adopting a 2084 rule for a candidate species, the commission can allow for ongoing Incidental Take associated with certain public health and safety activities, so long as the agencies are implementing specified conservation measures that have benefit for the species, there's certainty in that approach, and the agencies know what to do in terms of conservation measures, and as long as they're implementing it, then they can continue with their public health and safety activities and particularly they can do that on an emergency basis because as I noted, there's often not time to get a permit if you're dealing with a mud slide or a flood, or you're dealing with the drought and you just get hit with curtailments that give you a zero allocation.
0:28:05.3 MC: That would be my recommendation. Those are places where the Commission has a little bit more flexibility to balance the needs of people and the fish, that's not a flexibility they have in a listing decision itself, and so I do recommend engaging on that at the February hearing because at the February hearing, if they determine that the listing may be warranted, then the species becomes a candidate and that take prohibition kicks in, so the 2084a rule will be needed no later than February 17th, 2022.
0:28:38.7 LD: Alright, well, thank you very much, Mary Lynn for that great explanation of this issue and also recommendations for actions that people can take, and they need to be thinking about taking them right now, so thank you very much.
0:28:50.9 MC: My pleasure. Nice to talk with you.
0:28:54.5 LD: Always. And thank you to our listeners for joining us for this episode of Digging Into Land use Law for additional information on this topic or other environment and land use matters, please visit our website at nossaman.com. And also, don't forget to subscribe to Digging Into Land use Law wherever you listen to podcasts so you don't miss an episode until next time.
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0:29:19.9 S2: Digging Into Land use Law is presented by Nossaman LLP, and cannot be copied or re-broadcast without consent. The content reflects the personal views and opinions of the participants. The information provided in this podcast is for informational purposes only is not intended as legal advice and does not create an attorney-client relationship, listeners should not act solely upon this information without seeking professional legal counsel.
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- CERCLA at 40: The Monster That Often Eats the Village
Congress enacted the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), also known also as Superfund, in 1980 to address the horror of sites like Love Canal where discarded toxic chemicals began oozing into neighboring backyards and basements, contaminating air, soil and water, and endangering human health and the environment. Many people were sickened and hundreds of homes that were found to be uninhabitable were bulldozed as a part of the cleanup. Since its enactment, CERCLA has become the predominant site remediation vehicle and its reach has expanded far beyond the typical landfill sites to include factories, waterways, mining sites and recreational areas. Moreover, CERCLA’s impacts extend beyond contaminated sites into many aspects of commerce. In this episode of Digging Into Land Use Law, Nossaman Environment & Land Use partners Leslie Nellermoe and Reed Neuman discuss some places to look for the CERCLA monster and offer possible strategies to harness the beast.
Transcript: CERCLA at 40: The Monster That Often Eats the Village
0:00:00.1 Leslie Nellermoe: In 1980, Congress enacted CERCLA, the Comprehensive Environmental Response Compensation and Liability Act, also known as Superfund, to address the threats posed by contaminated sites like Love Canal. Since its enactment, CERCLA has become the predominant site remediation vehicle and its reach has expanded far beyond the typical landfill sites to include factories, waterways, mining sites and recreational areas. CERCLA's impacts now affect many aspects of commerce. Today we'll talk about some places to look for the CERCLA monster and offer possible strategies to harness the beast.
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0:00:38.3 Speaker 2: Welcome to Digging Into Land Use Law, Nossaman's podcast covering the development of all things in, on, or above the ground.
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0:00:54.6 LN: Thank you, joining us for this episode of Digging Into Land Use Law. I'm Leslie Nellermoe, a partner in the environment and land use group at Nossaman. I have practiced for a number of years with my focus on contaminated sites, all aspects, clean-ups, sales, mergers, and sometimes even permitting. I'm joined today by Reed Neuman, who's also a partner in the environment and land use practice at Nossaman. He has practiced environmental law and litigation for over four decades. He represents major manufacturers and other private entities around the country. So, let's start, Reed with a brief discussion about what CERCLA is and why it came into being, so then we can talk about what it's changed, how it's changed, and its importance in today's legal and commercial world.
0:01:40.3 Reed Neuman: Very good. Hi, Leslie.
0:01:43.6 LN: Good morning. So, Reed, why did Congress pass CERCLA?
0:01:45.1 RN: Well, I think, Leslie, I hope, anyway, most of our listeners are familiar with the origin story of CERCLA that in 1980, after Congress had already put into place several of the, what we consider to be the bedrock of environmental laws, pollution control and protection laws, the Clean Air Act, Clean Water Act, Safe Drinking Water Act, and a little later the Ripper Statute, there still remained a sense that impacts from historic waste disposal needed to be addressed a little more effectively and more quickly. Although there were various statues already on the books, including things that long forgotten like the Rivers and Harbors Act and Ripper, of all those statutes were available, they still depended upon a fairly cumbersome process of the government showing that our threat existed, that it needed to be dealt with, and by and large then persuading a court to fix the liability to parties and persuade the court to impose a remedy through injunctive relief.
0:02:37.7 RN: As you can imagine, those cases too often move fairly slowly through the court and not getting action out into the field as promptly as the public wanted it to be, again, needing to prove up to threat that our health and human environment, there's need to affix the liability and then to convince the court what the appropriate relief is to impose through injunctive relief. The bad optics of the Love Canal situation and others were continuing to bring pressure on the federal government.
0:03:07.5 RN: So after a few years of thinking about how to do it, Congress in 1980, devise what we know now to be the response action and reimbursement scheme under CERCLA, that largely has shifted the focus to work in the first instances accelerating response actions and putting up front the site investigation and response action process, and keeping the focus away in the first instance from going to court to get these cases started, although CERCLA does have its own immanent hazard and injunctive relief provision like Ripper does, which is essentially a statutory nuisance provision, it's really used and the response action and reimbursement approach has become the norm, as I said, this was intended by Congress to fill in perceived gaps to what the Federal toolbox was at the time, and over the years, it has become indeed the predominant vehicle to address the impacts from legacy contamination.
0:04:03.9 LN: What did the clean-ups look like in those early days? What kinds of sites are we talking about and who was in charge?
0:04:08.9 RN: Well, again, driven by the optics represented by situations like Love Canal, where there were just ghastly impacts on neighbors and residents and things that are sort of obvious to anyone, deteriorating facilities, stacked drum sitting idle on the back dock at a factory, or frankly, fires, explosions and catastrophic events leading to the release of hazardous substances, there were a number of problem children sites that were already on the radar of US EPA, and as to which US EPA and the state agencies had a fair amount of information through its regulatory apparatus to understand what the threats were at these particular sites, these handful of bad actor sites were the first ones that EPA moved to put on the national priorities list of sites needing to be attended to, and again, most of these were already in the system by way of information generated in the regulatory process.
0:05:10.0 LN: EPA was in charge at that point.
0:05:12.3 RN: EPA was really the only game in town at that point. You had willing and to some extent able state agencies that were part of the process, but for the most part, US EPA was the agency that was obviously directed by Congress in CERCLA to get started on collecting information, putting together the national priorities list and organizing the response action program as it did, it had through the provisions, the enactment of the appropriations under CERCLA, it had a significant war chest assigned to it for money to conduct site investigations and response actions. There was an awful lot of partnering that the federal government did and continues to do with state agencies to work together on data collection, site investigation, PRP identification efforts, but for the most part, EPA was the lead dog and it still remains so on many of the bigger sites.
0:06:08.9 LN: When you say PRP, what do you mean?
0:06:11.8 RN: PRP is a potentially responsible party, it's a term in the vernacular that's come to be sort of inclusive of all the parties whose status is laid out in the statute of parties that can be liable under CERCLA for having either arranged, transported or somehow been involved in the ownership of facility as that term is defined, where a release defined, of a hazardous substance defined, occurs that necessitates a response action and cost. So PRPs are just obviously what we talk about as that universe of responsible entities that are potentially liable parties under the defined terms in CERCLA.
0:06:49.8 LN: EPA had this big list, they had a big pot of money. Did they get them all cleaned up?
