Ten years ago, only specialists attempted to rehabilitate contaminated properties. Today, many developers are interested in brownfield redevelopment. Why? Because well-located, non-polluted infill sites become harder to find, remediation technology is cheaper than ever before and there is more clarity related to liability and government-sponsored incentives.
That said, brownfield development is still a difficult job that requires expertise in science, law and finance. But developers who can master these skills, or hire those who can, are often richly rewarded.
“People develop brownfields for several reasons,” says Robert Colangelo, executive director of the National Brownfield Association, based in Chicago. There is a shortage of land in urban infill areas, and if a developer can find the right brownfield property, he can generate a higher rate of return than can be achieved on non-polluted properties. “People are able to do deals that they could not do before because of a change in (governmental) policy,” says Colangelo.
Brownfield properties are more complicated than other properties. They need special financing, which is typically more expensive than conventional financing. The properties also take longer to develop and they have more risk, he says.
So why should developers bother with brownfields? The answer is that in spite of the difficulties, many of these former industrial sites are in highly desirable urban infill areas and are far cheaper than comparable non-polluted properties. Also, brownfield development qualifies for subsidies, including tax increment financing (TIF), which allows for taxes on an assessed value of the property to be used for redevelopment activities, including infrastructure improvements. Plus, the cost of remediation has declined in the last 10 years as the technology has improved.
The Price Is Right
For an example of the advantage in land acquisition costs, consider Atlantic Station. The 138-acre, 12 million sq. ft. mixed-use project is taking shape on the site of the former Atlantic Steel Mill in Midtown Atlanta. The Jacoby Development Corp. paid $76 million to purchase the land in 1999, according to Jim Jacoby, chairman of Atlantic Station.
Even with the clean-up cost of nearly $25 million added in, the cost works out to about $731,884 per acre. For comparison, the developer of the nearby site for the new home of the Atlanta Symphony paid $22.3 million for 6.36 acres, according to Databank Inc., an Atlanta-based commercial real estate research company — about $3.5 million per acre.
A great price, however, is not the objective: The price is only right if the location is ideal, says John Gates, co-chairman and CEO of real estate investment trust (REIT) CenterPoint Properties, which specializes in industrial real estate development, including redevelopment of brownfields. “If the property is in a great location, unless it has deeply embedded nuclear waste, it will be developed,” he says.
Oak Brook, Ill.-based CenterPoint, for example, is developing a four-building, 1.6 million sq. ft. industrial park located on 155 acres in the southeastern edge of Chicago, where a Republic Steel plant once stood. A joint venture with the Ford Land Development Corp., the park is 100% pre-leased to credit tenants — suppliers to Ford Motor Co., whose Chicago assembly plant is a half-mile away.
The city of Chicago is making available $11 million in TIF financing, and has built new roads to improve access to the area. Wetland remediation, to improve flood control and restore natural habitat, is being paid for by CenterPoint and the state and federal governments.
According to Colangelo, private sector developers typically use government-sponsored voluntary cleanup programs, liability release instruments, such as “comfort letters,” declaring no further remediation is necessary, and technical assistance from government agencies, in addition to TIF financing,” says Colangelo.
Brownfields Can Be Gold Fields
CenterPoint has proven that brownfield redevelopment can be a lucrative business — if you know what you're doing. In 2002, CenterPoint boasted a 20% return on investment and has reported average total returns of 21% since its initial public offering in 1993. While the company does not break out the numbers, a third of its development business is in brownfields — the rest is in other infill development and greenfields. “If bought under the right terms, [polluted land] should have a higher yield than greenfield acquisitions,” says Sean Maher, senior vice president of investments.
In addition to the push for infill redevelopment, another force behind brownfields conversion is a changing attitude toward polluted sites. “In the last 15 years, there has been a significant evolution of environmental case law. Everybody is focused on putting incentives in place” so that brownfields can be re-used without letting polluters off the hook, says Curtis Toll, environmental attorney with Greenberg Traurig in Philadelphia.
In 2002, new rules were adopted in the federal Small Business Liability Relief and Brownfields Revitalization Act that clarified liability issues, making redevelopment more attractive. A prior law, the 1980 Comprehensive Environmental Response Compensation and Liability Act (CERCLA), was amended in 1986 at which time the “innocent owner” defense was added.
