For far too long, owners of real estate with environmental problems - "brownfields" - had few avenues for relief. The notion of redeveloping environmentally tainted properties seemed to be a theoretical exercise that involved impossible-to-satisfy regulators, lenders who wouldn't return phone calls and a chasm of liabilities that had no bottom.
But that scenario is rapidly becoming out of date. Many positive developments have sharply improved the climate for brownfields investment. For example, useful tools such as environmental insurance and guaranteed maximum price contracts from engineering firms now adequately mitigate risk. Three years ago, only one firm provided environmental insurance; today, at least five major firms do so, and competition has made the products much more efficient. Engineering firms are competing fiercely for consulting and clean-up contracts and are prepared to put their own credit on the line to get projects completed at a fixed cost. Thanks to more sophisticated technology and a wealth of accumulated experience, the certainty associated with clean-ups has improved substantially.
Consequently, owners, lenders and brokers can now accurately determine the cost and timeframe for remediating an environmental problem, analyzing risk factors much as they would for replacing a facade or installing a new parking lot.
Brownfields, as designated by the U.S. Environmental Protection Agency, are those 450,000 sites that are unused or under-used due to a real or perceived environmental condition. In 1980, Congress passed The Comprehensive Environmental Response Compensation Liability Act ("CERCLA" or "Superfund," amended in 1986), which established a program to identify and remediate contaminated sites. But as we all know, CERCLA created more litigation than clean-ups.
The statute cast an expansive liability net, imposing strict joint and several liability on potentially responsible parties who contributed to the contamination. Not only were the original contaminators at risk for the clean up, but all subsequent owners and operators of the tainted property were included in the "chain of title," making them potentially liable as well. This created significant issues for lenders who wanted to pursue a foreclosure.
Lack of progress under federal clean-up initiatives led to efforts to simplify the regulatory approval process. Perhaps most important was the move by the federal government to transfer jurisdiction of over 60% of brownfield sites to the state level. Forty-three states have either passed or are considering brownfield legislation that would reduce the liabilities of prospective purchasers and allow for less stringent clean-up standards, making remediation easier.
Compelling evidence that brownfield redevelopment is a reality is the fact that Brookhill Redevelopment has acquired and financed 32 tainted properties over the last two years. Equally significant is that 25 of these properties already have been remediated, redeveloped, leased and sold at market prices.
The recent acquisition of a large industrial property in Indianapolis illustrates how brownfield redevelopment can work for the seller, the broker and the community, as well as the redeveloper. This well-located asset was available at a discount to its intrinsic market value from a major institutional seller unable to adequately address environmental and vacancy issues and extremely concerned about continuing liability.
Despite lengthy and expensive efforts to remediate the property, the seller could not obtain closure of the environmental issues. Brookhill worked with Indiana regulators to design a workable procedure under the state's "Voluntary Remediation Plan." Once a plan was approved, we moved forward to materially improve the property's occupancy rate. Utilizing the broker (among others) who had sold Brookhill the property, new leases were signed, and we expect shortly to sell the property to a local developer at a market cap rate. The seller's environmental liability was assumed by Brookhill, the state was able to point to a successful remediation, and the broker was able to earn several fees.
The conventional wisdom, which regards contaminated real estate as a problem rather than an opportunity, still prevails throughout much of the real estate industry. But that way of thinking is obsolete. In fact, as the real estate cycle matures and conventional opportunities for value enhancement and high returns become fewer, the profitability of successful brownfield activities compares very favorably today with other types of real estate transactions.
In summary, important changes in government regulation, insurance products and clean-up technology have vastly improved the viability of brownfields investment. Property owners, lenders, brokers: Please take note.