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Brownfield It’s not a dirty word (or business)
anymore By Judi Biederman The term “brownfields” conjures up
various negative images of abandoned, contaminated land that nobody wants to touch for any
reason. But brownfields, loosely defined as sites with some level of environmental
impairment, are far from dead. In fact, according to the United States Environmental
Protection Agency, the definition of a brownfield is “a site, or portion thereof,
that has actual or perceived contamination and an active potential for redevelopment or
reuse.” Today, more and more of these sites are being cleaned up and turned into
active, vital areas because the word on the street is that brownfield redevelopment can
put some very green dollars into the bank. Besides offering the possibility of an
enticing profit margin, both developers and investors are finding that “turning
around” a contaminated property is viewed as socially redeeming and is likely to
garner public accolade because a health menace or visual eyesore is removed from the
public domain. Developers can often cut deals with governmental entities for tax benefits
and even venture funding in return for bringing unused property back to life and back onto
tax rolls. Among the benefits, recent federal legislation has spurred brownfield
redevelopment by turning it into a reasonable endeavor. But the redevelopment of contaminated sites is
an effort filled with complex issues and risks as well as opportunity. The rewards of
turning around such a property can be greater than with a typical transaction, but
it’s not a game for novices. If there
were a job description for brownfield redevelopment, it would read, “Only the
sophisticated need apply.” Participants really need to know what they’re doing,
or they need to be willing to bring in experts. The good news is that the experts are out
there and looking for “brown” sites to clean up and turn “green.” Andrew Bender and Daniel Alper, of MGP
Environmental Partners LLC in New York, note that recent legislation since 1995 has made a
big difference for anybody willing to get involved in properties that have any degree of
contamination. It used to be that few or none of these sites got cleaned up because they
had to be brought to pristine status, making the endeavor economically unfeasible to
attempt. However, federal “brownfields” legislation has made clean-up
requirements based on the property’s future use, coining the industry term
‘RBCA,’ or risk-based corrective actions. Standards are now lower for properties
that will be reused for industrial purposes than they are for commerical reuse, which in
turn are lower than standards for residential reuse. This has encouraged redevelopment
because it has become economical – if it is done properly. Bender and Alper say there is a definite
possibility of making money on a brownfield real estate deal because the land can often be
purchased for a discount based on the expected cost of remediation. But this is where it
becomes important to get expert opinions. The current value of the property must be
correctly evaluated, along with the cost and time involved in cleaning it up. The clean-up
operation will be dependent upon determining a reasonable use in the future, and it is
imperative that developers understand the nature of the contamination and meet
governmental standards for remediation. Many developers, who may lack the necessary
experience and/or expertise, choose to use a company like MGP, which is a group of
strategic consultants. Bender and Alper describe themselves as ‘dealmakers.’
They can structure a whole deal, bridging the gap between municipal authorities,
developers, clean-up operations, and real estate transactions and then wrapping the whole
package with insurance coverage. “It’s complex and it requires experts,”
says Bender, “but at the end of the day it’s exciting.” Financing brownfield redevelopment can be
tricky but it can be done. In order to get institutional backing, Bender and Alper advise
that developers are likely to need a long-term relationship with a lender that understands
their business. The lender must be a sophisticated entity because required remediation
adds a layer of complexity to the real estate deal, both in terms of the time it takes to
do and the need to meet governmental regulations. More and more, there are private lenders
willing and even seeking to back brownfield projects, but they usually charge a higher
rate of interest than would be the norm for a traditional development because there is
more risk involved in the deal. Some lenders are teaming up to agressively
acquire contaminated sites. John DiNuzzo, of Lender’s Choice Funding, Inc. in Latham,
NY, a third-party mortgage provider, represents a group of investors that, in
DiNuzzo’s words, is “scooping up contaminated sites, cleaning them to government
specs, and turning them around.” His clients are actively seeking brownfield
locations for sale or lease turn-around. They realized, he says, that there is money to be
made in brownfield redevelopment. Part of the reason is that the land may be
cheaper to acquire and part of the reason is the equity ‘kicker’ or exit fee
– usually a five to ten percent fee on the back end of the deal – that is common
in privately-financed deals. DiNuzzo says some institutional investors are moving toward
increased brownfield investment as well. Pension funds, private annuities and trust funds
are finding that they can make a 12 to 16 percent return on brownfield loans as opposed to
the five or six percent common in more traditional investments. All investors seem to be
gaining more confidence as they are realizing that much of the risk involved in
redeveloping a contaminated site is diminished by the authority of governmental approval
upon clean-up. Where investors used to steer away from
working with contaminated sites, they have discovered that while remediation can be
difficult, it’s not impossible. “It’s kind of like the flu,” DiNuzzo
says. “Give it some chicken soup and orange juice and it will be okay.” Oddly enough, the sicker the land is, the
better some investors like it. That’s because the more difficult and costly the land
is to remediate, the cheaper it will be to acquire. Some also feel that it is easier and
cheaper to remodel an existing facility than to build a new one because an existing
facility is often already zoned for commercial usage and its redevelopment may not require
costly and time-consuming municipal approval processes. “But you have to have a need
in mind,” DiNuzzo cautions. He also warns the would-be developer of a
brownfield site that investors, whether private or institutional, will look at the
borrower’s reputation and track record. “If you’re IBM, you’re okay. A
young developer may get a tougher guideline.” DiNuzzo feels that brownfield redevelopment
will increase in the future, pointing to a recent statement made by U.S. Environmental
Protection Agency administrator Carol Browner as she announced in June the EPA’s most
recent award of more than $11 million in federal grants to help communities identify
brownfields and plan their clean-ups. In making the announcement, Browner cited a recent survey by the U.S. Conference of Mayors
estimating that 223 cities are sitting on about 178,000 acres of brownfields that could
bring in between $1-$3 billion in revenue if they were remediated, redeveloped and brought
back to property tax bases. Brownfields are potential gold mines that are ripe for
development, she added. Another reason than brownfield development
will grow in the future is the trend toward downtown revitalization.
