Once a sworn enemy of the commercial real estate business, environmentally challenged lands such as brownfields had the industry running for cover. But now, armed with improved legislation and a better understanding of the issues at hand, real estate professionals are fighting back.
Real estate entrepreneurs are seeing green over America's brownfields. A number of factors, ranging from a more favorable regulatory atmosphere and potential changes in federal legislation to new insurance vehicles to lessen potential risks and a desire by firms to reuse abandoned, well-located sites, are contributing to this interest in environmentally challenged land.
* The brownfields market is attracting large and sophisticated players. For instance, Koll - one of the nation's largest real estate services firms - recently teamed up with Germany's ENSR, the large environmental remediation company, to create Koll ENSR Environmental Realty Advisors (KEERA) to work with American corporations and institutions to clean up soiled real estate.
* Regional environmental firms, convinced they can apply their knowledge to redevelop brownfields, are now teaming up with commercial real estate brokers to identify potential projects and then propose potential solutions.
* Finite risk coverage, offered by companies such as Environmental Warranty Inc. of West Hartford, Conn., can protect new owners of contaminated properties from future liabilities and shield them from the stigma associated with polluted sites. Policies can also cap cleanup costs.
* "Environmental merchant banks," including efforts by Landbank Inc. of Denver and Cherokee Industries of North Carolina, are being formed to undertake $5 million to $100 million deals involving the redevelopment of brownfields parcels, either by buying the acreage or entering into a risk-sharing venture with property owners.
* The National Realty Committee and others are working diligently to convince Congress to pass legislation clarifying the circumstances under which real estate owners, prospective purchasers and lenders could and could not be held liable for environmental cleanup costs.
* The Clinton administration has announced plans to offer $2 billion in tax incentives to encourage the cleanup, redevelopment and reuse of contaminated, abandoned industrial sites in economically distressed areas. It also proposed accelerated tax deductibility of cleanup costs for purchasers of such sites, as well as policy steps to protect real estate lenders from undue liability for environmental cleanup costs.
"Undoubtedly, there has been increasing interest in brownfields," says Tad Jones, senior executive vice president, CB Commercial Real Estate Group, Los Angeles. "Many are in key locations within major SMSAs - highly populated areas - where the land is lying fallow, a blight on the neighborhood. Brownfields don't create jobs and can be a drag on the community, but the potential for an excellent real estate opportunity is there."
Bruce A. Amos, brownfields redevelopment manager for ECS Inc. of Exton, Pa., adds that the brownfields market has been around nationally for 2.5 years but is rapidly catching fire. "It started as a local municipal market and then grew into a national market for several reasons," Amos says. "One is that it is now an issue in corporate board rooms. The disposal of contaminated properties is no longer a line item in the annual report. Companies are starting to realize hidden value in these assets."
What are brownfields, and why are they creating such excitement among developers, real estate brokers, municipalities and politicians?
"Quite simply, a brownfield is a piece of land that has been used in the past for industrial or commercial purposes and, because of contamination or even the possibility of contamination, these properties sit dormant and are very difficult to redevelop," says U.S. Congressman John D. Dingell, the Michigan Democrat who is working on current brownfields legislation.
While brownfields occur in all sections of the country, they are most prevalent in cities, particularly those in the Northeast and upper Midwest. The U.S. General Accounting Office estimates that between 130,000 and 450,000 sites -- contaminated with heavy metals, gasoline or oil constituents from underground storage tanks and chlorinated solvents from de-greasing -- exist throughout the country. They do not include Superfund type sites.
Harry Henshaw, senior vice president of Cleveland-based Galbreath Co. who heads up the Corporate Industrial Services Group, says that many of these are well-located industrial sites. "The infrastructure -- sewer, gas, water -- are there and so is railroad access," Henshaw says. "It makes sense to try to reuse this infrastructure, to see if they can be made at least as competitive as greenfields sites, particularly where you have to install all of the infrastructure going in."
So why haven't more brownfields been redeveloped? Fear of the unknown.
Those in the real estate field say one of the great ironies of the Superfund Act (the Comprehensive Environmental Response, Compensation and Liability Act or CERCLA) of the 1970s is that it guaranteed sites with almost any level of environmental contamination would become unusable for commercial purposes, since no private purchasers or lender was likely to come forward and get involved.
