Vestar Development took a chance with a former landfill, junkyard and foundry as the site for its Tempe Marketplace. After spending $40 million and nearly two years to clean up the site, Phoenix-based Vestar formally opened the $280 million 1.3-million-square-foot mixed-use center late last September.

The 120-acre parcel was so polluted it has been classified by the Environmental Protection Agency (EPA) as a Superfund site (a site designated by the federal government as eligible for assistance because it may endanger public health or the environment). The parcel was littered with 3,000 wrecked cars, buildings that had to be demolished and a landfill contaminated with PCBs whose dangerous gases had triggered explosions.

“When you get into these things, you think you have an idea of what is involved in the cleanup, but you really never know until you are in the middle of it,” says David Larcher, Vestar's executive vice president.

But Vestar thinks the trouble is worth it. The selling point for Vestar with this brownfield was that it was situated at the crossroads of vehicular traffic encircling the Phoenix metro at loops 101 and 202, Arizona's busiest. “We are at the intersection of two of the busiest freeways in Arizona, and that is the reason you go through the significant effort to clean up the site and take the time and expense involved,” says Larcher. In its first year, Tempe Marketplace is expected to generate $300 million in sales drawing 20 million people from a 15-mile radius.

Tempe Marketplace is just one example of the efforts developers are undertaking across the country. With financial help from federal, state and local agencies, developers are taking second looks at brownfields. In their previous searches, they would have bypassed them in their quest for pristine greenfields and in-fill sites.

Now, with the government subsidies and well-defined remediation procedures, once overlooked brownfields are being redeveloped with high-density retail projects. For example, Vestar received a $1 million federal grant from the Brownfield Economic Development Initiative, whose purpose is to spur redevelopment of contaminated sites and create jobs. The U.S. Department of Housing and Urban Development also provided a $7 million loan. And the sales taxes collected by Tempe over the next 20 years will be shared with Vestar to help absorb a portion of the $40 million remediation, which ran over by $25 million.

The exact number of U.S. brownfields is unknown, but estimates place the number between 400,000 and one million, says Robert Colangelo, executive director of the National Brownfield Association, which promotes the responsible development of these sites. Over the past decade, 50,000 brownfield sites across the nation have gone through a voluntary cleanup. Retail developments have been the most popular according to Colangelo due to lower clean-up costs, compared to residential development, and their high appreciation land values.

Moreover, retailers, including Target, Home Depot and Lowe's are locating on urban brownfields because more often than not, they are the only sites available to accommodate the big-box projects.

Additional factors that make brownfields attractive, he says, are that they are oftentimes located in markets where the barriers to entry are prohibitive or there are just no large tracts of greenfields available.

“There is more interest than there has ever been in the past,” says Peter Hollingworth, the founder of Sacramento, Calif. — based Brownfield Financial, which funds brownfield developments. “One [reason] is that we are running out of greenfields. Two, there are a lot of public incentives to work with in-fill properties, and they tend to be brownfields. The technology is also advancing to the point where it is more economical. For those reasons, it is poised to become very important in this country as a source of development business.”

Little more than a decade ago, redevelopment on contaminated sites was considered a risky venture. Businesses were concerned about ongoing liability, the cost of cleaning sites to strict standards and the high cost of financing.

That changed in 1995, when the EPA initiated a two-year pilot project with state and local governments and Native American tribes to rehabilitate contaminated sites for redevelopment. The EPA provided seed money for projects that laid the foundation for the Small Business Liability Relief and Brownfields Revitalization Act, which became law in January 2002.

In Killingly, Conn., when the former Anchor Glass Container Corporation shuttered in 1997, it left behind manufacturing and warehouse facilities atop soil and groundwater that had been contaminated with volatile compounds and petroleum-based products. With the help of $1.5 million in tax increment financing from the Connecticut Brownfields Redevelopment Authority, Ceruzzi Holdings has cleaned up the 85-acre site and is developing it as Killingly Commons, a 525,000-square-foot retail center. It's scheduled to open late this year.

“The retail market has been one of the quickest to recognize brownfields as a redevelopment opportunity,” Colangelo says.

The reason, notes Colangelo, “A lot of times the parking lot and the foundation for the building act as an engineering barrier to the contamination. So they combine the construction cost with the remediation effort. In the past, someone would clean up a site and then build on it.”

Win-win

North American Properties built its Lakeside MarketPlace on 40 acres of a former landfill that was once home to a flea market. Mark Toro, a partner, who established the firm's Atlanta office in 1996, says the location in rapidly growing Cobb County was attractive, but the land required a great deal of remedial work to make it viable for development after it was purchased in late 2004.

