Brownfields projects: Opportunities, risks, and rewards of contaminated real estate

Robert M. Petrovich is vice president and director of operations with The Remington Group, LLC, headquartered in Cazenovia. Petrovich is also a partner in Madison Properties, a closely held private real-estate investment and management company. He has bachelor's and M.B.A. degrees from LeMoyne College and has taught at Cornell University's Department of Agricultural, Resource and Managerial Economics. those in, as well as those on the periphery of, this market, seems to be that considerable business opportunities exist for investors willing to take a risk in redeveloping contaminated real estate. That assertion appears to be true, but there are significant barriers to entry and tremendous project challenges to successfully completing brownfields projects. The supply of available sites for redevelopment consideration is vast. The demand for such property and the identification of end-users is where the players are separated from the dilettantes.

The EPA (U.S. Environmental Protection Agency) has defined brownfields as abandoned, idled, or under-utilized commercial or industrial property where expansion or development is complicated by real or perceived environmental contamination--just the opposite of greenfields, which are typically virgin sites, located in suburban or rural areas. The USEPA estimates there are between 500,000 and 750,000 potential brownfields sites in the United States. The most significant concentration of these sites is in the Midwest up through the Northeast. Predominantly in urban settings, brownfields sites typically have been overlooked by developers as project opportunities. Such factors as location, regulatory hurdles, and depressed and blighted neighborhoods are factors limiting the redevelopment of urban cores within many U.S. cities. On top of those traditional challenges, add the environmental-liability ramifications of owning a piece of contaminated property.

Why brownfields?

Recently, however, some developers have recognized an opportunity to realize handsome returns on their investment from tackling such challenging properties. Brownfields projects offer a number of stakeholders an opportunity to benefit from such redevelopment. Municipalities have the opportunity to put tax-generating properties that have been undervalued or not producing any tax revenue back into productive use. Site owners have an opportunity to sell property that previously was not marketable because of the stigma of real or perceived environmental contamination. Regulatory agencies at both the state and federal levels have an opportunity to close out files on greater numbers of remediated sites. Lenders and other sources of capital have an opportunity to expand their markets by providing project financing.

An important component of federal brownfield legislation has been environmental justice and the effects of redevelopment on urban neighborhoods. Environmental justice translates into jobs being infused into urban neighborhoods where work is desperately needed for low- to moderate-income residents.

For environmental real-estate consultants and attorneys, new markets are available beyond traditional environmental-related service offerings. For developers, an inventory of new project opportunities is available for consideration. Many brownfield sites are located in areas with existing infrastructure (water and sewer) along with roads and other transportation amenities. For developers, this is a positive, as opposed to greenfield sites where many of these infrastructure requirements have to be either expanded or, in most cases. constructed for the first time.

Environmental groups benefit from this kind of redevelopment initiative on a number of different fronts. First of all, there is preservation of green space and control of urban sprawl. In addition, tied in with the regulatory stakeholders noted above, the environmentalists' goal is the remediation of environmental-contamination problems on properties which had been languishing under more traditional regulatory programs without solutions.

History

In order to understand the context of current brownfield initiatives involving public-sector programs under the New York State Environmental Quality Bond Act (passed in 1996), as well as the Voluntary Clean Up Program (a private-sector initiative through the New York State Department of Environmental Conservation--DEC), some historical perspective is appropriate. CERCLA (Comprehensive Environmental Response, Compensation & Liability Act) or "Superfund" legislation was passed by Congress in 1980. The impetus for Superfund was to provide statutory provisions to deal with abandoned hazardous-waste sites across the United States. Superfund was to provide a means to deal with the investigation and cleanup of sites abandoned by former industrial users that were no longer on the property or were out of business.

The key component of Superfund legislation is that liability was joint, several, and retroactive. Under CERCLA, joint and several liability means that any party liable under the statute may be held responsible for the entire cost of a site cleanup, without regard to the extent of its contribution to the property's condition. Absolute or strict liability means that a party can be liable for cleanup costs without regard to fault. Understanding the liability scheme of the statute is important, because the intent of Congress was to bring responsible parties to the table to effectively apportion costs (responsibility) for site cleanup, if parties could be identified in the chain of title. The actual outcome was that responsible parties engaged in legal finger pointing and procedural delay, with few sites actually being remediated. The average duration and cost of a federal Superfund project is approximately seven years and $15 million.

Naturally, progress was slow, and few of the original 1,400 National Priority List (NPL) sites identified under the Superfund program were remediated. In the early 1990s, Congress was debating Superfund reauthorization and recognized the problem with the-original legislation. Congress heard testimony on methods to facilitate an increase in the speed and volume of remediation work on contaminated hazardous-waste sites as well as ways to reduce the costs.