According to Equitable Real Estate Investment Management Inc.'s Douglas A. Tibbets, who is chairman of National Realty Committee's Environmental Policy Advisory Committee, Washington, D.C., the cloud of potential CERCLA liability has made contaminated properties less attractive to purchase, finance and privately remediate.
"Laws were set up that caused the market to implode and not address the real issue of remediation," says Nicholas Patin, managing director of Newport Beach, Calif.-based Koll Investment Management. "The way the laws were structured was that anyone who had created a problem was held fully accountable for bringing environmental conditions back. Not only that, but regulators said, `you must eliminate everything that is toxic,' irrespective of what the intended use of asset was."
Now, he adds, regulators realize that society can't spend its entire net worth to remediate assets that have been contaminated and instead are adopting risk-based closure, looking realistically at issues and working with the people who caused the problems and who own assets for a timely solution.
"Where the EPA used to say, `There is a certain type of contaminant in soil, we want it down to zero parts per million,' and the area was an industrial park, the EPA now says, `Remove any contaminates that impact public safety, but we'll allow one or 10 parts per million on the other contaminants that aren't a threat to public safety," Patin says. "It used to be that 80% of money was spent to get the last 10% of contaminants out of the ground."
Today, regulators are starting to look at actual potential exposure and routes of exposure, and that bodes well for potential developers of brownfields, says Robert S. Walters, PE, director of client services for Boelter Environmental Inc. of Park Ridge, Ill. "In some cases, you can't clean it up to the point where you can drink water if there is no ground water on the site," he says. "You have to analyze what exposure there is and calculate an acceptable risk, whether it's one in a million or 100 in a million."
The Illinois legislature recently passed legislation allowing for a risk-based approach, a paradigm to determine cleanup objectives, Walters says. "It's hoped it'll turn around (brownfields) real estate transactions, because as developers go further and further out, they're running out of greenfields," he says. "And the cost of doing that is tremendous."
Environmental insurance to the rescue
If more brownfields turn into greenfields, people like Charlie Perry may be responsible. Perry is president and CEO of Environmental Warranty Inc. of West Hartford, Conn., a company formed 4.5 years ago with about four people, who had banking, insurance, finance and real estate backgrounds. A national insurance brokerage firm, EWI specializes in environmental insurance coverage with special emphasis on the reduction of environmental remediation risk and cost for the owners of real property.
EWI and others offer a new kind of insurance program that not only helps companies pay for remediation but preserves their financial stability. Often referred to as finite risk or blended insurance, the coverage is tailored to the specific needs of the deal.
According to Perry, the company's commitment and focus is to insure that environmental risk and its financial and regulatory implications do not de-rail one of the most productive and vibrant industries in the nation: commercial real estate.
"Unknown environmental problems are a far, far greater source of loss than fire, vandalism, theft or title risks," says Perry. "I doubt if there's lender in America that hasn't run into an environmental problem, either directly or indirectly."
EWI -- which has joined ranks with Lawyers Title Corp. of Richmond, Va., to form a subsidiary company called Lawyers Title Environmental Insurance Agency with 14 offices nationwide -- is in the forefront of creating insurance programs which satisfy regulatory agencies that enough resources are committed to complete a cleanup and, at the same time, protect the developer and lender from numerous liability.
Among some of its work:
* A shopping center with known contamination in the groundwater emanating from a neighborhood site. The owner of the site was looking to sell the property and wanted to comfort the buyer regarding environmental issues. EWI issued a policy for the property with a government order trigger and no exclusion for the known contamination. "If the regulatory authority requires the owner of the center to take remedial action for environmental conditions on the site, the policy would respond," Perry says. "The limit of the policy was $5 million with a deductible of $25,000."
* A Fortune 500 company that was selling a manufacturing location in Illinois to another Fortune 500 company. "The seller did not wish to provide the buyer with an environmental indemnification for the site," Perry says. "EWI entered the negotiations and issued a policy in favor of the buyer for this site. The policy was accepted in place of an environmental indemnification with the sale price being discounted by cost of the coverage."