0:06:55.6 RN: No, obviously, after the law was passed, it was going to take some time to shake out the reach, the impact and frankly the effect of some of the fairly startling provisions in the statute, right away there was litigation up and down the wall with challenges to the standard of liability set forth in the statute, defenses, if any, to liability, things like that. So the early cases, one by one, tackle a lot of these issues that were either unclear or not codified at all in the statute, but the extensive legislative history suggests that they meant to be dealt with, and over time, the case law emerged fairly clearly that liability under the statute is strict, it's joint and several, and very importantly, it's retroactive in its application, reaching back to activities that occurred long, long ago, if indeed there still today are impacts or threats from contaminated materials released or disposed many, many years ago way before the enactment with statute, they still can be addressed through the statute. The important thing, of course, that carries throughout the legal regime is that liability under the statute is without regard to fault, defenses are very, very limited. And for the most part, that case law has confirmed that when looking at potential liability under the statute, we're not talking about what historically are well-understood common law concepts of fault, whether the conduct was intentional or negligent or anything in between.
0:08:28.2 RN: We're mostly focusing on the status of the entity as through potentially a responsible party rather than conduct, did you own the facility? Did you generate the waste, did you transport it or give it to somebody to be transported for disposal, or did you send it down the sewer or did you let it migrate away from your property without regard to fault, those are the types of entities that are covered as responsible parties.
0:08:54.2 LN: Has a lot of change over the last 40 years?
0:08:58.1 RN: It's changed a lot and, in some respects, it's changed very little. In the latter, it's relatively unchanged in terms of the basics of the liability scheme that I just described and how response actions are conducted the National contingency plan is essentially unchanged in 40 plus years since the statute was enacted. It lays out how one goes about conducting a site investigation and selecting a response action or remedy or removal action, but a lot of litigation has occurred over the years, as I mentioned, about the availability and the nature of any defenses to liability whether harms at a complex site can in some ways be divisible or divide it for terms of liability that my stuff's over here to the one side, but it's not over there, Should I be liable for only that one side or should I be liable for both sides. Those types of questions have been dealt with and are still being done, to a large extent, in the courts. All of which is mostly an attempt to pare back and minimize the sometimes-harsh impacts of the application of joint and several liability. More recently the litigation, it's still going on today with some frequency is focused on what parties may be entitled to bring claims under what circumstances, whether they have to be sued by the government, entitled to bring a claim or can they be a volunteer to conduct a response action.
0:10:17.3 RN: For how long do those claims accrue before they have to be acted upon lest they be barred by applicable eliminations periods, and frankly, what protections that parties can get when they settle claim in whole or in part from potential claims from other parties. Those are the types of things that litigation these days, is mostly focused on.
0:10:36.5 LN: If I had a banner at the beginning of this period 40 years ago that said, "It's not fair, it doesn't make sense, just write a check." I could still use that today, couldn't I?
0:10:47.1 RN: That's basically the deal, of course, fairly quickly and conclusively got rid of the notion that fairness was a defense to just about anything. Most entities now that have had any experience, good, better or indifferent, with statute and the legal principles understand that fairness is not what it's about whether I did or didn't do the right thing, whether I was negligent in doing that or whether I did what I did, because the state agency told me that that was the best place to dispose of my stuff 40 years ago. That doesn't matter. So basically, yes, the inquiry now has shifted away from whether it's fair, whether I was smart, dumb, good or bad, and now it's just, do I fall into one of the categories, and what do we do about it?
0:11:29.3 LN: So how do sites look now? You said that the easy ones were identified early on and some of them were addressed, what do they look like now?
0:11:36.1 RN: I guess I should say that it's not so much the easy sites, but it was the notorious and obvious sites, and that was the Acme landfill down the road with the fence around it that everybody knows not to enter because it looks like Chernobyl, then obviously the abandoned site with drums piled up, those types of things were the ones that were obvious and most needing of immediate attention, increasingly now we're finding that Superfund type liabilities arise it in more nuanced and less obvious situations, whether it be under a concrete floor of a factory that for years has been operating cleanly and efficiently, but then when the redevelopment comes along and you dig in, you find, "Oh my gosh, there's tanks that were not emptied underneath 20 feet down, and by the way they're leaking." Those types of situations give rise to response actions and potentially CERCLA claims nobody really understood or intended. It's not just the places where a disposal occurred and was obvious, it's more likely nowadays to be these unknown problems, these places where hazardous substances have come to be located, whether washed downstream from a mining site or whether from an outfall of a sewer that then has sort of loaded the bottom of a river bed with a layer of contaminants that indeed is a facility that can be addressed through the CERCLA program.
0:13:00.7 RN: And again, it's not just the stuff where somebody intentionally and knowingly took something to be dumped, it's where hazardous substances have come to be located, so increasingly are some very surprising locations that are themselves now, Superfund facilities.
0:13:13.7 LN: Is EPA still running the show?
0:13:15.2 RN: EPA is still in charge of setting the ground rules, obviously setting the principles in place, an awful lot of what EPA, years ago, decided was the best approach to settling cases with PRPs and what consent agreements need to look like. An awful lot of the practices, whether you want to call them best practices or not, practices adopted by US EPA, and it's always friendly counterpart, the Department of Justice, do indeed permeate and have been adopted largely by a lot of the state and other actors, who themselves either want to compel clean-ups or conduct clean-ups and want others to pay for them, but we have a whole lot of other actors, for sure. EPA is no longer the only sheriff in town, fair number or if not the majority of states have by and large, enacted baby Superfund statutes that mimic the liability scheme, perhaps have even a broader reach because unlike CERCLA, they can reach out to touch petroleum related waste in a way that CERCLA carved out years ago. Tribal groups and regional governments and a whole bunch of other actors now are basically finding themselves at the forefront of initiating response actions, and as we'll talk about in a few minutes, an awful lot of activity that ends up in a CERCLA claim arises not from government compulsion or government health protection initiatives, but from private party transactions and dealing with your neighbors.
0:14:44.8 LN: I've also observed that the roles of state and federal government have changed in that not only are they the enforcers, but sometimes they are also the liable parties, and I think that's a big change, do you not?
0:15:00.5 RN: It is a big change, I suppose it was a matter of time before it came to be realized that the state and federal governments operate in communities, they have fairly large institutional activities that themselves are pollution causing. They need to use solvents at air force bases, they need to use all sorts of chemical materials at military and hospital facilities and VAs, obviously the awful lot of waste associated with nuclear materials processes end up in landfills or at least used to, and so yes, the state and federal governments themselves, increasingly because of their business like operations in a lot of locations, themselves end up being PRPs and end up being involved in Superfund site liability determinations and allocations.
0:15:50.4 LN: Let's move away from the government actors and talk, as you mentioned we would, about private parties and real estate transactions and how CERCLA comes into play there.
0:16:01.3 RN: Yeah, well, increasingly I think folks that are in business, have ownership of properties or have sold assets or real estate, understand that impacted properties and the vestiges of those operations or industrial activities have left behind types of conditions that themselves usually manifest in claims to clean them up and if that's the case, then that can be a CERCLA and the state analogs going to be a primary consideration in whether and on what terms to sell, or acquire, or redevelop and refinance property. Increasingly, folks have come to understand that assessing whether there's ongoing or potential response actions at a piece of property, or that there's activities nearby where the plume that's heading your way and that in 10 years may be on your property and that you either need to do something to protect perhaps your water supply, or you need to do something to protect the value of a property, all sorts of things need to be assessed at the beginning that at their end point could end up being involved in a CERCLA response action and claim. The need is there to be understanding whether there's outstanding orders, directives, permits or consent agreements with the government or private parties that either describe or may implicate response action obligations down the road.
0:17:25.0 LN: There also are some initiatives under CERCLA, both state and federal to redevelop contaminated site. How does that come into play here?
0:17:33.9 RN: Well, it comes into play in a lot of ways, but basically, you find now that properties that likely were with good reason deemed to be unusable or likely not to be re-used for any purpose beyond the fairly dirty purpose that they had been subjected to in years past can, through the federal programs to incentivize and encourage redevelopment of what we call brownfields brings back into play a lot of properties that for years, companies may well thought of Well, we're done with the clean up that needed to be done, measured by the standards at the time or measured by the community expectations at the time, and that that site won't be a problem later on. Well, now, if it indeed that factor is to be reconverted into some sort of other public use or that area of property that was impacted by surface mining or whatever wants to become a golf course. Well, you all of a sudden have the need to be looking at the potential for response actions and costs on properties that for years were just deemed to be sort of in the rearview mirror.