In addition to the NPL sites, numerous other sites with lesser degrees of contamination have been identified at the state level across the country. It is from these "lesser contaminated" sites that the estimate of between 500,000 and 750,000 brownfield sites is derived. Concurrent with Superfund reauthorization testimony, the leaders of U.S. cities presented their concerns to Congress through the U.S. Conference of Mayors. Mayors testified to Congressional committees that Superfund was not working and that a new way of thinking was needed to facilitate a faster and more cost-effective remedy to environmental contamination.

Federal and state programs

As an outgrowth of the concerns of the early 1990s, EPA promulgated a pilot grant program in the mid-1990s to act as a catalyst to assist municipalities in establishing policies and procedures to more effectively deal with local brownfield sites. The federal grant program provided $200,000 to municipalities for brownfield inventory and characterization. The grant funds were to be used to assemble consortiums of professionals to serve as a brain trust in creating methods for municipalities to classify and prioritize the rehabilitation of contaminated local real estate.

At the federal level, economic incentives were proposed to elicit the interest of private-sector dollars in the remediation of brownfield sites. The Clinton administration proposed (in its most recent budget proposal) $2 billion in tax credits for developers involved in brownfield projects. The Internal Revenue Service has also provided some economic relief for developers of brownfield properties. The IRS has allowed project costs associated with site remediation to be expensed and recaptured in one year.

New York State-level initiatives run on two parallel tracks: one being the Voluntary Clean Up Program as a private-sector program; the other being the 1996 Bond Act Brownfields Grant Program, a public-sector funding initiative. Under the NYS Voluntary Clean Up program, a volunteer (not the party responsible for the contamination) can offer a plan to redevelop a property using private funds. The Voluntary Clean Up Program offers greater flexibility on investigation and remediation based on the intended future use of the property.

The focus of the Voluntary Clean Up Program is removal of contamination sources such as leaking underground storage tanks. The Voluntary Clean Up Program provides a limited release from liability from the New York State DEC. However, that limitation does not cover third-party suits or suits brought by the NYS Attorney General's office.

Under the Bond Act Program, New York State has made available $1.75 billion in grants and loans for a variety of environmental projects across New York State. $200 million of the Bond Act funds are valuable for environmental restoration or brownfield projects. A critical component of the program is that properties are to be municipally owned for grant funding reimbursement. The state will match project costs on a 75- to 25-percent split with the municipality, where the state provides $0.75 for every dollar spent on eligible project costs within the program. The Bond Act requires adherence to strict cleanup procedures and standards which do not offer the same flexibility or speed to conclusion as the Voluntary Clean Up Program. However, under the Bond Act program, you do have the full power of the State of New York behind you for indemnification against future liability.

On the waterfront

Of the 500,000 to 750,000 potential brownfield sites identified as project opportunities in the U.S., realistically, only 10 percent (50,000 to 75,000) of those sites are candidates for private redevelopment dollars. These sites are typically the cream of the crop and, generally speaking, have some sort of waterfront component associated with them.

For private deals, the following ingredients seem to be critical. For the "classic brownfield" as defined by the EPA, good real-estate fundamentals (location, location, location) are necessary. In addition, transportation access, infrastructure, utilities, amenities, parcels sized appropriately to sustain the intended future economic use, as well as a clear exit strategy, are paramount for capital investment to be made and returns realized. Waterfront location (on or near a waterfront) is a key ingredient to a private-sector deal. In New York State, there is a move toward waterfront redevelopment with the Canal Corridor program initiative under the auspices of the Community Development Block Grant program of HUD (the federal Office of Housing and Urban Development).

People's desire to be near waterfront locations has manifested itself in successful redevelopment projects in Boston, Cleveland, Baltimore, and Pittsburgh, as well as other communities across the country. For the marginal sites (the other 90 percent of brownfields) that are available for redevelopment, most suffer from poor real-estate fundamentals in addition to the stigma of environmental contamination. These sites require public funding to rehabilitate properties and put them back into reuse.

Each deal unique

As mentioned earlier, there is a lot of talk about brownfield redevelopment and the revitalization of distressed urban property. The business of refurbishing environmentally-compromised sites is a multi-faceted process--a complicated, grueling, and capital-intensive endeavor.

There is no identifiable process with established deal components to successfully redevelop brownfields. Every deal is unique, and there are facets of the transaction that require "one-of'-type evaluations of returns and performance.

For firms to be successful, there must be access to and availability of serious financial resources if sellers are to take buyers seriously at the negotiating table.

Copyright Central New York Business Journal Aug 31, 1998
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