Memo

To:	Dave Corliss and Toni Wheeler
From:	William F. Ford
Date:	March 6, 2008
Subject:	Status of Former Farmland Nitrogen Facility in Lawrence, Kansas

Factual Background

The former Farmland Nitrogen Facility in Lawrence, Kansas is a 467 acre tract of land located on the southeast portion of the City on K-10 Highway. This manufacturing facility opened in 1954. Farmland purchased the facility in 1984 and closed operations in the year 2001. Over the life of this facility, it manufactured various nitrogen fertilizer products. The site has been the subject of periodic environmental investigations and clean ups for more than 30 years.

The most recent comprehensive characterization of the site’s environmental condition in the City's possession is a 2006 site characterization report for the property. According to that report, approximately 225 acres of the former Farmland Nitrogen Facility are either clean, or not sufficiently contaminated such that any further action is anticipated to be required.

According to the 2006 site characterization report, approximately 242 acres of the facility are in need of further environmental remediation. The types of contamination found at the facility include soil, groundwater and surface water contamination. The major contaminants at the facility are nitrogen compounds, ammonia, petroleum hydrocarbons and various heavy metals.

There is ongoing monitoring of the site's condition and planning for environmental remediation of the site. This monitoring and environmental remediation is being pursued by a trust set up through the Farmland bankruptcy and is monitored by the Kansas Department of Health and Environment (“KDHE”). The trust is in the process of negotiating a potential final remediation plan with the KDHE but that remedy has not yet been chosen and there is currently no specific timeframe for completion of environmental remediation at the site. Even after a long term remediation strategy is selected and implemented, it is likely that there will be long term monitoring required of environmental conditions at the site and some operational restrictions on use of some portions of the site for many years.

There have been various cost estimates for environmental remediation and administrative oversight of the former Farmland Nitrogen Facility over the years. The most recent estimates the City is aware of range from approximately $4.5 to $8 million dollars for environmental remediation and $1.4 to $8 million dollars for demolition cost of the site. These cost estimates are significantly dated in some instances and include some work which has been completed already at the site. Final cost estimates will need to await negotiation between KDHE and the trust on a choice of remedy.

farmland bankruptcy

Farmland Industries filed for bankruptcy in May of 2002. As a part of the bankruptcy, a plan for handling bankruptcy assets and liabilities was approved by the bankruptcy court in December of 2003. As a part of that plan, a property disposition process was created for real estate owned by Farmland in the state of Kansas. Farmland created a remediation trust agreement to hold four pieces of property in the state of Kansas which were subject to ongoing environmental remediation obligations supervised by KDHE. Those properties were in Hutchinson, Lawrence, Topeka and Wichita. In conjunction with KDHE the Farmland bankruptcy trust estimated the costs for remediation of these four properties and placed monies within the remediation trust to pay for that remediation and the administrative costs associated with these four properties. KDHE is listed as the primary beneficiary of that remediation trust and considers the money in the remediation trust as the financial assurance that the environmental clean ups will occur at the various properties. The trust is only obligated to clean up the property to the amount of the trust funds.

The remediation trust also provides a process by which the properties within the trust may be sold, and the trust continues to exist until the properties have either been cleaned up or they have been sold under the trust terms. Properties can be sold under the remediation trust agreement only with KDHE approval (except in very limited circumstances) and any sale will likely need bankruptcy court approval. At this time the only two properties left remaining in the remediation trust are the Hutchinson property and the former Farmland Nitrogen Facility in Lawrence, Kansas.

The process by which properties under the remediation trust agreement are expected to be sold is through a bankruptcy court sale. The sale process may include an auction that is prompted by submission of potential starting bids to the bankruptcy estate. The bankruptcy estate then selects one of those potential bids as the starting point and the bid format to begin the auction. The actual auction then follows the chosen bid's format with ultimate approval of the auction and sale required from the bankruptcy court.

city OF LAWRENCE goals for the former farmland nitrogen facility

The former Farmland Nitrogen Facility is a substantial and high profile piece of property with significant potential for jobs development in the region. The City's goals for the property are outlined in the Draft Farmland Industries Redevelopment Plan. These goals include making sure that the environmental remediation of the property is completed and performed appropriately. Similarly, the City is interested in making sure that the property is not sold off in a piecemeal fashion leaving only the most contaminated portions as undevelopable land. In general, the City wants a productive and appropriate uses for the property as quickly as possible. The City also desires to avoid unknown and open ended liabilities often associated with environmental liabilities on property.

Towards these goals the City is interested in influencing the use of property through normal governmental land use restrictions and potentially through City ownership of the property.

In order to accomplish the City’s goals, the City has previously decided to make a bid to purchase the former Farmland Nitrogen Facility in order to try and commence the auction process and set the format for a bankruptcy court auction. The City has submitted a bid to the bankruptcy estate.

The structure of the bid submitted by the City to try and start the auction of the former Farmland Nitrogen Facility provided that the environmental trust funds would remain in place to perform the site remediation. The City would not be responsible for clean up of existing site conditions at the property. Under the proposed City bid, the City would not be out of pocket funds up front to acquire the property, and the City would take a portion of the administrative trust funds held by the remediation trust to cover certain demolition and carrying costs for the property. Under the City's bid, the City would be responsible to pay for necessary demolition and carrying cost for the property.

It is unclear at this time whether there are any other bids in active consideration for purchase of the former Farmland Nitrogen Facility out of the bankruptcy court remediation trust.

Even if a City bid is not chosen for the starting bid to begin the auction process, the City should have the opportunity to bid in any auction for sale of the former Farmland Nitrogen Facility. When the auction begins, the City may choose to bid or may choose not to bid depending on the structure of the bid format chosen and on the economics of the bidding process. At the present time there is no auction set and there is no timeframe for when the City can predict that such an auction might occur.