0:18:37.0 LN: If you are a buyer and are doing this investigation that you mentioned of neighbors and so on. Is it just immediate neighbors? Is it current neighbors? Can you go further back in time?
0:18:47.7 RN: No, I guess the beauty and the curse of CERCLA is if there is a problem, if there is gum stuck to the bottom of your shoe in terms of a sub-surface area at the property that is contaminated or a tank that needs to yanked, or if there is a set of pipes that were filled at one time and are contaminated, the recourse is not just with the immediate seller that you're in privity with as you would be in contract law, and not necessarily the guy that occupies the property next door, that...
0:19:14.3 RN: 15 years prior to that guy's ownership of that property, sent onto your property through the ground water, a plume of contaminated material, all of those things are in play if to the extent that there are available parties to go after, whether they're obviously still in existence and amenable to suit, but you have to be thinking about recourse against all of these types of parties right up front, and it's important to look at the history of the property that you're talking about, the history of some immediate adjacent neighboring properties in terms of what industrial activities may have occurred and as a result, whether impactful activities have taken place at those properties and assess what was left behind and un-remediated or at least left in the air to be determined as to whether there is a problem that may manifest itself in years to come that...
0:20:08.2 RN: If you become the owner of the property, and if you're the owner of the property at the time of any release, well, then you fall into that category of liable parties, and you may be asked in the first instance to do something about it, and the challenge will be to try to find out who others are that need to be brought in that should be doing something about it.
0:20:27.3 LN: And how do you bolster your case against those others?
0:20:30.1 RN: Well, what it means is that in addition to thinking about understanding the problem and going through the normal due diligence steps to ascertain what the problem might be and how bad it might be and figure out how to negotiate for it if indeed there is to be a set of environmental obligations that you are going to either take on as the buyer or be left with if an unsuccessful seller, as soon as you're getting wind of the existence or potential existence of a problem, that party really needs to start thinking like a plaintiff to pull together the requisite information to understand what the problem is if appropriate to do something about it, and to do something about it in a way that you're thinking about being a potential plaintiff to be able to assert a claim and successfully transfer some of that liability, if appropriate, to other parties and that that means that just instead of just looking at record evidence to understand the problem, it may be more proactive steps in the way of sampling exercises and other things may need to be started fairly early on to get your arms around the problem in a way that if it comes time to assert a claim, and stick some of that liability on somebody else, you've begun the process of perfecting that claim right from the get-go.
0:21:45.9 LN: Are there rules that you have to follow to make sure your claim is ready to go, if that's where you have to end up?
0:21:51.6 RN: Yeah, pretty much whether you're dealing with the federal government, obviously, or if it's a state lead site, or if indeed you are a private property owner that's looking to protect yourself and maximize the value of your property because you don't want to get stuck with liability that really should be somebody else's problem. The NCP, the federal regulations enacted under CERCLA, like I said, lay out and have for years laid out how to go about conducting a response action, and by and large, those are applicable to just about any response action that one could conduct. If you follow those rules and not necessarily with respect to all the things in terms of holding public meetings and what not. But if you basically follow those rules and other things that have sprung up around them as best practices under the various scientific and engineering standards to conduct, you will probably assure that you have at least a prima facie, a threshold case of establishing liability on the part of somebody else, if in deed there is a somebody else to whom you can connect by nexus information for the liability.
0:22:56.7 LN: How about timing, you have to be worried about when you start this?
0:23:00.7 RN: As I mentioned, you absolutely do, because when there is a credible suggestion that there is a threat, there is a release that needs to be acted upon besides reporting that to the responsible agencies, it may be that the private party is in the first instance, the one that has to deal with it, and indeed the clock will start running. It's not unlike discovery rules in common law practice, once appraised of the problem, you have some limited amount of time to do something. Now, if you have an agreement with the government for the conduct of a response action CERCLA will then kick you into certain time parameters based upon whether your activity is a removal or a remedial action, there are separate statutes of limitation that pertain to your ability to bring federal causes of action for recovering those costs, but by and large, to answer your question, yes, absent an agreement with the potentially responsible parties on the other side to toll the running of any applicable statutes of limitation. Yeah, you're on the clock. Once you find that there's a problem that needs to be dealt with.
0:24:02.8 LN: Once you have this information, are there reporting obligations beyond those to the environmental agencies that you should be aware of?
0:24:10.7 RN: Yeah, putting aside potential claims, whether you are or not in the mindset or in a position to do something about it, in terms of shifting through legal means, those liability costs to other parties, the fact that the gum is stuck to your shoe and there is a known or potentially large environmental liability associated with your business or your real estate or both, there certainly are situations where the magnitude of those potential liabilities becomes so great that if you're a public company, they have to be accounted for in your financial records, and if one or more of these liabilities under CERCLA are known and reasonably estimable and they are sufficiently material to require acknowledgement in your public reporting, companies do have to go through the exercise, setting aside reserves that are adequate to cover those liabilities until they're either resolved and taken off the books, or they go away through divestiture or other means to shift those problems to somebody else, so if a known problem, which is fairly easy to determine if there is a potential of a liability because you've either received a letter from the government, you've signed on to an agreement that says, Hey, that's your problem, or some other way that you have some reasonable way of knowing that if it's a problem, it's yours, the tougher problem then is to figure out whether the cost of that potential liability later to be determined that's this big...
0:25:42.6 RN: A clean up and your percentage of that clean-up is x, those future parameters are difficult to estimate, and only if they're estimable do companies need to put them onto their books, but if they're estimable within a range, and the range is from a reasonable best case to a reasonable worst case potential outcome, you typically almost always have to book at the high end of that range to keep your nose clean with the accounting rules.
0:26:14.8 LN: You talked a little bit about risk shifting as you were talking about how you set the deals up, and so on it seems to me that that's a pretty big deal, so are there other risk-shifting processes or procedures or issues that you'd like to bring to the real estate transaction discussion?
0:26:31.3 RN: Yeah, I think in fairness, we talked only mostly about the ability through legal means to shift costs to other parties at arm’s length, more typically, or perhaps most typically, companies find themselves sharing those risks by agreement in real estate transactions, they find some way to identify, quantify and then allocate the risk of either a known problem, there is a consent agreement to finish over the next 10 years, completion of a ground water pump and treat system, you're going to take that on, you're going to pay either all of the costs, or I'm going to split the cost with you up to a certain amount or whatever. Those are known liabilities, and it's fairly easy to allocate in the transaction document the risks of those future costs. What's more difficult obviously, if it's a contingent or an unknown inestimable future liability, you have to figure out but the challenge is for how long to share that risk with the buyer and seller, depending on what position you're in, what things would trigger either the ability to access insurance or escrowed funds that have been put aside to deal with that contingent liability or to tear up the agreement entirely and to go back into court to litigate who should pay and how much...
0:27:48.8 RN: All of those things can be addressed with difficulty, but can be addressed, that should be addressed in the environmental portion of the transaction documents.
0:28:00.3 LN: Just one last thing on this general concept, is it not also true that these issues come up when you're selling your company or merging with another company and not just on specific real estate transactions?
0:28:12.0 RN: For the most part, these liabilities arise in conjunction with a physical piece of ground somewhere where hazardous substances have come to be located, but the liabilities run with the assets of the entity, and indeed this is something that needs to be looked at with respect to purchasing an entity outright. Even if the real estate that the company operated on in big town USA long ago has been divested and turned into the new local library, the liability associated with the activities of that entity years ago need to be accounted for in the transaction document because indeed... Again, the liability is not just because you own the property, but if you fall into the category of someone whose status connects to the historic release of the hazardous substances.
0:29:01.0 LN: I think we should move to another arena for allocation, which is outside of the transaction arena, and in the paying for the response costs, paying for the remedy cost arena. I think it makes sense for us to move to that now.
