The Evolving Brownfield Situation Essay Research Paper

A Discussion on:

The Evolving Brownfield Situation

Real Estate Development

Rick Woodruff

October 20, 1996

Preface:

Stan Wilson and I (Josh Simon), conducted our research on Brownfields together. Upon discussion we realized that our two papers would be almost identical in content. In order to prevent you from reading two similar papers we decided to collaborate our efforts into a single essay. We believe that the following paper is a comprehensive discussion of Brownfields including their future role in development. The added length is necessary, due to the comprehensive nature of our discussion. The work necessary to complete this paper entailed more hours of work than if we were to each have written individual papers. In a class that revolves around our future role in the Real Estate Development process we felt it a waste of your time to read two extremely similar papers just for the sake of having two papers. If there is a problem with a collaborated effort we would be glad to redo the work in an individual structure and take whatever late penalties you deem necessary.

Introduction:

Brownfields are abandoned, idled or under-used industrial and commercial sites where expansion or redevelopment is complicated by real or perceived environmental contamination that can add cost, time and uncertainty to a redevelopment process. Throughout our country their are an estimated 450,000 brownfields. These vacant properties exist in our cities serving no productive purpose and act as both eyesores and environmental and economic pitfalls.

Our inner-cities, where most brownfields exist, were once the only choice of development for our nations industry. However, with the birth of environmental law and regulation the redevelopment of these brownfields has become a complicated and often costly procedure. One that induces many businesses and corporations look outside our urban centers for growth and development. This trend not only leaves our inner cities vacant and economically decrepit, but also leads to urban sprawl, a phenomenon which induces the development of greenfields or the undeveloped pristine land outside urban centers.

The following essay presents a comprehensive study of “brownfields.” First, we will examine the historical background of brownfields, both their physical creation and inception of brownfields status via the Superfund law. The background discussion will continue with an examination of redevelopment issues presented in a context of the current legal and economic framework. Following the background presentation, a description of recent and proposed governmental changes regarding the redevelopment of brownfields will ensue. Next we will analyze the potential benefits made possible by these recent changes. Case Studies will be included to exemplify how the past changes are working to our benefit and why we should continue in this direction. Lastly, the potential opportunities for developers will be furnished which will lead to our concluding remarks.

A. Historical Background

Many sites across the country once used for industrial/commercial use have been abandoned — some are contaminated, some are merely perceived to be contaminated. These sites are known as brownfields, and in the past any such property has been avoided for redevelopment. A report from the General Accounting Office finds that: “As states and localities attempt to redevelop their abandoned industrial sites, they have faced a number of obstacles, including the possibility of contamination and the associated liability for cleanup… This situation is caused largely by the federal and state environmental laws and court decisions that impose or imply potentially far-reaching liability. The uncertain liability has encouraged businesses to build in previously undeveloped non-urban areas — called ‘greenfields’ — where they feel more confidant that no previous industrial use has occurred.” This situation has lead to a number of far-reaching problems – social, economic as well as environmental.

One of the fundamental issues of brownfields is that the vast majority of the sites lay in urban areas. Areas where environmental concern seems not only distant, but also secondary to many of the other concerns of the local population — like unemployment, crime and poverty. However, the brownfield issue is clearly an environmental problem that is tied directly to a cities economic vitality and competitiveness. Properties sit abandoned because of real or perceived contamination. Cost enefit analysis has driven development away from these sites toward suburban and rural greenfields because of a web of federal and state law and regulations that entangle brownfields. Hence, a shrinking urban economy and tax base which facilitates urban decline.

Two very powerful trends have engendered this condition: the establishment of environmental regulation without regard to economic ramifications, and a general litigation craze that has assigned legal liability without regard to logical personal or corporate responsibility. Essentially, groups or individuals that had little or nothing to do with a site’s contamination become responsible, and in turn liable, for its cleanup. Meanwhile, the actual polluters escape accountability. Some cleanup requirements are far too stringent; others, ambiguous and changing. Furthermore, the division of authority between levels of government and various agencies makes compliance with the laws difficult.

These aforementioned uncertainties coupled with related delays and confusion linked to reuse of brownfields leads to burdensome costs, which results in the industrial sites sitting idle. Cost enefit analysis shows that these projects do not prove to be economically feasible in lieu of the possibilities and savings presented by greenfield development. The resulting environmental consequences are as bad as the economic ones: sites that require cleanup stay contaminated. Also, the development that ensues in the pristine greenfields creates further environmental degredation and new infrastructure must be established, in light of the existing capabilities of the urban area, often at great expense.