The amendment was intended to exempt property owners from liability if they did all they were supposed to do to find pollution before they bought the property, says Kendy Hess, an environmental attorney with Chicago-based Altheimer & Gray. But the amendment was toothless, she says. According to the law, “you were supposed to perform all reasonable inquiry, but if there was something out there which you did not catch, then you did not perform all reasonable inquiry,” she says.
The new law fixed the liability structure and established a definitive standard of inquiry (the American Society of Testing and Materials phase I analysis) that developers are expected to follow. It is concrete and familiar, says Hess. However, the Environmental Protection Agency is expected to issue new regulations and change the standard.
Still, the clarification of federal law helps put brownfield developers on more secure legal ground. “Years ago, there were no rules and no precedents” for remediating polluted properties, says Gates. And brownfield regulations were either “draconian or too lax, so it was a crapshoot,” says Gates. “But in the last two decades, rules and processes for remediation have become clear and the technologies are more economical and efficient,” adds Gates. “What used to cost $1,000 a ton to remediate 10 years ago, may cost as little as $10 a ton,” today, he says.
In the late 1980s and early 1990s, regulators required the developers to clean up the sites, says Peter Weiner, co-chair of the environmental department at San Francisco-based law firm Paul Hastings. Now, the decision to clean up the site is risk-based, which allows developers to leave contamination if it isn't doing harm.
That opens up sites that redevelopers would have had to avoid in the past. One good example is a 240-acre Union Pacific rail yard in downtown Sacramento, now being developed by Millennia Associates of Venice, Calif. Millennia is the development arm of the Jerde Partnership, an architectural firm, which has undertaken urban redevelopment all over the world.
The site was once the largest train repair and manufacturing facility west of the Mississippi. A mixed-use complex called Gateway will replace a portion of the site, which will also include an intermodal transportation center where commuter trains, taxis and light rail will converge.
The Union Pacific rail yard has many kinds of pollutants, says Joel Ross, principal of New York-based Citadel Realty Group, one of the partners in the Millennia project, including asbestos, solvents and paint. “But it is possible to clean it up enough to do a mixed-use project, including residential,” says Ross.
All Insurance Is Not Created Equal
Even though liability laws are improving somewhat, brownfield developers still need a risk transfer mechanism which enables them to manage environmental and financial risks while limiting liability, says Stuart Miner, vice president of Denver, Colo.-based LandBank, which specializes in brownfield redevelopment. Environmental insurance is an important part of a risk-management program, he says.
Remediation cost cap insurance, according to LandBank, covers developers for clean-up costs for known contaminants on the property or adjacent properties if necessary, and covers ordinary cost overruns of the remediation project. Environmental liability insurance covers costs due to discovery of contaminants unknown at the time a remediation plan was developed and costs due to changes in the regulatory environment, as well as third-party liability.
Bill Lynott, president of LandBank, warns developers of polluted properties not to take just any “off-the-shelf” policy because it may not be sufficient protection against risk. “Landowners need an environmental consultant, as well as an insurance policy,” he says.
Brownfields Go Mainstream
Ten years ago, only specialty operators such as LandBank bought brownfields, according to Weiner. Now, mainstream companies are buying them, too.
One of the biggest home builders in the U.S., the Miami-based Lennar Corp., in a joint venture with its former subsidiary LNR Property Corp., is embarking on a plan to redevelop 680 acres of land on Mare Island, site of a former U.S. Navy ship yard in San Francisco Bay.
After agreeing to a complex set of agreements with the city of Vallejo, which owns Mare Island, and the Navy, Lennar is planning to develop 1,500 homes and 6 million sq. ft. of commercial real estate on the land. For this privilege, it will supervise the clean up of the property, invest heavily in the island's infrastructure and share profits with the city. “We don't usually get involved with land that is not remediated or is in the process of being remediated,” says Stuart Miller, Lennar president and CEO. But the Navy is paying for the clean up of the site, he says, which makes the deal appealing.
These bases were built in the middle of nowhere, says Miller, but over the last 20 or 30 years they have become part of metropolitan areas. At a time when buildable land with infrastructure and entitlements in or near urban areas is in short supply, he adds, these bases begin to look very attractive.
Hortense Leon is a Miami-based writer