0:29:17.0 RN: I do too. I was going to say in that regard, that although we've talked a little bit about voluntary efforts to shift responsibilities through transaction documents, the types of cases where you don't have a transaction, but you have a dispute, you have an assertion that one or more entities is involved at a super fun site, giving rise to CERCLA claims, whether held by the state, whether held by US EPA, or held by a tribe or held by a private party, invariably parties have been less than satisfied with recourse to the courts to resolve these disputes, and increasingly are availing themselves of the services of private industry, of very capable professionals that mediate and allocate these types of cost, multi-party sites, hundreds of parties, very greatly complicated fact patterns, and I think Leslie you have a lot of experience with that. Recently, some of it painful, but if you don't mind talking about it, I think that's where we should shift.
0:30:15.8 LN: Okay, I do have some experience with that in a particular site at which I've been working for many years, because all of these cases take forever and ever to resolve, it is the Portland Harbor site, and there are some hundred parties participating in an allocation process, these parties are all potentially responsible parties or PRPs at a site that includes about 12 miles of the Willamette River in the vicinity of Portland, Oregon. A number of years ago, like 13, EPA suggested to the group of PRPs that an allocation process might be useful because they did not anticipate that litigation would be the way to resolve how the costs of the remedy would be shared. So we embarked upon that. We did hire as a group two very, very successful mediators who have worked in both complex river systems and other sites for many years and bring a wealth of experience and expertise to the site in a way that you are unlikely to find when you initiate litigation because there are few jurists. Certainly, you can't predict that there would be one in every jurisdiction who really understand these matters and are willing to put in the time and effort it takes to sort through all the facts, even with the help of magistrates and the like...
0:31:35.5 LN: We started this process, we are trying to avoid litigation so far that's been only marginally successful because there is an action pending which is told to bring other parties into the mediation allocation process, but in general, the effort has been focused in this allocation process.
0:31:53.5 RN: How have you noticed parties reacting to, if you will, or accepting being part of a process where you're consciously avoiding the courts, you're avoiding going to see a judge, maybe a magistrate, maybe a magistrate that's got some experience with these types of things. You're not even dealing in ADR with a former judge, you are dealing with folks who are in the profession for the express purpose of helping to resolve these very complicated types of sites, have you found that for the most part, parties go into it with a level of acceptance and an expectation that they're going to get treated fairly and get a decent... Or at least an explainable outcome.
0:32:34.0 LN: Absolutely. In this instance, we have someone whose background is in economics, but who has done a lot of allocations, and we have an experienced Superfund lawyer as our allocation team. My observation, having looked at parties big and small approaching this, is that overall, people think that they are being treated fairly.
0:32:53.0 LN: People are confident that the legal issues that they raise will be decided correctly, and that ultimately the allocation that comes out of this very long process will be appropriate and fair. This process is specifically set up to result in a preliminary allocation report followed by mediation, which gives the parties another chance to say, “Well, we don't agree with this piece, we don't think this is quite fair. Could you look at this again?” There are several ways in which people get to have their voices heard, and I think that makes a big difference in their attitudes toward the process.
0:33:27.5 RN: Is it your experience, Leslie, that these types of situations allow parties to sort of bring their best to the table, put all of their facts on the table, is it the case that the level of sophistication and expertise that you're dealing with in terms of the professional allocator allows you to explain yourself, perhaps in a way that you wouldn't be able to do in court then if the outcome is what the outcome is, at least you haven't had to pull any punches and cut any corners.
0:33:53.5 LN: Absolutely, I think that all of the practitioners, whether they are the scientists, the consultants or the lawyers in this allocation, are in fact bringing their A-game and they are doing that because they know it'll be heard, they know it'll be understood. And in some cases, they've been directed to answer specific questions or provide specific information, so I think that's a huge part of the reason that this is likely to be successful. The other thing that I think is really helpful is that this is an alternative dispute resolution process, it is covered by mediation confidentiality, and that does allow people to respond to inquiries and to provide information that they might not readily provide in the litigation setting. As a result, I think we have a better record. I think people better understand what their neighbors and historical residents of their property have done, and I think that just makes for a better process.
0:34:48.5 RN: Do you find that as a result of the thoroughness of the presentations that you're able to make in these proceedings, and again, the fact that the folks to whom you are presenting these things that may actually speak the language and know what you're talking about, does that mean that the ultimate acceptance by your client, or folks on the other side who perhaps have been at some point reluctant to accept the reality or the likely outcome, does it mean to you that there's a higher level of acceptance of the outcome, if you go through this kind of sophisticated process.
0:35:20.5 LN: I think it absolutely means that. Our mutual client in this case has never been designated PRP, but for factual reasons, they believe that they will get a far better shake out of this allocation process than they would in litigation, and I don't believe that our client is the only one in that sort of situation, I believe that even though this process has taken a long time, it has given all of the parties an opportunity to observe the professionalism of the allocators and the way they make decisions, and to be confident that the outcome will be one that they can live with.
0:35:54.3 RN: We have talked a little bit about how liability and risks get determined and allocated in the context of the Superfund remediation program, what we think of as the clean-up program, I mentioned upfront that we're not specifically talking about how the NRD program works with different jurisdictional agencies that develop records for either asserting claims or are more likely to engage in consensual agreements to conduct restoration activities and assessments, but a lot of what we've been talking about in terms of the liability scheme and the fact that the liabilities that once determined can be allocated certainly would seem to apply to what you've been talking about in terms of the expertise of the professional allocation process, there aren't that many NRD cases yet that have gone through that process, but there certainly seems to be no reason why they couldn't. And I think that's something that we probably should be looking for down the road, but the NRD program... How it works and how you interact with it. I think it's a whole other discussion. One thing that I wanted to ask you about, Leslie, is that because of your experience, is that we've talked a lot already today about the role of US EPA, state governments, private parties, but we're neglecting one particular party, also in the Superfund cleanup program, particularly in the NRD Program, and that is the tribes that have jurisdictional interests of their own. Can you talk a little bit about that?
0:37:20.1 LN: Yes, thank you. In Portland, for example, there is a natural resource trustee Council, which is involved in assessing damages to natural resources and then determining likely causes and seeking funds to restore or replace. The tribes who are part of the council are also involved in overseeing the remedial decisions and the implementation just as EPA in the state of Oregon are, their roles are a little bit different because although the state has state funding and EPA has funding authorized by Congress, the tribes, generally do not have budgets that allow for participation in oversight, and therefore are looking to the participating parties to fund their participation, but certainly I have seen over time remedies shift, remedies change, implementation vary because of tribal concerns and issues both about cultural and historical resources and present day concerns about their members. So they are a player. I think they're becoming an increasingly large player at many sites that I see, and they do change the dynamic. With that, I think we'll conclude, thank you to our listeners for joining us for this episode of Digging Into Land Use Law.
0:38:36.8 LN: For additional information on this topic or other environmental and land use matters. Please visit our website at nossaman.com, and don't forget to subscribe to Digging Into Land Use Law, wherever you listen to podcasts so you don't miss an episode. Until next time.
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0:38:54.8 S2: Digging Into Land Use Law is presented by Nossaman LLP, and cannot be copied or re-broadcast without consent, content reflects the personal views and opinions of the participants. The information provided in this podcast is for informational purposes only. It is not intended as legal advice and does not create an attorney-client relationship. Listeners should not act solely upon this information without seeking professional legal counsel.
- Market Rent Adjustment Provisions in Long-Term Ground Leases
In this episode of Digging Into Land Use Law, Nossaman Real Estate Group Co-Chair David Graeler and associate Maya Hamouie discuss myriad problems that may arise when a market rent adjustment provision in a long-term ground lease is stated unclearly. David and Maya, along with guest speaker Scott Delahooke, MAI, review a recent market rent adjustment arbitration concerning a long-term ground lease, the key California case law at issue in the dispute, the different valuation approaches taken by the ground lessor and ground lessee, the differences in approaching valuations in California versus other jurisdictions and how the arbitration panel ruled. They also discuss ways to draft rent-adjustment provisions to more clearly lay out the adjustment process and to hopefully reduce the likelihood of litigation.
Transcript: Market Rent Adjustment Provisions in Long-Term Ground Leases
0:00:00.2 David Graeler: Long-term ground leases almost always include a provision that enables the ground lessor to achieve a market-based return on the land over the course of the lease’s term. How these rent adjustment provisions are written will have a major impact on how the ground lessor and ground lessee will settle upon future rent many decades after the ground lease was executed. This episode will be of interest to anyone involved in long-term ground leases, including attorneys, lessors, lessees and appraisers.
