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New DCA Policy Presents Roadblock to Brownfield Redevelopment
By Daniel M. Murphy
 as printed in NJPA Real Estate Journal, November 24, 2006
The success of redevelopment initiatives in New Jersey over recent years is evident throughout the state. The redevelopment of properties which have fallen into physical and economic decay have led to productive, tax generating resources benefiting numerous communities. However, a recent policy change adopted by the Division of Codes and Standards of the State Department of Community Affairs threatens to slow the redevelopment process and create uncertainty in the market place. The DCA has recently adopted a policy which prohibits the sale of residential housing to the public until a No Further Action letter is issued by the New Jersey Department of Environmental Protection.
Many redevelopment projects contain residential components, as well as various commercial uses such as office and retail. The fact that such projects include "for sale" residential housing requires the developer to register the residential component with DCA pursuant to the Planned Real Estate Development Full Disclosure Act. With several limited exceptions, PREDFDA prohibits the offering or conveyance of any interest in a planned real estate development or retirement community prior to the registration of the project with DCA.
Many redevelopment sites contain environmental contamination which must be addressed to the satisfaction of the NJDEP. The typical protocol for identifying and remediating contaminated sites or "brownfields", include: (1) conducting environmental investigations of the property; (2) preparing a remedial action work plan which sets forth the methodology for "cleaning" the property to established standards; (3) obtaining approval of the RAWP from NJDEP; (4) implementing the remediation in accordance with the RAWP; and (5) obtaining a letter of No Further Action from NJDEP. The remediation of brownfields often includes the capping of contaminated soils pursuant to the protocol set forth in the RAWP. This capping typically requires the placement of clean fill and/or the installation of impervious structures such as building foundations, roadways and parking areas. Upon the completion of the remediation process, a Remedial Action Report is submitted to NJDEP for approval. Only after the RAR is approved, NJDEP's form of Deed Notice is recorded in the County Clerk's office, will NJDEP issue the NFA letter.
Up until recently, DCA would register a residential project to be developed on a brownfield provided that the Public Offering Statement disclosed the type and extent of the contamination, a summary of the RAWP and a representation that upon the completion of the remediation, an NFA letter will be issued by NJDEP.
However, the policy of DCA has recently changed to the detriment of prospective home owners and the building industry as well as the continued redevelopment and remediation of brownfields. DCA's new policy is to prohibit the conveyance of residential units until an NFA letter has been issued for the entire site. The impact this new policy will have on continued redevelopment and brownfield remediation cannot be under-estimated.
Up to this point, developers have relied upon the fact that as long as the brownfleld has been developed in accordance with an approved site plan that has been prepared in accordance with the NJDEP approved RAWP, that they would be permitted to convey title to residential units. On large tracts of land, developers typically build in phases for economic reasons. Once sales revenues are generated from early phases, that money is used to construct later phases. It is difficult to obtain NFA letters for parts of a brownfield site, it being the NJDEP's preference to issue only "site-wide" NFA letters. Further, and even more significant, is that DCA's new policy does not distinguish between soil and groundwater NFA letters, the latter being much more difficult to obtain. In fact, soils-only NFA letters could be, and are often issued years before the groundwater NFA letter is issued.
As a result, developers and their construction lenders must contend with the fact that residential units cannot be conveyed to the public until the remediation of the entire site is completed and the NFA letter is obtained. This policy will make many redevelopment projects economically unfeasible. In addition, there often is a significant delay between completion of the remediation and issuance of the NFA letter by NJDEP. This threatens the developer's ability to close title to the unit within the stipulated time frame set forth in the unit sales contract. It also triggers the requirement to obtain project approval from the U.S. Department of Housing and Urban Development if closings cannot be consummated within two (2) years from the date of contract.
DCA and NJDEP have met recently with developer representatives in order to address these issues. One proposal being considered is to permit developers to close title to units if they post a performance guaranty with DCA in order to insure that the remediation process will be completed. This would address DCA's primary concern; that being, in the event the developer fails to complete the site remediation, the condominium association would have the financial wherewithal to assume such responsibility. Such a solution seems to address the economic pitfalls posed to developers as a result of the new DCA policy, but the development industry must be diligent in making sure its interests are protected. We'll see if DCA is willing to adopt such a proposal in the interest of Smart Growth.
Daniel M. Murphy, Esq. is a partner of the West Orange, NJ-based firm of Wolff & Samson PC. Murphy, whose practice consists of a broad spectrum of real estate matters, can be reached via e-mail at dmurphy@wolffsamson.com.
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