And most times, the cost of clean-up is relatively minor, says Jan Schutze, M.S., R.G., vice president of environmental services at Los Angeles-based Building Analytics. "It's about $20,000 to $30,000 worth of work to find out what the problem is and quantify it. The difference in price in construction may only be around $5,000."
Schutze says that changes in the industry as a result of better people in government, consulting and development have improved the treatment of environmental properties.
Even so, new national legislation is needed to provided real estate lenders with the comfort level they need to underwrite transactions that will expedite the cleanup and redevelopment of thousands of moderately contaminated sites, experts contend. J. Thomas Black, urban development economist at the Urban Land Institute in Washington, D.C., says the laws as currently written don't make developing brownfields economically viable.
"It's an incredible dis-incentive," says Black. "Why subject yourself to that risk if you have other alternatives? So most of the states in the industrial belt have passed legislation providing voluntary remediation programs, new investor protection for liability and incentives for people to come in and invest in sites. They've done just about all they can at state level, including providing financial incentives, but federal law is still sitting there lurking over the situation. The EPA has tried to fix the process as best they can, tried to reduce the exposure for lenders, passive investors, but the court said they didn't have authority to do that."
Roger Platt, national policy counsel of the National Realty Committee, says that when you have a federal statute with a broad liability net, it makes potential purchasers of projects anxious about being caught in the web.
In the past, Platt says, many of those involved in enforcement spent much of their time suing people to clean up sites, and a lot of money was spent in lawyer's fees, because so many of the parties who were sued went out and sued other people. "That led to a dissipation of the cleanup focus," he says. "The liability mess is very broad, such that the program was recognized as doing a weak job in getting sites cleaned up."
Congress and the Clinton administration are aware of the brownfields legislative problems and are working toward a solution. However, Platt adds, there remains a tremendous gap between the Democrat and Republican ways on how to craft these changes. "I think in an election year, it is always difficult for everyone on Capitol Hill to determine what the best course of action is," he says. "We are sober in our appraisals about Superfund reform but hopeful that policy makers will pursue those areas of agreement with brownfields."
The government itself may even be more sympathetic to the brownfields problem now since it has some of its own. In testimony before a Congressional hearing on the brownfields redevelopment panel, J. Peter Scherer, senior vice president at The Taubman Co., Bloomfield Hills, Mich., noted that the proposed sales of military installations and other federal facilities to nongovernmental parties has provided the government "with a taste for the kind of challenges faced by private owners when they try to transfer, finance and redevelop contaminated property."
Two other developments are also bringing brownfields to the forefront of the real estate industry. One is an accounting rule change; the other is environmental insurance.
Federal Accounting Standards Board Rule 121 is forcing owners (as of Dec. 15 of last year) to not only carry real estate assets on their books at true market value but also to show a contingent liability on the balance sheet for anticipated remediation costs. For instance, Ryland Homes has taken a $27 million write down, and Texaco has taken $640 million to recognize the environmental impairment issue.
At the same time, an insurance safety net of sorts is being created by people like Charles L. Perry Jr., president and CEO of West Hartford, Conn.-based Environmental Warranty Inc. Perry says that business has increased as much in last 12 months as it had in the past three years.
And, a number of visionaries are entering the brownfields field. "Selected real estate developers are excited about this," Perry says. "There is a joint venture, Clean America Properties, between Joe Canizero of New Orleans and an environmental law firm and another is by William E. Simon and Cherokee Advisors. Niche developers bring an entrepreneurial attitude to a transaction. They're entrepreneurial developers who can come in and expedite and facilitate the use of a piece of property."
For instance, Galbreath is heavily involved in the brownfields business, representing not only clients who own sites they would like to sell but community agencies who want the brownfields to be productive again -- and tax generating. The real estate firm was recently selected to head up a team to redevelop 120 acres in Pittsburgh, a former steel mill site about a mile from downtown that the city acquired years ago.
"I think now we have a happy confluence of interests," says the National Realty Committee's Platt. "Municipalities, themselves, recognized they have an asset that may be under-utilized and using it could increase the tax base and improve the economic life of their particular city, so there is now a renewed focus."