The largest concentration of brownfields problem is found in northeastern and midwestern cities — areas with a long history of industrial concentration — however, brownfield sites can be found almost anywhere nationwide where significant population density exists or industry once flourished.

Much of the complications and related problems of brownfield redevelopment stems from the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), commonly known as the Superfund law. Subsequently, many states have passed their own Superfund laws. The federal Superfund law derives its name from its establishment of a trust fund, financed by industrial taxes, for the cleanup of polluted sites. Upon the creation of Superfund, federal and state regulators compiled a list of actual or suspected sites. The said sites became unmarketable, even after cleanup, because of carrying the fatal stigma of having attracted attention from the federal hazardous-waste bureaucracy. Yet another inefficiency is that sites with little or no contamination become stigmatized and caught up in the procedures designed initially for severely polluted toxic-waste dumps.

This trust fund component of Superfund explained above is of only secondary importance to the law’s liability structure, which is aimed at requiring polluters, rather than the government and taxpayers, to pay for cleanups. “Strict, retroactive” liability and “joint and several” liability are the major components of the law. In essence, these provisions turn out to mean that property owners of contaminated sites can be held liable for cleanup even if they had nothing to do with the contamination.

Liability has not only fallen into the hands of property owners, lenders have been hit as well. When property owners/developers cannot foot the cleanup bill, or when banks have been forced to foreclose on a property, it is the lending institution stuck with the resulting litigation and compliance costs. The fear of these possible exorbitant costs steer possible funds to other safer investment opportunities. Once again the government has stymied the private sectors attempt to alleviate a public ill.

The unrealistically stringent cleanup standards imposed by the EPA and other regulators(which historically have not taken end use into consideration or utilized risk based cleanup) are not the only dissuading factors involved in brownfield redevelopment. This liability stratagem discussed above also generates expensive litigation costs. Costs that have been disastrous for both economic development and environmental protection. The windfall of litigation it creates, though beneficial to lawyers, inflates costs by more than 30%. The result of all this is that developers and financiers frequently shun properties that carry even the slightest hint of contamination and just go to a greenfield site.

It is clear that the political and regulatory tides must change in order to clean up our current brownfield problem, something that will have multitudinous benefitial ramifications to America s environment, economy, and aesthetic beauty, not to mention the opportunities to real estate developers across the land.

B. Changes to the Current Framework:

The present state of brownfield development is rapidly changing. In the past redevelopment of environmentally damaged property has been extremely difficult due to stringent cleanup standards. The EPA, through CERCLA, has established a rigid predetermined level of cleanup necessary for all properties within the Superfund inventory. As previously expressed developers have stayed away from these projects, leaving much land within our urban centers not only vacant but also environmentally unsound. Brownfields, not being economically feasible for redevelopment, will continue as environmental hazards until concrete changes to environmental law are made. The Clinton Administration and the EPA have begun offering changes to the current system in order to speed urban cleanup and spur redevelopment. Changes to the current framework will allow the private sector to undertake redevelopment of brownfields by enabling them to become profitable.

The importance of redeveloping brownfields is clear; both job creation and economic growth are linked with environmental protection. Recycling brownfields into productive use discourages urban sprawl while retaining and creating new jobs for the surrounding communities. Previously abandoned properties are returned to the tax base which further serves to increase neighborhood economic vitality

Individuals must follow government laws which provide guidelines as to how redevelopment activities must be undertaken. However, in our society the government can not force individuals to partake in unprofitable business ventures. The Clinton Administration can not force the private sector of our economy to clean up environmentally damaged land. The government, however, can change laws, including tax laws, which may induce individuals and corporations to change their business behaviors. The Administration s efforts to speed cleanup of toxic waste sites and improve the economic and environmental health of our communities are being enacted by changing laws and regulations.

The Administration s brownfield policy has evolved from the original goals of Superfund – the national effort to clean up toxic waste sites. No longer will the federal government mandate rigid predetermined cleanup standard for all 450,000 of our nations environmentally damaged properties. To clear the way for economic redevelopment of sites that don t warrant further federal action, the Administration has removed more than 27,000 site from Superfund inventory. More than 12,000 small businesses and individuals have been protected from Superfund liability for cleanup of sites where they did not cause the damage. Properties that have been removed from the Superfund inventory must no longer follow Superfund standards — thus permitting these properties to be redeveloped with a possibility of economic profit for the developer.

