The Brownfield Bonanza

Reclaiming a brownfield site can create a field of dreams—if done correctly. Here’s a review of how to make a redevelopment go right.

By Robert L. Reid

Robert L. Reid is managing editor of Scrap.

Brownfield redevelopment is a hot topic these days, and it’s easy to understand why.

Brownfields—abandoned or underutilized industrial properties that have potentially mild, easily remediated environmental problems—represent a real estate bonanza. In many cases, you can negotiate a substantial discount off the price of choice industrial property that, if you’re lucky, might come with buildings, utilities, access to transportation, and other desirable features.

But desirable features extend beyond the property itself. Considerable tax savings are also possible, depending on your location.

And just about everywhere, reviving a brownfield site will make you a hero to state and federal regulators. In fact, if you do everything right, regulators might even give you a letter practically guaranteeing that they won’t sue you for any further cleanup costs.

Now, the downside.

Such promises not to sue are hardly ironclad agreements. If you don’t quantify the contamination completely and accurately and keep to your cleanup schedule, you could get stuck with a worse environmental problem than you expected. Moreover, brownfields are so popular now that you might find the neighborhood around your scrap facility being turned into parks, condos, or other upscale projects—and then you could be pressured to move whether you want to or not.

So, what do you need to know about brownfields to make sure you enjoy the paybacks and not the pitfalls of this real estate adventure? This advice from some brownfield veterans tells you the key points to consider.

Choose Wisely

The first step to redeveloping a brownfield involves selecting the site itself. There are plenty to choose from given that the United States has an estimated 450,000 properties that can be termed as brownfields, according to the U.S. General Accounting Office.

You should select a brownfield site the same way you pick any other piece of real estate—by location, price, amenities, and other benefits. “Brownfield isn’t the panacea for every contaminated site out there,” explains Ted Davis, vice president and COO of Industrial Metal Processing Inc. (IMP) (Spartanburg, S.C.), which relocated its headquarters to a 45-acre brownfield in 1997. “The site has to have some other things going for it than just qualifying as a brownfield. If it’s in a bad location, if the infrastructure isn’t right—the gas and water and sewer and all the stuff you need—it’s still going to be in a bad location after it’s cleaned up.”

In IMP’s case, the brownfield was on a major railroad line, had a large building ideal for storing scrap under cover, and nearly $1 million of concrete on the ground. Those factors—plus a 60- to 70-percent discount on the property’s market value—made the brownfield a viable option, Davis notes. (Despite that discount, the cleanup expenses pushed IMP’s final costs a little beyond the property’s market value. Still, the site’s beneficial factors made it preferable to developing a greenfield site, Davis explains.)

Likewise, location was the principal benefit of a brownfield purchased by Industrial Scrap Corp. (East Chicago, Ind.). As fate would have it, the state cleaned up a 10-acre illegal dump adjacent to the company’s operation, and the property became the ideal site for expansion, explains Rick Gertler, vice president. A greenfield located elsewhere would have left the company “too spread out” to react as quickly to equipment breakdowns, inventory problems, and other issues, he notes.

Testing, Testing

So, let’s say you’ve picked the property you want to redevelop. Now you’ve got to find out what environmental problems the site has, if any. Generally, this is accomplished through a Phase 1 and Phase 2 site investigation as part of the real estate due-diligence process.

The Phase 1 portion mostly involves examining the property’s history—who owned it over the years, what kind of businesses operated there, and does any of that information point to possible environmental problems. A typical Phase 1 survey costs $1,500 to $3,000, depending on the site’s size, and should identify about 90 percent of potential problems, explains Jerry Bowden, senior project manager for Patrick Engineering Inc. (Lisle, Ill.), an international construction engineering firm.

Bowden, who examined the 6.5-acre brownfield purchased by Universal Scrap Metals Inc. (Chicago), says a good environmental engineer should check with state and federal environmental agencies, as well as the local fire department, for any history of reported hazardous spills or other emergency response incidents at the site. And if the previous owners didn’t report such incidents, historical fire insurance maps and old aerial photographs can point to the location of possible problems, such as aboveground or underground storage tanks that have been removed but could have left behind contamination.

If the Phase 1 investigation points to possible contamination, the Phase 2 portion should identify and quantify the problem. A far more intensive process, Phase 2 involves drilling and analyzing soil samples and possibly testing groundwater. It’s also more expensive—soil and groundwater sampling cost about $10,000 apiece, Bowden says.