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0:00:35.2 Welcome to Digging Into Land Use Law, Nossaman’s podcast covering the development of all things in, on, or above the ground.
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0:00:52.2 DG: Thank you for joining us today. I’m David Graeler, co-chair of Nossaman’s Real Estate Group and chair of its litigation department. I’m joined today by my colleague, Maya Hamouie, who is an associate in our real estate group, and Scott Delahooke, who is an MAI appraiser with the Delahooke Appraisal Company. Today we’re going to be discussing a real-world example of a market rent adjustment provision and a long-term ground lease that resulted in a hotly contested multi-day virtual arbitration before a panel of three arbitrators. Our client in the matter was the ground lessor, so please keep in mind that while we are going to be providing a balanced analysis of the two sides’ positions, we lived the case for a couple of years advocating for the ground lessor.
0:01:38.7 DG: Scott, thank you so much for joining Maya and me today. You were one of our appraisal experts in the arbitration, and we’re very excited to visit with you on a real-world example of what can happen when a rent adjustment provision in a long-term ground lease is, how shall I put it? Less than clear. As far as what we’re going to be covering today, we’re first going to start with a general overview of facts that gave rise to our arbitration, including the pertinent provisions in the long-term ground lease. We’ll next discuss how we approach the valuation in light of the governing lease documents. We’ll then discuss how the ground tenant approached the valuation, and then we’ll wrap up with how the arbitrators decided the case, the merits of our trading versus litigating in court and we’ll provide some thoughts on how the ground lease could have been written differently to avoid some of the problems that our client and the opposing party encountered.
0:02:36.0 DG: Alright, so let me set the stage for the case that we arbitrated. This was a long-term ground lease that was entered into back in 1980. It had a base term of 35 years and two options that would extend the base term out to a maximum of 50 years. The property was located in the North Hollywood area of Los Angeles and was unimproved at the time the ground lease was entered into. The ground tenant ultimately constructed some incubator or flex base buildings that still exist to the day. Our client is a public agency who acquired the property some years after the original ground lease was entered into. The original lessor was Southern Pacific Railroad. So, our client inherited its lease and really didn’t have anything to do with drafting the original lease, and as it turns out, had no one to talk about what they intended when the original lease was entered into. Scott, maybe you can talk a little bit about some of the characteristics of the property from an appraiser’s perspective.
0:03:52.6 Scott Delahooke: First of all, thanks very much for the opportunity to be part of the panel and to talk about this fascinating case. The property that was encumbered by a single lease was actually two separate sites, both of which were on a corner across the street from each other. As you noted, the sites were originally railway right-of-way, so they were relatively shallow in-depth and very long, but because they were corner sites, they were fairly functional, they had good access. The depth of the sites along the main right-of-way was about 80 feet, and that became an issue of both research and conversation during the arbitration. The underlying zoning on the date of value was PF or public facility zone. That also became an issue of great conversation. That is a very specific zone classification given only to sites that are owned by public agencies. It is not a classification that’s assigned to a private party that owns a site. The two sites were built with single story multi-tenant industrial spaces, you mentioned, David, incubator-type spaces.
0:05:11.2 SD: So, each one of the spaces was about 1000-1500 square feet, and there were local mom and pop stores or storage users in them. Buildings were built after the lease commenced, so it was at the discretion of the ground tenant as to what they built and what they have continued to manage today. They are both level sites, and they are in an area of North Hollywood where there was a huge trend towards building, even on sites of this configuration, four, five and six story multi-family, high density developments with ground floor parking and commercial. So, the trends were away from the type of use that was initially built on the sites, and that also played into a lot of the conversation of this matter.
0:06:04.8 DG: Yeah, in fact, one of the things that I presented at the arbitration was evidence that the land uses were changing in response to some of the transit stations that were put in place in recent years, including light rail and bus transit. And so there had been a lot of transit-oriented development in that area, which influenced your opinions in this case, right?
0:06:32.7 SD: Absolutely, yes. And whether they were in this specific overlay of transit or proximate to it, developers were building like crazy as much residential housing as they could because of the subway station and the bus station facilities that were proximate to this particular site.
0:06:58.3 DG: Okay, so here we are, we got retained by our client, who was the lessor in this case. One of the first things we did was read the lease to understand how we were going to go about figuring out what the rent should be as of the rent reset period. And I should mention that the rent reset period we were looking at was as of June 1st, 2015, and while we didn’t arbitrate the case until late 2020 into early 2021, it was all about what rent would be retroactive to June 1st, 2015. Maya, I know you spent quite a bit of time reading these leases, maybe you can tell our audience about some of the key provisions in the lease that helped inform our approach with respect to this rent adjustment.
0:07:50.6 Maya Hamouie: Thanks, David. I’m excited to be here today. So as David mentioned, the rent revision in the ground lease was really the key provision that the dispute centered around. And the rental revision provision provided that the rent shall be the reasonable and fair rental value of the premises at the time of each such revision as determined by the lessor and lessee, but not less than the rental rate then in effect. And reasonable and fair rental value of the premises are really the key terms here that David will get into. And as David mentioned, this provision also allows for retroactive payment of the revised rent amount. And the lessor here is the one who has the power to allow for the arbitration to commence or allow for the appraisal of this in order to determine the rental revision, and here the lease provided for a panel of three arbitrators with each party choosing one and the third being selected by the two arbitrators.
0:08:44.7 DG: Thanks, Maya. And so here, after reading the lease, I made the determination that reasonable and fair rental value necessarily was going to require an appraisal expert, and so I reached out to you, Scott, first to see if you were interested in participating in this appraisal assignment, and then ultimately to value it. And I, of course, sent you the underlying lease documents. How did you interpret reasonable, fair rental value of the premises when you first read those words?
0:09:17.2 SD: Great question. And the term reasonable is a term of art, not an appraisal term. Certainly, an appraiser is to collect data and analyze the data in a fair and reasonable manner and pay attention to the definitions of value and the scope of the assignment. But I have not seen that word used in a lease of any kind, including a ground lease, so you and I talked through that issue of what does reasonable actually mean in this context. The lease was also silent as to whether or not the terms and conditions of the underlying lease were to be considered, so absent a specific directive that the lease was to be considered including the remaining term of the lease, it was my view that the property should be looked at as if vacant and available for its highest and best use for a developer that would work in conjunction with the underlying ground lessor or a private property owner who had developed the property to its highest and best use. You and I talked that through at great length in the very beginning, and I think we both saw that as the appropriate way to move forward.
0:10:31.8 DG: Yeah, absolutely. And part of what helped inform my decision on this was the conversation we had about what the purpose of this ground rent recent provision was, and as we discussed, any time a lessor agrees to encumber its land with a long-term lease, it’s taking significant risk that the appreciation of the land is going to outpace the rents it’s generating, in terms of what a reasonable return on the value of the land would be, and so it’s prudent in all kinds of long-term ground leases to incur these types of market rent adjustment provisions to ensure that over time, the owner of the property will continue to generate a reasonable market-based return on the value of the land. I assume you agree with all of that?
0:11:23.5 SD: I do, and I’ve worked on assignments where there are certain constraints that the reset provision has. For instance, a reset provision may say that you’re supposed to appraise the value of the land, assuming you could build only a 20,000 square foot office building or an industrial building of a certain size. So that there’s a consistency between the use of the property and the value of the underlying land, but without that constraint, which we did not have in this case, in my mind, it clearly puts the onus on the appraiser to look at market trends, to look at the highest and best use, to look at the underlying zoning or the most probable zoning and move forward and value the site accordingly, and that’s what we did, and I think that was the appropriate approach to take.
0:12:16.0 DG: Now, the magic words in this lease were reasonable and fair rental value of the premises. It does not say market. There’s no reference to a market-derived value. I know we had some discussions early on whether rent needed to be a market derived value. What caused you to conclude that it should be?