The Clinton administration has proposed a Brownfields Tax Incentive Plan “that is good for the environment, good for the economy and good for the growth in neighborhoods in America that for to long have been left behind”. The Presidents plan will provide a tax incentive for those who clean up and redevelop contaminated, abandoned properties. A central component of the proposed plan will allow businesses to fully deduct the cost of cleaning up brownfield sites from their income taxes for the year in which clean up occurs. “The incentive would be available in existing EPA Brownfields pilot areas, in areas with a poverty rate of 20% or more, in adjacent industrial or commercial areas, and in Empowerment Zone/Enterprise communities, both existing ones and those that would be designated in the second round proposed in the President s budget.” The program will cost the federal government a total of $2 billion over seven years and is intended to leverage $10 billion in private clean up investments on 30,000 brownfields properties. Hence, improving environmental and public health protection and spurring economic development nationwide. Cleanup costs are a major barrier to redeveloping brownfields, by making cleanup costs fully deductible in the year in which they are spent business now have a real incentive to clean up and develop contaminated properties in distressed communities.

As discussed earlier, liability issues are still one of the most significant impediments to brownfield redevelopment. Property owners have found through due diligence related to a sales transaction, that their property was previously contaminated by a neighboring property, and as a result, find themselves in a legal quagmire. Lenders, often seen as a “deep pocket” are also still quite concerned about their long-term exposure to environmental liability. While the Clinton Administration s tax incentive plan allows for a greater possibility of profit on brownfield redevelopment, investors, both developers and lenders, must not be held liable for prior environmental damage.

The EPA and the Clinton Administration recently provided lenders with key incentives that allow them to invest in brownfield sites without the risk of having to cleanup the land from a loan default. The EPA has provided “covenants not to sue”(CNS) which protects lenders and developers from the costly litigation that previously deterred brownfield redevelopment. The Administration has limited the legal exposure of investors who develop sites filled with hazardous waste. Developers as well as lenders generally won t be held responsible for pollutants left by a previous owner.

Central to brownfield reform is the elimination of the most onerous liability provisions present in Superfund law. Michigan recently passed legislation replacing joint and several liability with a provision holding parties liable only for contamination it is proved that they caused. Elimination of this liability spares purchasers the threat of endless litigation and subsequent cleanup that would make them avoid contaminated properties altogether.

Part of the “liability solution,” might be insurance policies that insure against overruns in cleanup costs and also against unanticipated future environmental risks. There has recently been a lot of progress in the development and application of these policies. Insurance programs are not inexpensive but for a specified period they do put a cap on future liabilities, and in effect, transfer liability to the insurer’s risk portfolio.

Another impediment relates to the question of “how clean is clean?” There are a number of efforts underway to more accurately characterize hazards and to quantify those hazards in relationship to specific risks associated with specific activities on a property. This concept is known as “risk based clean-up and land use.” “There is a growing consensus that if contaminants remain contained, are not spreading in or to groundwater, or are not impairing public health through hazardous exposure, then it may not be necessary to take remediation to pristine levels.” The EPA s relaxment of cleanup standards is intregal to the redevelopment of brownfields. It is not necessary to have the soil 50 feet under an office building be clean enough for a baby to eat.

“Where the EPA used to say, There is a certain type of contaminant in the soil, we want it down to zero parts per million and the area was an industrial park, the EPA now says, Remove any contaminates that impact public safety, but we ll allow one or 10 parts per million on the other contaminants that aren t a threat to public safety. It used to be that 80% of money was spent to get the last 10% of contaminants out of the ground.”

Deed restrictions then become attached to the property which specify land uses in accordance with the specific risks associated with that site.

Risk based land use has its own attendant potential problems in balancing an economically viable level of clean-up with an acceptable level of risk to the community, the developer, the lender, the end user and all other interested parties. From a community perspective, however, this type of approach is acceptable as long as it is driven by a long-term vision of land use. Pairing levels of cleanup with the end use of the property makes sense, in more ways than one. Not only does the site reenter the tax base and provide economic revitalization to the community, an environmentally contaminated site is cleaned to an acceptable level.

