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Agricultural Law Forum December 2014

In this issue:

Outgoing Administration Backs New Phosphorous Management Tool
Draft Hazardous Substance Reporting Regulations Could Impact Farmland Sales
Farm Succession Planning Can Provide Peace of Mind and Minimize Taxes
General Discharge Permit for Animal Feeding Operations Renewed
Draft Medical Marijuana Grower’s Regulations Available for Comment

Outgoing Administration Backs New Phosphorous Management Tool

On December 1, 2014, the Maryland Department of Agriculture (MDA) formally proposed new regulations governing how and when farmers can apply chicken manure, which is rich in phosphorous, to their crops. The proposed regulations describe how MDA intends to phase in the use of a new Phosphorous Management Tool (PMT) developed by University of Maryland scientists to analyze areas where there is high risk of phosphorous getting into nearby waterways and to develop agricultural land management practices that will reduce the movement of phosphorous into sensitive streams and other water bodies. Although the PMT will only apply to farms where the soil fertility index value is 150 or more, a significant number of farms on the lower Eastern Shore have high phosphorous levels and will meet this criterion. The PMT will be included in the Maryland Nutrient Management Manual (which is incorporated by reference into the Code of Maryland Regulations (COMAR)) and will replace the Phosphorous Site Index that is currently used.

The PMT regulations were originally proposed in December 2012, but were revised and withdrawn twice by MDA after farmers raised concerns about the impact of the new regulations and uncertainty about how they would be implemented. The revised regulations now include a six-year phase-in, with the farms with the highest risk of potential phosphorous loss being required to transition sooner. All nutrient management plans developed after July 1, 2020 will be required to use the new PMT.

A recent economic impact analysis estimates that implementation of the PMT would cost Eastern Shore farmers $22.5 million over six years. It would cost the State another $39 million in subsidies to help transport poultry litter and reimburse some of the cost of having to purchase commercial fertilizer. The study also concluded, however, that it is impossible to compare the value of improved Bay quality that might occur because of implementing the PMT with the actual costs to be paid by farmers.

MDA is accepting comments on the proposed regulations until December 31, 2014. For additional information, contact Maggie Witherup at mwitherup@gfrlaw.com or 410-576-4145.

Draft Hazardous Substance Reporting Regulations Could Impact Farmland Sales

On October 31, 2014, the Maryland Department of the Environment (MDE) published draft regulations that would require reporting to MDE “immediately” of certain environmental sampling results that “indicate a release of a hazardous substance to the environment” above certain “thresholds.” If enacted, these regulations could significantly impact Maryland farmers and other property owners seeking to sell their land.

The regulations require a responsible person (RP) to report environmental sampling results to MDE if they are over certain thresholds. For most sites, an RP is an owner or operator of the property where the sample was taken. However, the obligation is not limited to current owners. A prior owner or operator who has retained a copy of a sampling result meeting the criteria may be required to report the result to MDE. The regulations also provide that people working at the site or other property users may make a report. It does not matter whether the owner or operator performed the test; the only issue is whether the owner or operator is in possession of the results. So, for example, a prospective purchaser who conducts sampling would not necessarily be required to report it to MDE unless or until the prospective purchaser acquired title. However, if that purchaser provides the current owner a copy of the results, the current owner likely will be required to report the sampling results. Responsible persons are required to file a report upon the later of: (1) 30 days after the regulations are effective; (2) 30 days after discovery of a report older than October 1, 2009; or (3) 15 days “after discovery” by the RP of sample result above the reporting thresholds.

The reporting thresholds are contained in a guidance document (incorporated by reference in the regulations) and include a long list of constituents with residential and non-residential standards for reporting. These thresholds are generally very low. In the case of some substances like arsenic, for example, the threshold is the “anticipated typical concentration,” meaning you will be required to report arsenic detections that are what would be expected to occur naturally on any property in Maryland. We anticipate that many Phase II Environmental Site Assessments and other sampling reports will show at least some sample results that exceed these numbers and therefore may need to be reported to MDE.

The regulations do not include any “grandfathering” for prior sample results regardless of how long ago they were taken as long as you still possess the results. So, for example, a soil sample result from 1980 that an RP currently has in his or her possession must be disclosed, even if the RP no longer owns the property. Although MDE has indicated that RPs are not required to search their records, if challenged it will be extremely difficult to convince MDE that the property owner did not know it possessed a report. And once a report is discovered, it must be submitted to MDE within 30 days of discovery.

The timing of disclosure of sample results likely will be most problematic in the middle of a sale or lease transaction when sample results are obtained during due diligence periods. Potential purchasers or their lenders/investors are likely to insist on disclosure and resolution with MDE prior to closing on the property. Depending on transaction deadlines and MDE processing time this may be difficult if not impossible.

There are exemptions for properly-applied pesticides and fertilizers, de minimis residential use of hazardous substances, releases previously reported to MDE or the EPA, or oil releases already subject to other provisions of MDE regulations. Although there are provisions for naturally-occurring substances, they are limited and discretionary with MDE.

