Curtis Slocum, Brownfield Development Specialist, Voit Development Company (Nov 08)
For many real estate executives and firms looking to acquire and build new facilities, brownfield sites can cause serious concern that masks the potential buried beneath the contamination. Looking at the brownfield market, proven experience is the key factor in determining whether a brownfield investment will yield a high return along with the high risks involved.
In many industrialized states such as California, New York, Ohio, Michigan, New Jersey, and Massachusetts, the only properties still available for new projects are brownfield sites that have been contaminated and remain unutilized. The ability to decipher the risks and the benefits and the expertise to use existing tools that help in the remediation process are key factors in unlocking opportunities within the brownfield market.
By definition, a brownfield is a property that is underutilized due to environmental contamination or an assumption of contamination, that has not been redeveloped due to environmental concerns and the perceived cost of remediation. These properties are often characterized by their size and location. Though brownfield redevelopment involves a fair amount of risk, there are also strong opportunities to acquire real estate at good land basis if the purchaser has a solid foundation of knowledge regarding what to look for and what to expect when acquiring a brownfield property for redevelopment.
It is very important for companies looking to acquire brownfield properties to know what classification a particular site falls under and how much contamination is associated with that classification. There are four major types of brownfield properties.
• Superfund: The largest challenge for a potential purchaser is presented by a Superfund site. A Superfund site represents the most contaminated type of brownfield, which translates to a very high cost for remediation and redevelopment and typically a long duration of time before redevelopment is possible. An example of a Superfund site is the Avtex fiber plant in Front Royal, Virginia - for nearly 30 years, there have been more than 100 people working full-time to remediate the site.
• Petroleum: Petroleum sites are the most common type of brownfield and in most cases are the easiest to remediate. These sites are properties that contained leaking underground storage tanks (USTs) full of petroleum that have contaminated the soil and groundwater. Petroleum is a common contaminate with existing technology that has been field tested and proven to successfully remediate these types of properties. Petroleum is also a regulated substance that makes it easier for a company to negotiate cleanup with a governmental or state agency. These factors make these types of sites cheaper to remediate than their Superfund counterparts. Petroleum sites are typically able to be remediated for redevelopment in less time than other types of brownfields, having the process completed in months instead of years.
• FUDS: Another type of brownfield property is a formerly used defense site (FUDS). These sites represent land that was once used by the military or military contractors for a variety of operations. The extent of the contamination is dependent upon the type of military operations that were carried out at the site. These types of brownfields are often deeply contaminated with a wide array of exotic chemicals, toxins, and explosive residue for which there is no demonstrated technology or proven formal process for remediation and cleanup of these chemicals. Additionally, there is an established, formal process for the acquisition and remediation of FUDS that cannot be shortened or amended in any way. This means that companies attempting to remediate and redevelop FUDS are looking at anywhere from two and a half to eight years to complete the remediation process.
• Industrial: The final category of brownfield is a typical industrial site containing chlorinated solvents and other contaminants. These industrial brownfields historically establish a middle ground between the extremely expensive and highly contaminated Superfund sites and the more elementary petroleum brownfields in terms of cost and timeframe associated with remediation.
Financing and Administration
Knowledge of the type of brownfield you are dealing with is a key factor in order to be adequately prepared for the financial burden, associated risks, and a realistic estimate of how long a given property will take to remediate. There are also other key steps that a firm should take when acquiring a brownfield property for remediation.
Financing is a major consideration when redeveloping brownfield properties. Particularly in today's difficult economic climate, obtaining financing for real estate transactions is very difficult, but obtaining financing for an environmentally contaminated project is an extreme challenge. Being prepared and educated on the estimated cost of remediating various types of brownfields can help a firm seek out brownfield projects that have the greatest chance to obtain financing.
Potential brownfield buyers also need to be armed with the necessary administrative paperwork, making sure that it is negotiated in advance with the regulatory agency overseeing the contaminated property, so buyers know what to expect as they begin the process of remediation and redevelopment. An important component of this administrative paperwork is utilizing the existing and continuously improving legislative tools available to brownfield purchasers to protect the buyer from the threat of liability associated with the original contamination of the property and facilitate the process.
Obtaining a Prospective Purchaser Agreement (PPA), available in virtually every state, can expedite the process. PPAs serve as a voluntary cleanup program that the buyer enters into with an environmental regulatory agency to remediate a contaminated site for the purpose of redevelopment. This important piece of paperwork protects the purchaser from environmental liability for the cleanup of a property in exchange for the public benefit provided by returning an underutilized brownfield to productive use. Other provisions such as the California Land Reuse Revitalization Act of 2004 (CLRRA) also help expedite the remediation process and protect purchasers from certain risks. CLRRA was written on the state level to establish a process for brownfield redevelopment that greatly reduces the timeframe needed to remediate and redevelop many sites.