C. Benefits from a Changing Framework:

Across the country, the EPA, state, and local governments hope that by merging environmental cleanup with economic development they can revitalize aging cities by encouraging industry to halt their flight to our nations greenfields. “When a contaminated site sits in the middle of a community, even after the immediate danger to public health has been removed, that neighborhood looses jobs, looses its tax base, looses hope. Meanwhile, development goes on outside the city, in fields and forests never before developed, leading to more driving and creating of more pollution.” The recent and continuing change of laws and regulations will spur development of our nations 450,000 brownfields. The development of brownfields will raise the tax base of our cities, bring jobs back into the community, limit urban sprawl, stop the development of unneeded infrastructure, and most importantly clean the environment in which we live.

D. Opportunities for Developers:

Developers, according to teaching, have an 8 stage model for Real Estate Development: inception of idea, refinement of idea, feasability, contract negotiation, formal commitment, construction, completion and formal opening, property, asset and portfolio management. In considering a project for development, a developer must analyze each step in the model. With the changing of environmental laws and regulations conserning brownfields the redevelopment of such a project begins to make sense.

While the 8 stage model helps in ascertaining the opportunities and pitfalls of a project, the true test to developing any piece of property is will it make money? Does the potential profit outweigh the risk associated with the development? In the past, while profits from redeveloping a brownfield may have been great the risk of “joint and several liability” was almost always greater than the upside potential. The elimination of this liability along with the “covenant not to sue” offers the developer protection from any unknown hazards.

Elimination of unexpected future expenses enables the developer to clearly define the costs associated with redevelopment of a brownfield. The developer can create pro-forma s adding cleanup costs to the cost of development. Additional incentives give the developer the tax right to deduct the cost of the entire cleanup in the year the expenses were paid (under pre-described circumstances). This deduction enables the developer to indirectly have the government pay a large portion of the cleanup expense. The developers pro-forma s for a brownfield redevelopment project may now look quit positive.

State and federal agencies want brownfield redevelopment. Every community wants the best for its residents. Economic growth, cleaner land, preservation of greenfields and a pretty view are all desired throughout our country. To further intice developers government agencies offer grant money to communities for the redevelopment of brownfields. Application is based on counties, with many counties having millions to offer developers. Further the

E. Case Studies:

1. A Case Study from the Grand Rapids Business Journal, August 5, 1996

Following a $ 7 million investment to purchase and renovate the former Autobond Corp. building at 706 Bond Ave. NW, Grand Rapids Spring & Stamping Inc. and its subsidiary Optimum Manufacturing Inc. have moved into the facility, creating 160 new jobs in the downtown area.

The 110-square-foot expansion has allowed GR Spring & Stamping to increase

its stamping capacity in the new facility while opening up space in the company’s Walker facility to expand its spring-manufacturing operation. The move also has enabled Optimum Manufacturing, previously in a leased building in Byron Township, to expand its plastic-injection molding and assembly capabilities.

But if Michigan’s environmental law had not undergone sweeping changes that

went into effect in June 1995, the Autobond building would have remained vacant,

as it had for the previous four years. “It was a good building at a good price,”

said James Zanacki, president of GR Spring & Stamping, “and it met our needs

better than another option we were looking at. But it had an environmental problem.”

Until the law was changed a year ago, the state’s flagging a property as a “site of environmental contamination” had the same effect as a ship’s quarantine for the plague — no one wanted anything to do with it. Buying one of these so-called brownfield sites also bought the liability for the contamination and its cleanup. Furthermore, the cleanup had to return the site to pristine condition, clean enough for a preschool playground.

The only way around the new-owner liability was to enter into a Covenant Not to Sue (CNTS), an agreement with the state not to sue the new owners and to require the seller

to clean up the site out of the proceeds from the sale. The complexities of a CNTS were ominous enough to limit the number granted to just 37 in the 1991-95 time period in which this was the only way for a buyer to avoid the liability for the site s contamination.

Not surprisingly, few brownfield sites were reclaimed. Instead, business expansions and new construction continued to target the so-called greenfield sites in order to eliminate the risks and costs of purchasing a contaminated property. Because greenfield sites largely are undeveloped areas, this kind of development often requires new infrastructure and contributes to urban sprawl.

A year ago, state policy on reclamation of brownfield sites was completely reversed. Major amendments, introduced by Rep. Kenneth R. Sikkema, R-Grandville, were enacted to Michigan’s primary environmental cleanup law, Part 201 of the Natural Resources and Environmental Protection Act, Act 451. The amendments allowed new purchasers, operators or lenders who foreclosed on brownfield sites to obtain an immediate exemption from liability for existing contamination by performing a Baseline Environmental Assessment (BEA) to distinguish existing contamination from any that might occur in the future.

