Remediation Funding Sources: The Basics

NJDEP frequently requires responsible parties to post a Remediation Funding Source (RFS) to secure remediation obligations.  Under current regulations, those conducting cleanups pursuant to the Industrial Site Recovery Act, certain “Spill Act” cases, or those conducting a cleanup under an administrative consent order, must post an RFS.  In contrast, if the responsible party is undertaking an environmental cleanup in an “environmental opportunity zone” or is utilizing an “innovative remedial action technology”, no RFS will be required.  Governmental entities, owners and operators of certain licensed childcare centers, along with certain educational facilities are also exempt from the RFS regulations. Acceptable forms of collateral include (1) lines of credit (2) environmental insurance policies (3) letters of credit and remediation trust funds (4) self-guarantees and (5) applicable loans and/or grants.  Significantly, NJDEP requires that the RFS be increased as the estimated cost of any cleanup increases.  Similarly, a responsible party may also petition NJDEP to decrease the amount of the RFS, based on a revised cost estimate.

NJDEP’s current position does permit responsible parties to draw from the collateral to actually fund a particular cleanup.  In other words, the “collateral” is converted to a source of funds available for expenditure to bring the remediation effort to successful conclusion.  In theory, NJDEP will consider such draw requests no more frequently than every three months.  Interested parties must consult the State’s detailed application requirements for both LSRP and non-LSRP retained cases.

In acquisition mode, purchasers will be best served to avoid sole reliance on the RFS to ensure that remediation is fully and satisfactorily implemented.  Instead, a separate stand-alone escrow may be created, with automatic escalation clauses, requiring replenishment of, or an increase to, the separate escrow amount.  Sellers and purchasers should also take extra care in defining the particular expenditures deemed to be within the ambit of the “cleanup costs”, as defined by the operative escrow agreement.  Appropriate provisions should also be included to address contingency provisions in the event the parties fail to reach agreement on the revised remediation cost estimate.  Specific contractual terms should be included to provide for independent judgment and alternative measures where deadlock is encountered.
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