0:12:36.1 SD: So not only was the word reasonable unique, but the rental value is unique. Usually, it’s market rent or some phraseology like that. Rental value is kind of a unique term, but you and I talked it through, and I think ultimately, it’s the ground lease reset in this case, and in all the cases I’ve worked on, have provisions there to allow for appropriate return to the ground lessor position. And so, I used and all of the experts in this case also used the definition of market rent put forward by the Appraisal Institute’s Dictionary of Real Estate Appraisal. So there actually wasn’t a disagreement in the underlying definition of market rent that we all apply, we just all applied it differently.
0:13:26.1 DG: Yeah, and I remember not knowing how the tenant was originally going to take it or interpret that in taking the deposition of the tenant’s person most qualified, who conceded that it would be a market-derived value. So, it ended up not being an issue. So, we know we’re going to derive a market-based value, and you mentioned earlier that you concluded based on the language of the lease that you are going to derive a value that was based on the highest and best use to the land. What was a necessary step after that in order to assist you in generating your valuation opinion?
0:14:08.6 SD: So, we talked a little bit earlier about the market trends and the higher density residential development that was taking place, I also mentioned earlier that the underlying zoning was public facilities, which is a very unique classification given by the city, two sites that are owned by agencies. I went to the city and said, “If this was being developed by a private developer to its highest and best use, would the PF zoning be the applicable zoning that the city would use?” And they said, “No, that’s just in place because of a public agency’s ownership of that site.” So, then I asked the question, “Well, what is the reasonable, reasonably probable zone classification to consider when I’m looking at this site? Whether the public agency keeps the site and ground leases it to a new ground tenant or sells it, what is the right way for me to look at this as an appraiser? How would the city look at this?” And they confirmed that the surrounding zoning, which was commercial, it was C2 and C4 would be the zone classification the city would use to establish what would be permitted on these sites. So that was... And it was a conversation with the city planners. It was... We also brought on another expert that you and I will talk about in a moment, but it was clear that the PF zoning was a constraint that was not what should be considered when looking at a market value, market rental rate for this particular property.
0:15:41.8 DG: And in assessing your highest and best use conclusion that you would ultimately reach, one of the important things was what would be legally permissible on the property, and that’s why you were looking at whether the PF zoning would prohibit legally the kind of use that you are envisioning. Is that an accurate characterization?
0:16:04.3 SD: Absolutely.
0:16:05.4 DG: Okay, and then one of the other things that you would look at with your highest and best use analysis is whether or not the property could physically accommodate the kind of use that you thought would be the highest and best use, which was some kind of a multi-family development. And as you mentioned earlier, this property only was about 80 feet deep, which potentially caused or created a development constraint, and as you just mentioned, we brought in a second expert who was an engineer who actually designed a mixed use development on this site and laid it out with a floor plan for both parking and residential units above in order to demonstrate that there was no development constraint based on the depth of the site, and also to help support how many units could ultimately be developed on the site. And how did you use that opinion?
0:17:00.0 SD: Yeah, so that opinion was really important. I’ll take a step back very quickly. There was actually a site adjacent south to the subject properties, which was only about 90 feet deep, which had been developed with a high density, five or six-story multi-residential development. So, I already had market evidence which showed that that type of structure could be put on a site that had similar depth to the subject site, but I went a step further because I wanted to engage an engineer who did design site plan, architectural work as well. And have them put a hypothetical development on our site and tell me based on setbacks and height limitations and all of that, if our site could be developed in a manner consistent with my comparables, from a density standpoint, from a placement standpoint, and from a construction cost standpoint. So that if our site would have taken a higher construction cost for underground parking or some other construction cost like that, I need to take that into account in my adjustment process, but he was able to go in and look and design a building very similar to what was being built around the subject property, and that the site depth was not a constraint and not a limiting factor on the density of development, or again, on the cost of construction.
0:18:29.1 DG: And just for the audience, I’ll summarize that based on the input of that other expert, and based on your own investigation that you made with the city’s Planning Department, you satisfied yourself that the subject property could be developed in a manner consistent with what you felt was its highest and best use which would be a multi-family development.
0:18:53.5 SD: Absolutely.
0:18:54.9 DG: And ultimately, you rendered an opinion of value for the land based on that type of development, which you then applied a rate of return to which was market derived as well, to conclude that rent should be $400,000 per year as of our June 1st, 2015 reset date, right?
0:19:15.4 SD: Correct.
0:19:17.0 DG: And I should mention that the tenant had been paying $116,000 per year in rent under the lease. So that just goes to show you how divergent the contract rent can become when real property values go up over the term of a long-term ground lease like this. I’m going to now talk a little bit about what the other side did. I would say that because the lease, ground rent reset provision in the lease was written the way it was, it allowed for the ground tenant to get creative about how it approached value. The first thing they argued, I think this was the tenant’s primary argument at the arbitration, was that rent doesn’t even need to be market-based, and this was despite the fact that the tenant got two appraisers to appraise the property using a market derived value, and it’s despite the fact that this is the way that two parties have always approached this issue throughout the history of the lease.
0:20:20.3 DG: But nonetheless, the ground tenant argued that the rent should be based on 25% of the gross rents the tenant generated from its sub-tenants. Again, the lease doesn’t say that, there’s nothing to indicate that the parties ever approached setting rent that way, but because the lease used the word reasonable, the ground tenant argued that that’s a reasonable way to set rent. The second thing the ground tenant argued was whatever the market rent would be or the reasonable rent should be as of June, 1st, 2015, it shouldn’t be applied retroactively because our client took too long to increase the rent. So, they argued against retro activity. And then finally, the ground tenant, as I mentioned, retained two different appraisers who approached valuation in a way, very differently than you did Scott and I’ll summarize their approaches.
0:21:19.7 DG: The first appraiser that the ground tenant retained was actually retained all the way back in 2015, and he focused heavily on the PF zoning of the property and concluding that the PF zoning really didn’t allow for any development on-site consistent with its highest and best use. And as a consequence, He discounted downward or adjusted downward his sales data by 50% or 75% at times, even though he was pulling comparable data that was very similar to what you relied on, in terms of being residentially oriented. And as a consequence, among other things he did, including initially believing that there was a parking covenant that damaged value, which he later conceded was a mistake. He concluded that the rent for the property should only be $100,000 a year, which was lower than the contract rent, and therefore he felt the contract rent should just remain in place. Our client obviously wouldn’t agree with that, so we ended up in the arbitration process. Once the arbitration process was underway, the ground tenant secured a second appraisal and much like the first appraiser, this second appraiser also approached value by looking at a market derived value, market rent definition and looked at highest and best use, he too took into account the PF zoning, but his biggest impact on value was the 80-foot depth of the site.
0:22:56.9 DG: He concluded that because of the 80-foot depth on the site, you really couldn’t make any kind of meaningful development on the property because it was development constraint. And he reached that conclusion without consulting any engineering experts like you did, Scott, and ultimately, because of that development constraint that he felt existed, searched for land sales that were acquired by a buyer without any plans for development, buyers who purchased properties for surface storage or surface parking with no plans for development. And in order to find those sales, he went very far away to get them in all inferior markets, and he admitted that. The closest sale was several miles away, I think two, three miles away, and the farthest, think I was 10 or 15 miles away, and he ignored a lot of sales that were much, much closer, and through those sales, he rendered a value conclusion that resulted in rent being $150,000 per year, so a nominal increase from the contract rent. So those were the differences in value as stated in the appraisal reports, then we got to taking depositions, and once I started taking the opposing appraisers depositions, I learned for the very first time that not only did they take into account what was written in the reports, but they also took into account the amount of time remaining on the lease at the time of the rent reset, specifically 15 years.
0:24:33.1 DG: And what they said is, even though the appraisal reports didn’t talk about this issue, the amount of time remaining on the lease would be a major impact on the ability of a tenant to develop the site because you would never realize a return on your investment in a 15-year time period. And therefore, as of June 1st, 2015, you couldn’t make any meaningful use of the property and that that had a major impact on their value conclusions, again, no reference to this in their appraisal reports, but it’s an argument they put forth at the arbitration, after testifying to it in deposition. So that kind of lays out the two sides appraisals. One thing that was not present in, Scott, your appraisal or the two appraisals obtained from the ground tenant was any notion that anybody was appraising rent based on the existing use. It was really not an issue that anybody was focused on based on the lease language, and then to our surprise, we received a motion in limine shortly before the arbitration began that sought to exclude your entire opinion because you failed to appraise rent according to the existing use, and instead appraised rent according to the highest and best use.