While it’s possible to do much of this work yourself—IMP’s Ted Davis did—some brownfield veterans recommend hiring an environmental engineering firm. Phil Zeid, president and treasurer of Universal Scrap, turned to his real estate agent for suggestions. He then contacted three or four companies and asked them to make presentations, ultimately selecting Patrick Engineering.

Although Zeid relied heavily on this engineering firm, he also conducted his own research into the site’s environmental issues so he would “have some comfort level” with the processes and procedures involved. And he talked directly with state regulators about cleanup plans and incentive programs. “I wanted to have some idea of what was required,” he says.

Industrial Scrap even hired an engineering firm just to double-check the testing performed by someone else, notes Gertler. After state regulators forced the responsible parties to clean up the illegal dump adjacent to his company’s property—a roughly $500,000 effort—Gertler’s technical team verified that the site wasn’t contaminated. Only then did Industrial Scrap purchase the property.

Regulation, Legislation, and Valuation

Once you know about a brownfield’s environmental problems, you can decide whether to proceed with redevelopment. If the cleanup project is bigger than you expected, you can simply walk away from the project. Honest.

Though “people think that if you drill for a sample you might somehow be held responsible” for cleanup costs, such concerns are unfounded, says R. Michael Sweeney, an attorney in the Washington, D.C., office of the law firm Troutman Sanders L.L.P. (Atlanta). “Environmental due diligence brings no liability.”

If you decide to continue with redevelopment plans, the next step is to talk with state regulators about what kind of voluntary cleanup program and incentives your state offers.

Although the U.S. EPA has appropriated money for its brownfield pilot projects since 1995, those funds go to cities, counties, and other local governments, Sweeney notes. State regulators—not the U.S. EPA—are the ones who grant redevelopers liability protection in the form of covenants not to sue or letters that designate no further action or no further remediation is required. (These letters become part of the property’s title and are transferable to future owners.) Most tax incentives are also provided by the states.

Liability protection and incentives vary widely from state to state and city to city, notes Ann Goode, senior policy analyst with the Northeast-Midwest Institute (Washington, D.C.), a regional nonprofit organization that tracks numerous brownfield issues. State brownfield programs are also housed in various agencies—some in economic development offices, others in state Superfund offices, and so on. To learn what your state offers, a good place to start is the local level, Goode recommends. Call your city’s economic development or community development department. Even if the development staff doesn’t directly handle brownfield efforts, they’ll probably know which department does, she notes.

According to Brownfields “State of the State” Report: 50-State Program Roundup, published this year by the Northeast-Midwest Institute, most states have some kind of brownfield redevelopment program. A few are only in a pilot stage limited to specific sites, while others apply only to businesses in certain specified zones. Six states—Wyoming, North and South Dakota, Mississippi, Kansas, and Nevada—reportedly offer no brownfield programs, incentives, or liability protection.

Understandably, liability protection seems to be the most important issue to brownfield redevelopers. IMP received a certified copy of its agreement with South Carolina on Jan. 18, 1996—and only then took legal possession of its new site a day later. “We could have pulled out at any time,” says Davis, who adds that without that agreement “we wouldn’t have touched the site with a 10-foot pole.”

Likewise, Industrial Scrap kept its brownfield acquisition at the “option” stage until receiving assurances from Indiana that no further cleanup at the site was required, says Gertler. In seeking such assurances, the company received help from the congressional representative for that part of northwest Indiana—Rep. Peter Visclosky—who toured both the firm’s existing scrap plant and the proposed brownfield, then wrote to the Region 5 EPA administrator on behalf of the company’s case.

States can also take legislative action to indemnify brownfield redevelopers. Michigan, for instance, used to enforce retroactive liability for contaminated sites, meaning that the new owner could be held responsible for problems caused by a previous owner. But those laws were rewritten in the mid-1990s to grant liability protection to new owners if they prepare and file a baseline environmental assessment with state regulators. Thanks to that change, Louis Padnos Iron & Metal Co. (Holland, Mich.) is currently redeveloping an old steel fabrication plant in Granville, Mich.

“Absent Michigan’s legislation, I don’t think we would’ve considered this site,” notes Shelley Padnos, the firm’s executive vice president and chief administrative officer, as well as ReMA president. “I give the legislature and Governor John Engler a lot of credit” for realizing the value of promoting brownfield redevelopment.

In neighboring Ohio, a special tax incentive is designed to make brownfields more economically attractive. Cleaning up a brownfield ought to make the land more valuable, which would mean higher taxes, right? In Ohio, a brownfield redeveloper doesn’t have to pay any real estate tax on the increased value for the first 10 years, with a possible rollover for another 10 years, says Sweeney, noting that other states let the redeveloper write-off a portion of cleanup costs.