After reporting, the regulations do not specify how MDE will respond and there is no deadline for response. This is the most significant unknown and is likely to be a significant issue for real estate transactions. For property involved in real estate transactions (e.g., buying/selling, mortgaging or refinancing, leasing), once a report is pending it is highly unlikely the transaction will proceed until MDE has issued closure. This closure may simply be a letter stating that no further action is necessary, and if the Department issues the letter very quickly (using its existing staff) the regulations will not be a problem. But there are no deadlines for response, no closure process is set forth in the regulations, and no funding exists for additional staff to process and respond to submissions. If MDE is overwhelmed by submissions, decides further testing is needed, or decides remediation is required, the property could be effectively entering indefinite purgatory.

For additional information, contact Todd Chason at tchason@gfrlaw.com, 410-576-4069 or Maggie Witherup at mwitherup@gfrlaw.com, 410-576-4145.

Farm Succession Planning Can Provide Peace of Mind and Minimize Taxes

If you are the owner of the family farm, you have probably spent many evenings worrying about the future of your farm after your death. Who will operate the farm when you are gone? Will there be a farm to operate if your estate is subject to estate taxes? With proper planning during your lifetime, you can alleviate some of these concerns so that your evenings are spent preparing for the next day’s work rather than worrying about the future of your farm.

There are many issues you should consider in planning for the succession of your farm. For instance, is there a particular form of ownership for your farm that will make management of the farm easier during your lifetime, ease transition at your death, and possibly save estate taxes for your family? Making the choice between a sole proprietorship, corporation, limited liability company, or other form of business entity can involve many variables, including your goals and the liability risks, tax ramifications, and management issues associated with each.

On the management side of things, you will want to determine whether any of your family members are interested in operating the family farm after your death, and if so, whether they are qualified to do so. Although you may plan extensively for the continuance of farm operations, these plans may be irrelevant if the individuals that you have tagged to operate the farm have no interest in doing so and/or are not adequately trained for the job.

If you are fortunate enough to have family members who wish to continue the farm’s operations after your death, what efforts at balancing your net worth, if any, should you make as to those family members who have no interest in the farm but who still wish to share in the family’s wealth? And should you start transitioning ownership of the family farm to the interested individuals while you are alive by implementing a gifting plan, or simply wait to transfer ownership at your death? Often, these types of emotional decisions can be more difficult to make than some of the business decisions involving the family farm.

Finally, what steps can you take to minimize the risk that the family farm may need to be sold after your death to pay estate taxes? While conservation easements and special land use valuation may reduce the value of your farm for estate tax purposes, there may nevertheless be estate taxes to pay, and minimal other assets from which to do so.

Obviously, there is no “cookie cutter” solution for every family that owns and operates a farm – each family has unique needs and circumstances that should drive their estate plan. Take the appropriate steps now to ensure that your estate plan is current and tailored to meet your specific goals and desires, as to the family farm and otherwise. For information about how best to plan for the succession of your farm, contact Laura Johnson at ljohnson@gfrlaw.com or 410-576-4065.

General Discharge Permit for Animal Feeding Operations Renewed

Effective December 1, 2014, the Maryland Department of the Environment (MDE) has reissued, with modifications, the General Discharge Permit (GP) for Animal Feeding Operations. All large and medium animal feeding operations that discharge or propose to discharge to waters of the State must be covered under the new GP. The proposed modifications to the permit are mostly minor in nature and are intended to eliminate requirements that are no longer applicable and provide consistency. Under the new GP, both Concentrated Animal Feeding Operations (CAFOs) and Maryland Animal Feeding Operations (MAFOs) will have the same requirements, which may be either a comprehensive nutrient management plan (CNMP) or a Maryland Department of Agriculture (MDA) nutrient management plan along with a soil conservation and water quality plan (SCWQP). According to MDE, most farms already have MDA nutrient management plans, many have SCWQPs, and there are more plan writers for MDA nutrient management plans than for CNMPs.

Any CAFO or MAFO owner or operator who has not already notified MDE of their intent to be covered under the new GP must submit a new Notice of Intent as soon as possible. For more information, contact Maggie Witherup at mwitherup@gfrlaw.com or 410-576-4145.

Draft Medical Marijuana Grower’s Regulations Available for Comment

Maryland’s medical marijuana commission recently voted to approve draft regulations to establish the State’s medical marijuana program. A law passed earlier this year allows up to 15 growers and up to 100 dispensaries around the State; however the proposed licensing fees would be among the highest in the country and likely cost-prohibitive for many: $250,000 for a two-year grower’s license, paid in a $125,000 installment per year; and $80,000 for a two-year dispensary license, to be paid in a $40,000 installment per year. The draft regulations now go to the Secretary of Health and Mental Hygiene for final review and if approved, begin the formal promulgation process. After the regulations are published in the Maryland Register, interested parties will have 30 days to submit comments.

For information about the proposed requirements to obtain a medical marijuana grower’s license or to submit comments on the draft regulations, contact Maggie Witherup at mwitherup@gfrlaw.com or 410-576-4145.