Local government leaders were eager to revitalize the blighted area, Toro says, so the company and the city of Acworth formed a partnership to secure tax increment financing to stabilize the landfill and make it environmentally sound. With $6 million from the Lakeside Tax Allocation District, approved in October 2006 by the city, Cobb County and the Cobb County School Board, it supplemented the cost of the work, which totaled $7.8 million.

In July 2006, North American opened Lakeside MarketPlace, a 330,000-square-foot power center anchored by a SuperTarget. “It probably was one of the fastest leasing projects we've ever had,” Toro says. “This has been done frequently enough now that most retailers are able to get their heads around it. Many of America's biggest retailers have figured it out.”

That wasn't always the case, says Kent Jeffreys, legislative counsel for ICSC. The Brownfields Revitalization Act has limited the liability and potential for litigation by establishing clean-up guidelines that greatly reduced costs. Now, Jeffreys say, the focus is on removing the source of the contamination and sealing the site.

“They (state and federal environmental protection agencies) have made it a more rational approach to cleanup,” says Jeffreys, the former director of environmental issues for ICSC. He explains retailers can insulate the contamination because in most cases we have a big footprint.”

The issues surrounding whether to develop a brownfield are similar to those of developing a greenfield. Developers must evaluate the infrastructure, customer base and transportation. Then it comes down to determining the scope of the contamination to see whether it pencils out.

“A lot of brownfields are close to mass transit and highways, and they have infrastructure around them,” Jeffreys says. “There is a lot of potential because they are in underserved communities.”

The biggest mistake made in brownfield redevelopments is underestimating the clean-up time and costs. The most important factor is not to skim on the investigation, says Martin Shelton, an Atlanta environmental attorney. There are ways to save money, but shortchanging an environmental assessment is not one of them, he says.

Every state also has its own rules. California's environmental laws are considered among the most stringent, which can prolong the process. Experts say the Rust Belt states of Michigan, Illinois and Pennsylvania offer the most latitude.

“Today there is more of a partnership. They don't look at the cleanup as the end game but redevelopment as the end game,” Colangelo says.

The up and down sides

The mark against brownfields is the liability a developer takes on when choosing to rehab a site that could be hazardous, says Toro. Government agreements and insurance can mitigate the liability, but it's still something that needs to be carefully evaluated. North American Properties' Lakeside MarketPlace northwest of downtown Atlanta, for example, is outfitted with a ventilation system to prevent the buildup of gases emanating from the landfill site.

However, the heavily weighted negatives can be negated by the financial contributions from the government. Last year, the EPA awarded 295 grants to 202 applicants, totaling $70.7 million, for site assessment, clean-up projects and sub-grants for low-interest loans to facilitate cleanups. Local tax incentives also help promote those efforts. Details about incentives and a state-by-state list of contacts can be found at www.epa.gov/brownfields.

While brownfields traditionally cost less to purchase than greenfield sites, that is changing. Vestar paid $1 million per acre for the Tempe Marketplace, which Larcher says is comparable to the cost of a greenfield site.“Historically there was a high degree of risk for brownfield deals, which allowed for bigger discounts in the purchase of land,” says Doug Elenowitz, a partner with Brownfield Partners, a Denver-based company that acquires and redevelops brownfields. “Because of the success of redevelopments over the last 10 years, sellers are not willing to provide as much of a discount.”

In the past, Elenowitz says, private equity firms looked for returns of 30 percent or more, but today the expectations are in the low 20 percent range.

Hollingworth emphasizes brownfield redevelopments can be a challenge to finance and the tightening credit market makes them even more so. Banks, he says, because of their lack of expertise, shy away from these deals.

“You either do it with deep-pocket equity investors or find a specialty finance company that is comfortable with brownfields,” Hollingworth says. “It is like any bridge loan — it is going to be more expensive.”

Brownfields Tips

Since 1995, the EPA's brownfields program has awarded:

  • 1,067 assessment grants totaling $262 million
  • 217 revolving loan fund grants totaling $201.7 million
  • 336 clean-up grants totaling $61.3 million

According to the nonprofit National Brownfield Association:

  • Up to $2 trillion of real estate may be undervalued because of contamination
  • 5,000 to 10,000 people make their livelihoods in the brownfield market
  • Environmental hazards are estimated to be present at 20 percent to 50 percent of all industrial real estate properties