A similar write-off exists at the federal level, but only in designated areas such as EPA pilot projects, empowerment zones, and enterprise communities—and only until Jan. 1, 2001, under current tax laws. There’s also a hint of liability protection at the federal level. The EPA can issue a “comfort letter” indicating that a particular property isn’t a “federal concern,” such as a Superfund site. And the agency has entered into memoranda of agreement with 11 states—Colorado, Delaware, Illinois, Indiana, Maryland, Michigan, Minnesota, Missouri, Rhode Island, Texas, and Wisconsin—specifying that it “does not anticipate taking removal or remedial action at sites involved in approved State Voluntary Cleanup” programs, unless the site poses an “imminent and substantial” danger to public health, welfare, or the environment.

Unfortunately, the EPA also stresses that these memoranda of agreement don’t constitute “no-action assurances” for any specific site. And the situation got even muddier last year when the EPA proposed a set of uniform guidelines for these agreements—guidelines that were quickly withdrawn when the states howled about the federal government trying to take away their authority. The issue, which has been described as a turf battle between regulators, was unresolved at press time.

Finding Funding

The primary obstacle to redeveloping brownfields is a lack of funding for such projects, according to a recent survey by the U.S. Conference of Mayors (Washington, D.C.).

The problem, notes Goode of the Northeast-Midwest Institute, is that although bankers and investors are becoming more comfortable with financing environmental cleanups, only a small portion of the lending community is interested in this kind of work. And while federal laws now give lenders greater protection against environmental liability, “a lot of people don’t know that or they don’t really believe it’s happened,” she says. In short, lenders still worry that any involvement with a contaminated site could stick them with a huge cleanup bill.

Fortunately, the lending community is learning by experience, Goode says, noting that “the more people see banks making successful loans [for brownfields], the more and more bankers will make those loans.”

Dean Jeffery Telego, executive codirector of the Environmental Bankers Association (Alexandria, Va.), which was formed to deal with environmental and lending policy issues, stresses that “certainty” is a key element in getting bankers to lend for brownfield redevelopments. The certainty banks want to see includes determining the exact extent of contamination and what kind of “closure” government agencies will provide in the form of liability transfer and protection, Telego noted in an article for Environmental Assessment Quarterly. 

Banks also want to see cleanup costs and potential liability below 40 percent of the property’s fair market value in an uncontaminated state. And bankers might triple-check cleanup cost projections, employ environmental escrows, and use environmental consultants and/or other contractors they know as a resource to help them monitor the life cycle of the cleanup or redevelopment loan.

In Goode’s opinion, innovative financing tools are needed to fund brownfields, with the most successful projects often involving a public/private partnership. For instance, states can establish a revolving loan fund to make low-cost loans on redevelopments, she notes. Escrow accounts also help, adds Jan Sheinson, vice president of American National Bank & Trust Co. (Chicago). 

Under an escrow, the bank could loan a scrap company, say, $500,000 to redevelop a brownfield, he explains. But since the cleanup could take six months to a year, the bank might insist that some extra security—let’s say $100,000—be held in escrow. Money could then be released from escrow as cleanup progress is made, verified through regular environmental reports.

Universal Scrap financed its brownfield redevelopment using a bridge loan from the city of Chicago. The scrap company’s bank then guaranteed loan repayment within two years.

IMP, meanwhile, turned to a nonprofit organization—the Southeastern Environmental Resource Alliance (Aiken, S.C.)—to help finance its brownfield project.

Keep to Your Schedule—And Your Word

When it comes time to reclaim the site, cleanup requirements vary from location to location. One scrap company, for instance, had to dig up and haul away about 1,000 yards of soil at its brownfield site. Another had a contaminated oil-water separator to deal with, an on-site landfill with an eroding cap that had trees growing through it, as well as more than 600 drums of used oil sitting around and 22 aboveground storage tanks that had to be cut up.

All cleanup activities should be specified in a detailed work plan submitted to state regulators as part of the agreement for the assurance against being sued, says IMP’s Davis. He also recommends giving yourself plenty of time to complete the cleanup, keeping weather delays in mind. “Once you get into this, don’t go back to the state and say you need an extension, that this isn’t working like you thought it would,” he says. Otherwise, you could end up with a contaminated site and no liability protection.

And if your brownfield project involves completely relocating from your current site to the redeveloped property, make sure you get some assurance—preferably in writing—that all permits for the new plant will be processed quickly, advises Sweeney. If necessary, be prepared to hire a litigator to accomplish this “because you could face a situation in which your old plant is shut down but your new one isn’t open yet—so you’re out of business,” he says.

