Co-locating: Look Before You Leap

Recently, my wife and I purchased an acreage directly next to property owned by my wife’s sister and her husband. I immediately started dreaming about all of the ways I could use this arrangement to make work around my house easier. We could share a lawn mower, a really nice one that I won’t have to store at my house. It would be such a great mower that my nephew would be begging me to mow my lawn for free and he would not lose interest until at least the middle of August. I could have built-in babysitters and someone to help me move furniture around the house. 

These dreams quickly faded when I started thinking about all of the additional work I would have to do to maintain the additional property. I also started thinking that maybe I would also have to do some additional work in return and maybe store some of this shared equipment at my house. 

My situation is not much different from that of my clients who are considering co-locating with a complementary facility. At the outset, it is easy to look at the obvious benefits of co-locating without considering the additional risks and potential costs associated with it. While these arrangements can be very mutually beneficial if properly structured, a full consideration of the benefits requires an equally searching evaluation of the costs and potential risks as well. So, as my title implies, it is best if you look, before you leap, into a co-location arrangement. 

Environmental Permitting. Frequently with co-locating facilities, the biggest hurdle is compliance with environmental permitting requirements. The closer two separate facilities are located to each other, and the manner in which they are related, the more scrutiny they may receive from environmental regulators. Increased scrutiny from environmental regulators frequently results in increased environmental permitting and compliance costs for both facilities. The U.S. EPA could consider one of the facilities a “support facility” or could consider both facilities as a “single source” with respect to the environmental regulations, even if the two facilities are owned by different companies. 

In order to determine if the facilities should be treated as a single source, the EPA considers whether the two facilities are part of the same industrial grouping (as determined by applicable SIC codes), whether they are physically contiguous or adjacent to each other, and whether they are under common control. The EPA has been aggressive in determining whether two facilities are support facilities and therefore should be considered as one for environmental permitting purposes.

Real Estate. Frequently the first consideration in co-locating is whether one party will lease property from the other or if each will own their respective adjacent sites. Both have their benefits and costs, but leasing arrangements need to be considered especially carefully. If the parties elect to have one facility lease property from the other, both need to consider the term of the lease and what will happen when and if the lease terminates. It is not necessarily easy to move a building and the equipment inside, which can make leasing property risky for the party building a facility on leased ground. However, for less-established facilities without access to the capital necessary to purchase property, leasing can reduce upfront capital costs and make the facility more profitable. Both parties to a leasing arrangement need to carefully consider in which situations the lease can be terminated and what effect the termination will have. For example, will the leasing party be required to remove the building and equipment once the lease terminates? Who will be responsible for environmental spills and contamination on the site, and what control can the land owner have in order to avoid contamination? How long does the lease have to last in order for the facility to secure financing?

While more of a practical concern, the parties need to also consider how each will access their respective facilities and whether any easements or other rights need to be extended in order to guarantee continued access. Will the leased facility require utility easements, roads or other rights in order to continue operating the facility? 

Insurance and Liability. Co-locating arrangements can have an impact on the respective insurance costs and liability risks for both parties. While sharing infrastructure between two facilities can be efficient, it can also change the risk profile of these facilities and could increase the likelihood and magnitude of an accident.     

In conclusion, while co-locating two facilities can offer both financial and operational benefits to both parties, there are additional risks that should be considered and mitigated before two facilities decide to pursue such a project. Negotiating these issues up front when both parties are on good terms is significantly easier than facing them when problems arise in the future.

Author: Joe Leo
Attorney, BrownWinick Law Firm
515-242-2462
[email protected]