0:25:56.0 DG: It was a fascinating motion because I thought, if the arbitration panel was going to grant it, then necessarily the ground tenant’s two appraisers who also didn’t appraise rent according to the existing use would also need to be tossed, and there would be no valuation opinions left. In any event, we did have an in-use appraisal for our client as well, I should mention that. Back in 2015, when our client was in negotiations with the ground tenant over what market rent should be, my client... Our client decided to retain an appraiser to value rent according to the existing use as kind of a check on value. It was not what it really believed rent should be or how it should be set, but it obtained that appraisal and that appraisal set rent at $225,000 per year based on the existing use, which was, again, higher than the landlord’s two other appraisals. And ultimately, we decided to exchange that in-use appraisal because of the word reasonable in the lease, I felt that the word reasonable would make it very difficult for our arbitration panel to come in at a number that would put the ground tenant upside down in terms of what it had to pay for the ground lease versus what it was able to receive in its sub-tenant rents.
0:27:25.0 DG: And so, coming in with a number in between seemed like a good strategic approach to give the panel an alternative choice on value. And because our client had offered to settle for less than that $225,000 per year figure. So, being where we are at this point, we really encountered two distinct legal issues that we had to run to ground, the first was whether it was appropriate to take into account the terms and restrictions in the lease, namely the amount of time remaining on the lease, and I’m going to ask Maya, who did all the research for us, she did great research in this case, including finding some articles that talked about the California rule, which was instructive on that issue. And the second was whether or not it was appropriate to appraise rent according to the land’s highest and best use, or its existing use, and Maya found four published cases on that, which also were instructive. So Maya, maybe you can talk about those two different legal issues.
0:28:31.2 MH: Sure, thanks David. So, I did find four published cases that addressed ground rent resets on long-term ground leases in several articles that discuss rent resets based on those cases. In one article the author coined the term and referred to the California rule as presuming that the value of the land means the fair market value in an appraisal as at its highest and best uses, not limited by any use restrictions in the lease or by the nature of the existing improvements, unless a clear intention to the contrary appears from the lease. And this was actually perfect for us because we’re in California, and this allowed us to argue that our appraisers could value rent as... At the highest and best use without any regard to the terms and restrictions in the lease. And the tenant was actually trying to apply the majority or the New York rule where if the lease is silent, you should consider the terms and restrictions of the lease.
0:29:24.4 DG: And you said you found four published court of appeal decisions that were instructive on whether to value rent based on the existing use or the highest and best use. What did those cases show?
0:29:37.2 MH: That’s right. So, in three of the cases, the leases had broad use provisions that allowed for valuing the highest and best use of the land for any particular purpose. In the last case, it was different, it had a lease that restricted the tenant to a single use, which was a theater, and so in that case, the land had to be appraised taking into account the used provision.
0:30:00.7 DG: So, based on that law that Maya so capably found, we argued that since we were in California and since the lease was silent on whether to take into account the terms and restrictions of the lease, it would be inappropriate to apply the remaining term of the lease in restricting the available uses. Interestingly, the tenant obtained a rebuttal expert from Canada who had written an article on this topic, but the article wasn’t specific to California and focused on the majority or New York rule, which said that when the lease is silent, you still take into account the terms and restrictions of the lease. And when I push that expert about it in deposition, he conceded that California was different, which I thought was a really, really key admission. And then finally, as Maya mentioned, the four cases she found, one of them called for an appraisal based on the existing use, because the use provision was only a single use. That didn’t exist in our lease, our least had a very broad use provision which allowed the ground tenant to put the property to any number of different uses, and it was much more similar to the other three published cases that allowed for value to be set based on highest and best use.
0:31:17.7 DG: So, we argued, number one, that the tenants argument that you had to take into account the terms and conditions that the lease was wrong under the California rule, and number two, that it was appropriate to appraise according to highest and best use, based on the three cases that said that where the least provisions had broad use permission. So, what did the arbitration panel ultimately do here? As we suspected, because our arbitrators were all trained lawyers, they focused heavily on the word reasonable in the rent reset provision, and ultimately, never really addressed whether it was appropriate to appraise rent, by taking into account the terms and restrictions of the lease. Instead, based on the word reasonable, and based on the fact that the lease called for rental value, they concluded that that must mean that the parties should appraise rent according to the existing use, they didn’t touch the fact that the use provision was broad, they did talk about how the parties later amended the lease after the improvements were built and therefore confined the tenant into a single use. But there was no case law that said that because the cases all spoke to what different uses were allowed under the lease.
0:32:41.6 DG: But by doing that, effectively the arbitration panel tossed the other, the ground tenants appraisals because they didn’t really appraise based on existing use, and in one instance, when they thought maybe he did, they noted that that appraiser’s comparable sales came from very far away. They also decided not to focus on Scott’s appraisal because he appraised based on highest and best use, and instead they focused on the second appraisal we exchanged and discounted it by 10%, and that was their value. I think it came out to a little over $202,000 per year, we had offered $200,000 per year on rent to settle, so we did better than that. And that could have been the end, and everybody could have gone away less than happy, but our arbitration panel decided to construe the lease as allowing for the prevailing party to receive attorney fees, and expert fees, and arbitrators fees, and none of that is present in the ground rent reset clause of the governing lease. So, number one, we felt that that was a mistake, but number two, even if it did provide for the prevailing party to receive attorney’s fees, the client, our client, the ground lessor, achieved an outcome that was based on an appraisal that it exchanged.
0:34:08.8 DG: Not one that was based on an appraisal that the tenant exchanged. It was within 10% of that appraisal in fact, and yet, the panel nonetheless concluded that the ground tenant was the prevailing party and awarded attorney’s fees, expert fees, and the arbitrators fees. The panel did allow rent to be increased retroactively, and so what that effectively did was wipe out the back rent that was owed and set the new rent going forward from the present time, it was less than a desirable outcome from our perspective, and one where I thought the arbitrators made some mistakes. Alright, Scott, so obviously, you’re not a lawyer, you’re an appraiser, you can’t really weigh in on the legal conclusions that were reached by our arbitration panel. I am curious to know your thoughts from an appraisers perspective on the ultimate determination of market rent at a little over $202,000 per year. And perhaps you could also comment on the overall underlying purpose of market rent adjustment provisions and long-term ground lease such as this one.
0:35:29.7 SD: Yeah, I think that’s a really important issue to discuss, because even though the appraisers for the ground tenant did not say the remaining term mattered, or had any impact on their conclusions in their reports, they did argue that in the depositions. And it just on its face, seems to me, to be both unfair and unreasonable to the ground owner. When a ground lease is started, a 55-year, 50-year ground lease, or longer, there’s a base provision of usually 30 to 40 years before the first reset, and all the appraisers in this case agree that to do a new development, you’ve gotta have at least 30 to 40 years to be able to recapture the cost of the improvements that you would build. And that anything short of that was just not enough time to recoup your outlay for building buildings. So in this case, there was a 35-year beginning term of the total 55 years before a reset, the rent was set, the ground tenant built their building, and got the return on and of those improvements they built.
0:36:42.3 SD: The fact that they were arguing that at the rent reset, we could only consider the remaining term, which was 10 to 15 years, and that nothing could be feasibly developed on the site, and the return generated over that 10 or 15 years meant that the value of the land was constrained to some open storage use. It is not market value of that land, based on its highest and best years. It actually is a less desirable piece of property at the first rent reset than it was in the original beginning of the lease, and it makes no sense to me that a ground owner would agree to a lease provision that actually results in a lower return, lower rent at the first rent reset than at the original beginning of the lease.
0:37:39.0 SD: And so, just on its face, it made no sense that this argument is what the parties intended, especially the ground owner intended. But again, the appraisers all... We all agreed, including me, that you need at least 30 to 40 years to recover the cost of new development. So that argument just made no sense. The other thing that we did is as the panel was beginning to lean towards the existing use, we could tell by the questions they were asking and by the way the ground tenant was presenting the information. We came up with rebuttal documents based on their actual profit and loss statements to show that the ground tenant was receiving or should have been receiving sufficient net income to be able to pay the rent I estimated and still have a return left over to their position as a ground tenant. And the panel completely disregarded that as well. So, this outcome for me was reasonable, but only as it applied to the ground tenant, not the ground landlord.