Though the legislation varies from state to state, most do have provisions that allow brownfield buyers to negotiate important agreements, indemnities, and cleanup agreements that can help navigate the landscape, shorten the timeframe for remediation, and, perhaps most importantly, protect purchasers from liability and lawsuits associated with existing damages caused by contaminated sites.
properties do present a significant amount of risk for the purchaser.
It is important to be aware of these risks and what actions purchasers
can take to manage them. There are three primary risk factors of which
to be aware: regulatory risks, financial risks, and human exposure.
When looking at the risks associated with brownfields, everything is
driven by the risk of human exposure.
These risks can be
measured in comparison with the type of brownfield property that is
being considered. Superfund sites pose the greatest threat for all
three of these risks, as these properties exhibit the largest amount of
contamination and are often the most costly to remediate. Petroleum
sites present the lowest exposure to these risks, as they are typically
the easiest to remediate, have a common contaminate with a proven
process for cleanup, and are the most cost-effective. Industrial
brownfield sites and FUDS tend to fall on middle ground when looking at
these risk factors.
The financial risk associated with
brownfields is driven primarily by the process needed to remediate the
site. Different remediation technologies are available for various
types of contamination. If a brownfield has contaminated soil and the
purchaser chooses to implement an excavation and removal or soil vapor
extraction of the soil, this process is available with less financial
risk than a more complicated Superfund site with greater contamination
that requires more involved technologies, engineered or institutional
controls, and long-term operation and maintenance (O&M).
the risks associated with brownfields are significant, purchasers do
have key tools available to help manage these risk factors. There are a
variety of insurance products available for brownfield buyers that can
help protect them from the risks involved in remediation and
redevelopment of a contaminated property. Any brownfield buyer should
purchase pollution legal liability (PLL) insurance. This relatively
inexpensive coverage protects Brownfield purchasers from third-party
lawsuits and regulatory reopeners. This is an important shield of
protection from third-party lawsuits claiming bodily injury or property
damages from neighbors claiming harm from the pollution already
existing at the property.
Regulatory reopeners can also halt or
greatly delay brownfield redevelopment when changes in regulations,
technological advances, or the discovery of previously unknown
pollution at the site results in unexpected regulatory involvement.
Insurance protecting buyers from this is extremely important, as
unanticipated delays of this nature can mean great financial burdens
and other complications for the redevelopment of a brownfield property.
cap insurance is another policy that can protect brownfield purchasers
from the financial risks associated with remediation of a contaminated
site. Cost cap insurance manages the economic risk when the actual cost
of remediating a brownfield site exceeds the estimated cost presented
at the beginning of the project. Cost cap insurance helps brownfield
buyers handle the innate uncertainty of liability and remediation costs
associated with a brownfield project by covering the difference.
the process of remediation and redevelopment of brownfield sites
continues to evolve and the shortage of available land for development
forces executives to consider Brownfield sites for their projects, the
industry will continue to discover new risks and trends that will need
to be considered. Soil vapor intrusion is one relatively recent
discovery of which potential brownfield purchasers must be aware.
soil vapor is the air within the soil that has the capability of coming
through the floors of a building and exposing people to the
contamination. This represents a new medium that must be treated when
remediating a brownfield property. In many cases, development can begin
on a brownfield site while the remediation of contaminated groundwater
and soil is still happening. However, with vapor intrusion, the
remediation typically must be completed before development can begin,
causing a significant delay. California is one state leading the charge
to deal with the regulation of soil vapor, which has gone largely
unregulated until now. It is likely many other states will follow
California's lead to regulate this new medium of concern.
risk involves lack of available sites. In many of the industrialized
regions with the greatest land shortage, a majority of the
petroleum-contaminated brownfield sites have already been redeveloped.
This leaves buyers with fewer options that tend to fall into the
larger, more complicated categories for purchase. These sites require
greater cooperation between the developer, regulators, and legal
instruments to help acquire and successfully remediate and redevelop
these sites back to productive use.
projects do have advantages as well as risks. Due to the risks involved
and the challenges faced by firms looking to remediate a site, the land
is often available for purchase at a significant discount. Brownfield
properties are well-suited for industrial developments or straight
retail, as opposed to residential or institutional. When the intended
use for the property does not involve tenants living at the property 24
hours a day, the extent of the cleanup is limited and can mean a faster
turnaround time to remediate and redevelop the property.
the potential buyer of a brownfield property has many tools available
to help navigate the complicated landscape of remediation and
redevelopment. Arming themselves with a thorough understanding of the
legal advancements, nature of the properties on the market, and
potential risks and management of those risks can ensure that the
investment in a brownfield project will yield a good land basis that
improves the bottom line.
Slocum is a development specialist and brownfield expert with Voit
Development Company, a commercial real estate development firm
headquartered in Newport Beach, California. Voit Development Company
has developed and acquired projects comprising of more than 24 million
square feet of space with aggregate values in excess of $2 billion.
Visit the company's website at (949) 644-8648 or online at www.voitco.com.