Equally important, the amendments set completely new, flexible cleanup standards based on the future use of the site and reasonable risk assumptions. Pristine is no longer the

only acceptable measuring stick, and the Michigan Department of Environmental Quality (DEQ) no longer assumes that children will be playing on factory floors. In fact, new owners no longer need to remediate all on-Site contamination completely before they can put brownfield properties back into productive use. “Due care” activities must be performed, however, to ensure that employees and customers can use the property safely and that their activities do not make the contamination worse. And the new law does require current owners who caused contamination to diligently pursue due-care activities

to meet the changed standards.

The building purchased by GR Spring & Stamping had groundwater contamination.

“As I understand it, the contamination is 50 feet below the surface …,” Zawacki explained. “It wasn’t a problem from the previous owner. It was just here, and I’ll bet you 50 percent of this area has that creek going through, and so you couldn’t do anything with all these old buildings. So now there are wells in place to monitor it. We have a due-care program. One of the reasons we sealed the floor … (was) so nothing could leak through. If we take dirt out of the building, it’s got to be checked. We haven’t gone down 50 feet, but I don’t think it’s health hazard to anybody here. It’s just been unrealistic in the past. If the law had remained unchanged, we wouldn’t have bought this building. In fact, nobody would have bought this building.”

With a year of the reversed policy under its belt, the DEQ has reported that 425 BEAs were received in the first 11 months following passage of the amendments — more than 10 times the number of CNTSs received in the preceding four years. In addition, in May 1996 the DEC conducted a telephone survey of 35 municipalities and found that 20 of those municipalities had seen an increase in actual redevelopment of brownfield properties, representing more than $ 220 million in private investment and the creation of 2,379 jobs.

Another outcome of the amendments has been a reduction in the number of sites now defined as environmentally contaminated. Adding in properties where the necessary cleanup activity has been completed, a total of 197 brownfield sites have been removed from the state’s inventory of more than 3,600. And 463 of these are located in Kent County.

“It is ironic that the old “Polluter Pay” law actually allowed the real polluters to escape the costs of cleanup and forced those with deep pockets to shoulder the burden,” Sikkema observed. “In one year’s time, our reforms have done more to help the environment and the economy than over the prior four years. That’s something to be proud of.”

2. A Case Study from Barr Engineering Company. A Twin Cities Minnesota firm.

Before: Old Beltway Dump

The Brownfields Concept: One of the main barriers to the purchase and reuse of contaminated properties is the fear purchasers and investors have of assuming unlimited liability to clean up pollution created by others. Land recycling programs have been established at the federal and state levels to encourage the redevelopment of contaminated urban properties in order to return them to productive use, creating jobs and preserving green areas outside of cities. These programs, in effect, limit the CERCLA liability that a purchaser ordinarily would have. The clean-up and reuse of these properties presents a unique opportunity for partnership between government agencies and private parties to achieve environmental protection, economic growth, and land use management.

After: Park Nicollet Clinic

Managed Risk — Successful Brownfields Redevelopment: Barr recognizes that different potential property uses require different standards of cleanup. Through our experience working within a variety of state VIC programs, Barr has successfully integrated risk evaluation with future land-use planning so that reasonable and appropriate cleanup

levels could be established. This resulted in environmental solutions that were protective, as well as time-saving and cost-effective.

Environmental and Public Health Benefits: The public’s exposure to pollutants at urban contaminated sites is minimized or reduced, as are the environmental impacts associated with industrial and commercial relocation to suburban green spaces.

Social and Economic Benefits: Abandoned sites are returned to productive use and to tax rolls. Short term construction and long-term permanent manufacturing jobs are created. Existing industrial areas and infrastructure are used and urban areas are revitalized.

Bibliography

1. Urban Land; Vol. 55, #6, page 43.

2. Chicago Tribune; 3,1:2, May 30, 1996.

3. “Superfund Liability May Add to Urban Sprawl, Congress Told.” Liability Week. April 26, 1993.

4. Brownfields, Not Heavy Contamination, Deserve Cleanup Investment, Official Says. BNA Environment Daily.

5. General knowledge of Brownfields garnered via Lexis/Nexis.

6. EPA Home Page.

7. Brownfields Inc. Home Page.

8. Committee for the National Institute for the Environment Home Page.

9. Grand Rapids Business Journal, August 5, 1996.