Once remediation work is under way, try to complete some big portions of the cleanup upfront as a sign of good faith—don’t leave all the hard work until the end, or the regulators might think you’re not serious, Davis suggests. And keep the regulators informed every step of the way. IMP even invited South Carolina officials to visit and witness key milestones in the cleanup as they were completed.

But involving regulators in the cleanup process doesn’t mean knuckling under to whatever they say. IMP, for example, did not want to deal with pre-existing groundwater contamination.

“That was our sticking point,” Davis says. “If the state had insisted we do groundwater, we would’ve backed out of the deal.”

As it turned out, state regulators didn’t insist on that. To stay clear of future groundwater trouble, however, IMP had to sample the existing level of contamination to establish a baseline. And now the company carefully tracks every chemical that moves in or out of the plant so that it can prove that none of the polluting chemicals are used in IMP’s operations. “We document any of the chemicals used here,” Davis says, “and that information’s archived forever.”

But even when facing such sticky issues, Davis has high praise for brownfields in general. “The task isn’t as daunting as it may seem,” he says. “Nowadays, if you try to greenfield a scrap plant, the zoning and permitting would probably be as equally cumbersome as the brownfield.” 

His advice: Do the brownfield—because if you’re a good steward of your site, “you’ll be a friend to the state regulators forever.” 

Brushing Up On Brownfields

If you’re interested in pursuing a brownfield redevelopment project, here are some resources that can help you learn what’s involved:

• The U.S. EPA is holding “Brownfields ’98” in Los Angeles, Nov. 16-18. This annual conference, designed for beginners and experts alike, brings together major stakeholders in business, development, finance, insurance, and law. Call Elizabeth Bennett, 202/260-1910, or Sally Reim, 202/260-7381.
  

The agency’s brownfield Web site—http://www.epa.gov/brownfields—offers information on regulations, pilot projects, and brownfield contacts in all 10 EPA regions. The EPA’s Technology Innovation Office also maintains a Web site—http://clu-in.com—on hazardous waste cleanup. Type “brownfields” in the search mode.

Finally, the EPA has several publications on brownfield redevelopments. Try Road Map to Understanding Innovative Technology Options for Brownfields Investigation and Cleanup (PB97-144810) and Tool Kit of Information Resources for Brownfields Investigation and Cleanup (PB97-144828). To order, contact the National Technical Information Service, U.S. Department of Commerce, 5285 Port Royal Road, Springfield, VA 22161; 703/487-4650.

• For brownfield lending information, contact the Environmental Bankers Association, 110 N. Royal St., Suite 301, Alexandria, VA 22314; 703/549-0977; or visit http://www.envirobank.org.
• The Northeast-Midwest Institute has several publications of interest, including Lessons From the Field: Unlocking Economic Potential With an Environmental Key, which includes 20 brownfield case studies, and the Brownfields “State of the State” Report: 50-State Program Roundup. For information, contact the institute at 218 D St. S.E., Washington, DC 20003; 202/544-5200; or visit http:// www.nemw.org.
  

In addition, the institute published Brownfield Redevelopment: A Guidebook for Local Governments and Communities jointly with the International City/County Management Association. Contact the latter group at P.O. Box 2011, Annapolis Junction, MD 20701; 800/745-8780.

• The U.S. Conference of Mayors offers Recycling America’s Land: A National Report on Brownfields Redevelopment. To order, contact the conference at 1620 I St. N.W., Washington, DC 20006; 202/293-7330; or visit http://www.usmayors.org/uscm.
  
• Another resource—Brownfields Law & Practice: The Cleanup and Redevelopment of Contaminated Land—explores the legal framework underlying federal and state initiatives to offer financial incentives and liability protection for voluntary cleanups under brownfield redevelopment programs. The two-volume, loose-leaf publication is available from Matthew Bender & Co. Inc., 2 Park Ave., New York, NY 10016; 800/223-1940; or visit http://www.bender.com.
  
• Government Institutes has published Brownfields Redevelopment: Programs and Strategies for Contaminated Real Estate, a 448-page guide to the issues surrounding the cleanup and redevelopment of brownfields. Contact Government Institutes, 4 Research Place, Suite 200, Rockville, MD 20850; 301/921-2323; or visit http://www.govinst.com. 
  
• You can also check out two articles published by Scrap: “Recycling Brownfields Back to Use” (July/August 1995) and “States Lead the Brownfield Charge” (September/October 1995). You can order these through Scrap’s Web site at http://www.scrap.org. •