COVER STORY, JULY 2010
BROWN & SERVE
Favorable factors may be coming together soon to give developers more reason to greenlight brownfield projects.
For those who understood and could manage the risks, brownfield redevelopment offered potential economic, socioeconomic and environmental advantages over development on greenfield sites. Looking forward to development activity increasing, is it reasonable in these cautious times to expect to see a return of the aggressive interest in brownfields and, if so, why would you acquire a brownfield rather than a greenfield and when is the best time to buy?
Along the 405 freeway in Los Angeles County, LNR Property Corp. and Hopkins Real Estate Group are converting a former municipal landfill into The Boulevards at South Bay, a dynamic development that will offer 168 acres of retail, restaurant, entertainment, hotel and residential choices.
Although numbers are a bit difficult to determine, the Government Accountability Office has estimated that more than 450,000 brownfield sites are scattered across the United States. Other estimates suggest that this number is closer to millions of sites; the variance is probably due to the broad nature of the brownfield definition. Brownfields can be defined as real property, the expansion, redevelopment or reuse of which may be complicated by the presence or potential presence of a hazardous substance, pollutant or contaminant. Brownfield sites can therefore be found along the entire spectrum of real estate and can range from sites with perceived redevelopment environmental issues such as former industrial/commercial properties with no environmental impacts through to Superfund sites with costly, complex contaminant interactions and persistent environmental issues.
The problem, therefore, with brownfields is not the availability, it is and always has been the real or perceived environmental liability risk/cost. Sadly, this risk is often exaggerated and was often cited as the primary barrier to redevelopment; it was certainly the reason why in the early 2000s brownfields were not the development of choice. That said, a lot of effort and advancement has been made to reduce factors that contributed to this perceived or real environmental liability risk and cost. There has been a degree of regulatory guidance consolidation providing more certainty regarding acceptable screening levels, more reliance on the acceptance of risk-based corrective action and the introduction of institutional controls, a step towards fit-for-purpose remedial action. In addition, the generalized view in the early 2000s that greenfields were the safer bet both in terms of time to develop and cost certainty has been dispelled.
Brownfields as former developed sites often have improved geotechnical characteristics and established infrastructure and services that reduce the development costs and additional land requirements compared to a greenfield. In addition, brownfields often have little to no cultural and biological concerns, and, as such, an expedited environmental review can be expected. Finally, brownfields do not excite the local population and environmental community in the same way as a greenfield development and if handled correctly can provide a considerable positive public-relations boost. These actions, efforts and educational outreaches have therefore helped remove or at least lower many of the barriers to stimulate brownfield redevelopment and, with the surge of brownfield redevelopment activity in the last few years, it’s clear that these activities were working.
It is ironic then that the efforts taken to reduce barriers to brownfield redevelopment have occurred at a time when the prime advantage of brownfield redevelopment was being eroded — the economic one. As property values increased the relative difference between the acquisition cost of a greenfield and a brownfield was reduced. In many cases, demand was so high for brownfield sites that there was little price difference between the two and reliance was placed upon increased demand-driven property value rather than the value add of improving the site and mitigating the real or perceived environmental concern. In hindsight, this was probably not the best time to buy brownfield sites, but before the downturn everyone wanted one.
Recently, as greenfield and brownfield property values have declined the relative difference between these values has widened and the risk-reward relationship has improved considerably. Coupling this with the additional benefits that have been added to this relationship with both increased regulatory clarity on brownfield issues and the reduction in the cost of investigation and cleanup of these sites due to recent fierce contractor competition could mean that we are looking at a winning combination.
Additionally, government financial incentives continue to be targeted to brownfield development and include the recent $100 million American Recovery and Reinvestment Act allocation for brownfields cleanup and assessment activities. This funding is in addition to other financing measures available to the public sectors that are already in place to stimulate this redevelopment market such as:
• Community Development Block Grants (CDBG)
• Section 108 Loan Guarantees —
• Brownfields Economic Development Initiative (BEDI) grants ($25 Million)
• Economic Development Initiative (EDI) grants
• EPA Assessment Grants, Revolving Loan Fund Grants, Targeted Brownfield Assessments and Cleanup Grants available to government entities and tribal communities.
Therefore, it would appear that the variable returns on a brownfield acquisition are much better at the bottom of the market than at the top as compared to a greenfield acquisition. It’s possible, as a backlash to current events, that we will also see a market shift from a demand for suburban living to urban infill, which by nature would suggest an up-tick in brownfield development. It is also possible that government funding will continue to be targeted towards supporting brownfield development and removing blight in inner city and other urbanized areas, and that public opinion will continue to grow against the use of greenfields as new development areas.
Finally, with a reduction in brownfield property value, it is possible that time pressures to evaluate, acquire and remediate a brownfield will be reduced, and more economical (but time consuming) remedial measures could be employed to reduce cleanup costs and gain appropriate regulatory closure. Given all these factors, it is possible that investors and developers in today’s depressed brownfield market may, just like the early brownfield developers in 2001, reap the enhanced rewards offered by a brownfield development in any potential market uplift. Despite these advantages and as a gentle final note, it should always be remembered that in considering the merits of a brownfield acquisition, especially given the large range of potential environmental impacts and associated costs, that the mantra for a successful brownfield redevelopment is less “location, location, location” and more investigate, evaluate and remediate — or simply caveat emptor (buyer beware)!
Andrew Brack is a principal in Partner Engineering and Science’s El Segundo, California, headquarters.
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