By Duke Dennis

What do parties to a real estate transaction think when they hear that the property acquisition they have been working on has groundwater contamination?

Owner:  How do I limit my liability and the future owner’s liability in order to sell the property?

Lender:  How do I protect my liability if I have to foreclose on the property?

Developer: What is the cheapest way to remediate contamination in order to reduce the development budget?

City Official:  How can we support remediation and development of contaminated properties in our city?

Investor:  How can we limit the costs of remediation so as not to eat up all of my profits?

Normally groundwater contamination would be a deal-killer due to the abnormally high risks and potentially exorbitant costs associated with such properties; however, this does not have to always be the case, especially in Texas where two pieces of legislation were put in place to incentivize remediation and development of properties with this very problem.  The Texas Voluntary Cleanup Program along with the Municipal Setting Designation have changed the way owners, lenders, developers, city officials, and investors look at the prospect of remediating a property with groundwater contamination by reducing the costs and liability of doing so.

Created in 1995 the Texas Voluntary Cleanup Program (“VCP”) offers protection to future lenders, landowners, and all non-responsible parties from liability to the State of Texas only after you have gone through the following steps: the current owner of the property must submit an application for the property to the VCP along with an Affected Property Assessment Report describing the contaminated area of concern and a $1,000 application fee. In the application there must be a signed agreement describing a schedule of events to achieve cleanup and an agreement confirming that the applicant agrees to pay all VCP oversight costs. Post-cleanup applicants will receive a Certificate of Completion (“COC”) from the Texas Commission on Environmental Quality (“TCEQ”), releasing all non-responsible parties from further liability to the state for cleanup of areas covered by the certificate.

The VCP process sounds simple enough, but limiting liability is only half the battle.  The other half is reducing the costs of remediation, so that begs the question, “Exactly what does “cleanup” for groundwater contamination entail under VCP guidelines?”  This is where the second piece of legislation, Municipal Setting Designation (“MSD”), comes in.

Under the VCP an acceptable form of groundwater remediation is obtaining a Municipal Setting Designation.  An MSD is a legally binding ordinance that prevents the use of groundwater at the site for drinking water now or in the future, thereby protecting public health.  Once the MSD has been obtained the subject property is considered to have been remediated, thus reducing the costs typically associated with remediation.  As the steps to entering the VCP were simple and straight forward, so are the steps to gaining an MSD.

To gain an MSD the property owner must do three things:

  • File for a resolution of support within the city that houses the property.
  • Notify landowners with water wells within a 5-mile radius of the subject property receiving the MSD of the following: purpose, eligibility criteria, location and description, type of contamination, and identification of the parties responsible (if known).
  • File an MSD application with the TCEQ along with a $1,000 fee and proof of meeting the first two conditions.

Once the application has been received by the TCEQ, there is a state-mandated 60-day period for the TCEQ to review and render a decision.  At this point if you followed all of the preceding steps to the letter, then it is a mere formality that you will get your MSD. For the cost of a $1,000 application fee and the cost to mail some letters to adjacent land owners you have now successfully remediated your property for a fraction of what it potentially might have cost.  Also, now that you have remediated the contamination you will receive a Certificate of Completion from the TCEQ eliminating any future liability to the State of Texas for cleanup of the property.

Using the Voluntary Cleanup Program and Municipal Setting Designation, you can reduce liability and costs of remediating properties with groundwater contamination.  If you are looking to buy, finance or redevelop a property with groundwater contamination you should be aware of these two pieces of legislation as they can protect your liability and your financial ability to do so.

The Author, Duke Dennis, is a Senior Analyst at Metropolitan Capital Advisors.  Duke may be contacted at ddennis@metcapital.com or (972) 267-0600.