0:38:49.6 DG: So, Maya... And thank you, Scott. Maya, I’m going to create a hypothetical time machine and put you in it and go back in time and you’re now the lawyer for Southern Pacific Railroad about to enter into a lease with this tenant, and you have the ability to tell your client what you think they should do with the rent reset provision. With the benefit of hindsight, how would you have approached things differently?
0:39:19.8 MH: So, the first thing that I would tell my client to do is to definitely not use the word reasonable. Reasonable is problematic because it allows the trier of fact to really do whatever he or she wants, and we really can’t predict the outcome. I would say stay away from that word. Second, I would that if you intend for rent to be based on the highest and best use of the land, without regards to the terms and restrictions of the lease, say that clearly, or if you don’t want to say that, say the rent will be based on 10% of the fair market value of the land, at its highest and best use. So, any of those options, I think could have helped avoid some of the issues that we faced in this case and the parties would have been on the same page had the lease rental revision been drafted differently.
0:40:03.3 DG: Yeah, I completely agree with that. Clarity is key, give the parties clear direction on what they should do so that when you disappear after signing that lease, whoever is going to be left having to deal with what you wrote 30, 40, 50 years down the road, has some sense about what they are supposed to do. And doesn’t end up in a situation where our tenant appraised apples, basically land that was constrained by the existing term of the lease, and our client appraised oranges. You want to make sure that everybody is appraising the same thing because that better ensures that the two sides are going to come together, it reduces the likelihood that there will be a contested process, and ultimately it saves everybody time and money. The benefit of hindsight, definitely stay away from the word reasonable, and if you want it to be based on highest and best use, without regard to the terms and conditions or restrictions of the lease, say it.
0:41:10.0 DG: Let’s talk a little bit now about arbitrating disputes and whether if we could go back in our time machine, we would have not used an arbitration provision that called for a panel of three arbitrators and instead maybe called for a single arbitrator, or maybe even no arbitration at all, and instead to just have these kinds of disputes litigated in court. Scott, I know you have personally served as an arbitrator before in valuation disputes, and I know you’ve also been an expert witness in similar types of disputes, and you’ve obviously testified in court quite a number of times. Do you have any thoughts on this issue?
0:41:51.4 SD: Yes, so, I would say being involved in, on several levels in arbitrations and also being in court in front of juries and judges, my preference is to be in a courtroom, whether before just a judge or a jury. It allows for... I like getting up and moving around and engaging with, especially juries to see if what I’m explaining is making sense, because if it’s not, then I can go back around and kind of get another stab at the apple and try and re-explain it until the lights seem to go on. In an arbitration setting, especially one that’s by Zoom, it’s much more difficult to get a sense of what’s going on. The other pieces, in my experience as an arbitration panel member, very often there is... There is the desire to get consensus to get all three panel members to sign off on the award, which means that, there isn’t necessarily... ‘because you have two-party appointed plus a neutral, there isn’t necessarily the desire to get it right, but to move it to some midpoint or some consensus, and I would prefer... And I think the outcomes where I’ve testified in arbitration and there’s a single arbitrator, there is more risk, but I think the outcome is much more likely to award the stronger case, the better experts, the better legal arguments.
0:43:26.8 SD: The single arbitrator will be able to follow, usually the best presented and most well-documented case, without having to reach a consensus and compromise with other panel members that may have agendas and try and pull them in a different direction. So that’s kind of my experience in this and David, I don’t know, you could talk about the economic piece of this and the speed, but just from a process standpoint, I would say single arbitrator or court of law.
0:44:00.3 DG: Yeah, you know, my thought on this, I would say has evolved over time and probably will evolve again in the future. But where I currently stand on this is the cost of an arbitration, particularly one like this, where we have three arbitrators, I don’t think is all that much less than litigating a case in court, and that’s supposed to be one of the reasons in favor of arbitration, you’re paying the hourly rates of three highly compensated professionals on top of the lawyers and the experts. The other thing is from a timing standpoint, there’s lots of discovery that takes place in arbitration, just like there would be in court. In the absence of a pandemic, I think that the timing is probably pretty comparable. Because we had a pandemic, I think we were able to arbitrate our case by a Zoom more quickly than we otherwise would have been able to try a case in court. But I don’t know that that was necessarily a good thing under the circumstances.
0:45:00.8 DG: And I agree with you, Scott, about the inherent tendency for a panel of arbitrators to compromise on an outcome, which probably takes away the ability of one party to really win. Here, each party designated one arbitration panelist, and those two designated panelists appointed the chair, which was the third panelist, all of our panelists came from the same ADR firm, which I think created its other challenges because I think there was even greater tendency for them to want to have a unanimous outcome. If all three neutrals came from different firms, maybe that would have helped with the problem a little bit. But all things being equal, I think in the future, I would want to adjudicate this kind of dispute in court, particularly because of the ruling the arbitration panel made on attorney’s fees. I think that was a clear legal error, I know the other side of undoubtedly disagrees, maybe they do now. But the reality is, throughout the case, nobody was thinking they would be entitled to recover attorney’s fees as a prevailing party.
0:46:12.4 DG: And with an arbitration, unless the contract that sets forth the arbitration provides for a right to appeal, there’s very little you can do to correct this kind of mistake. You can ask the arbitration panel to correct the error, not likely going to happen. You can then file a petition to the Superior Court to correct the error, but the law is pretty darn clear about the limited circumstances when those kinds of petitions to vacate an arbitration award will actually be granted. And so here, if we had been in court and the judge had made the mistake on awarding attorneys fees, we’d have the ability to seek review by the Court of Appeal. And then in...
0:46:57.3 SD: David, A quick comment on that. Something like that can be used in horse trading as well, to try and pull one arbitration panel member into a consensus, and it shouldn’t be a chip, it should be an independent decision, and I’m not speaking as a lawyer, but it seems to me that it should be an independent decision of the outcome and the award. And in this case, I don’t know if it was a chip, but I have seen and been involved in other cases where it was.
0:47:29.7 DG: And then I’ll just wrap up with a comment on my experience doing this arbitration via Zoom. It went better than I thought, but there were definite limitations with it, and not being in the same room with the triers of fact, there’s just not an ability to pick up on the non-verbal communication that people inherently will give you when you’re in a room with them, when you’re looking at a computer screen. And Scott, you and I have worked together quite a few times over the years in court, and I think one of your strongest skills beyond being a technically excellent expert and appraiser, is your ability to communicate in lay person’s terms and connect with your trier of fact. And doing it through Zoom limited your ability to do that, as compared to being in person. Ultimately, I don’t think that’s what swayed the panel one way or another, I think they were going to probably reach the same conclusion, even if we were there in person. But it was something I definitely noted. Any final thoughts from Scott or Maya?
0:48:41.5 SD: One funny recollection in this era of Covid is my deposition was in person and it was in my backyard, and unfortunately it happened to be on a day when it was 105 degrees, and I think it went, beginning to end, the deposition was maybe six to seven hours and counsel for the ground tenant, who happens to be a client of mine as well, wanted to stay and chat. So, we were probably sitting in the backyard at very high temperatures for a very long time, I think we almost lost the court reporter at one time, so anyway... [laughter]
0:49:18.5 DG: Yeah, the court reporter...
0:49:21.7 SD: These are the kinds of moments that we tend to remember. The unique moments.
0:49:26.3 DG: Yeah, great, great memories for sure that we will keep with us and tell more stories on for... Well, Scott, thank you very much for spending a little bit of time with us talking about this case.
0:49:37.6 SD: My pleasure.
0:49:37.7 DG: And Maya, thank you for your participation as well. And most of all, thank you to our listeners for joining us for this episode of Digging Into Land Use Law. For additional information on this topic or other environment and land use matters, please visit our website at Nossaman.com, and don’t forget to subscribe to Digging Into Land Use Law, wherever you listen to podcasts, so you don’t miss an episode. Until next time.
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