Cities everywhere are cleaning up and cashing in on new urban mixed-use and
retail/entertainment destinations. But, according to Howard Weitzman, senior vice
president of National Resources in Greenwich, CT, in the major metropolitan markets,
virtually all sites suitable for redevelopment will be contaminated in some way. “These sites are being redeveloped in
established areas that have been through a number of uses,” he points out, adding
that it is hard to find any reasonable piece of land within 25 miles of a major city core.
Because more opportunities for brownfield redevelopment are likely to occur, people,
including the public, will become more sophisticated about the reuse of formerly
contaminated sites. In general, Weitzman says the public is
responsive to any effort to do something constructive in its midst. But growing
sophistication about brownfield reuse may carry its own set of problems because public
knowledge doesn’t necessarily mean public acceptance. Weitzman’s company manages
a fund created to acquire environmentally impaired real estate; in the last two years, it
has acquired $168 million worth of land and real property. It then repositions or
redevelops the site, either in joint ventures or in strategic alliances. Sometimes, he
says, the public is glad to hear about a project where an environmental problem will be
eliminated, but then starts to worry about other things such as traffic, the visual look
and physical plant. “You would think you’d be a white knight,” he says, but
that isn’t always what happens. “The public is becoming aware, but not
necessarily educated,” Weitzman explains. Sometimes they use the environment as an
excuse, literally creating ‘political contaminants.’ “Buzzwords are
dangerous because people respond. They hear ‘pcb’ and will use it as an excuse
to oppose a project.” Weitzman says he calls people like this ‘CAVE’
dwellers-- an acronym for “citizens against virtually everything.” But, he says,
they are a fact of life-- and one that developers of any site need to know about and deal
with. While he also feels that the redevelopment of
environmentally impaired sites will increase, Weitzman warns that not every property can
be remediated effectively because the reuse may not warrant the cost. “There must be
justification in the private sector,” he says. “Remediation needs to be married
to the redevelopment plan because the clean-up will be dictated by the re-use.” Rick Mandell, of Aspen Portfolio Strategies in
Basalt, CO, notes that there is a growing interest in collaboration on developing
brownfield projects. For instance, on June 21, the U.S. Chamber of Commerce sponsored a
seminar to unite developers, government leaders, and sports figures with the business
community to address the revitalization of brownfield areas into recreational and
entertainment facilities. The Chamber is trying to unite all parties to foster direct
discussion aimed at making such projects happen. Mandell represents 12 brownfield redevelopers
and is actively trying to find deals for them. He says his focus is to make the
marketplace more efficient by acting as a forum and funnel between owners of properties
and redevelopers. He seeks out properties, evaluates them, and then finds most likely
candidates to participate in buyouts or joint ventures to redevelop. His company has also
created a program with a pension fund that offers loans for the redevelopment of
brownfield projects. Even though there is growing interest in
brownfield sites, it is not always easy to find them, Mandell says. He has heard estimates
that there are 500,000 sites that could be redeveloped in the United States. But many are
not feasible, either because their location is too isolated for significant reuse or their
level of contamination makes it uneconomical to redevelop and resell them. In reselling,
redevelopers want to make profit margin of 30-40 percent, he says. They need to be able to
redevelop the property themselves or to still make reasonable profit after bringing in
joint venture partners and experts. Some properties that would be economical to
redevelop are difficult to find because they are owned by individuals or companies who
don’t want to “stir up the dust.” The properties and their levels of
contamination are somewhat unknown and the owners, curently semi-invisible to authorities,
don’t want to draw attention to themselves. They don’t want to create the need
and subsequent costs to clean up the land or worry about increased insurance costs and
possible future liability. In the final analysis, Mandell says brownfield
redevelopment basically depends on the motivation of the buyers and sellers. With no pun
intended, the deal has to be “ripe.” When it makes sense for the owner as well
as the developer, it is likely to happen. Contact information: Andrew Bender and Daniel Alper MGP Environmental Partners LLC 212-317-8226 John DiNuzzo, Lender’s Choice Funding,
Inc. 518-786-0900 Howard Weitzman, National Resources 203-661-0055 Rick Mandell, Aspen Portfolio Strategies 970-927-3666 U.S. Chamber of Commerce, 202-857-5900 e-mail: Environment@USChamber.com United States Environmental Protection Agency
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