FEATURE ARTICLE, JULY 2006

STEP BY STEP
A look at the process of developing commercial real estate on environmentally challenged land.
David L. Nystuen

Now is the time to take a second look at environmentally challenged commercial properties, or “brownfields” as they are often called. Knowledgeable and savvy real estate investors are finding rewarding and profitable opportunities in redeveloping these properties, thanks in large part to positive changes in regulatory cleanup standards. The availability of public funding and a better understanding of environmental risk are also contributing to the feasibility of brownfield redevelopment.

Properties that were once abandoned, dilapidated, or simply underutilized are being transformed into thriving commercial centers, business parks, industrial complexes, and in some cases even new residential neighborhoods. Brownfield sites can be particularly attractive to developers because they often offer existing infrastructure such as utilities and roadways, and are located in populated areas that drive commercial development viability. Couple these advantages with renewed political interest in spurring economic growth and revitalizing urban blight, and we are presented with a timely opportunity to capitalize on profitable redevelopment projects.

For years, valuable real estate assets have been avoided by investors due to the perception that environmental challenges were insurmountable. In many cases, properties suffer a stigma, and in reality do not pose any significant environmental risk or liability. Of course, there are also brownfield properties that exhibit contamination at levels of concern; however, recent shifts in state regulatory policy now permit these properties to be redeveloped with very little liability exposure.

The following information illustrates a simple five-step approach for a typical brownfield redevelopment that begins with assembling a project team and ends with a successful, low-cost environmental cleanup strategy. We will examine the environmental inquiry phase, and also discuss regulatory changes, potential funding opportunities and environmental strategies that are compatible with — and that complement — brownfield redevelopment.

Step 1: Selecting Your Team

A successful brownfield development starts with an experienced team of professionals. The developer will need to draw on expertise from a diverse group of both private and public sector professionals. A typical initial team includes the developer, environmental consultant, lender, attorney and facility design professional (engineer/architect). Public sector professionals should be included from the very beginning, and include city/county redevelopment and planning staff, and political appointees, as well as state-agency officials involved in commerce and brownfield programs. For larger brownfield projects, it is advantageous to include federal brownfield program officials.

The developer should play a key role in team development and overall management of the brownfield development process. The entire team must be coached to focus on timely project execution, and must work diligently and cooperatively to achieve the final redevelopment goal.

Step 2: Initial Site Inquiry

With a development team assembled, the developer is ready to begin investigating environmental issues. Most developers are familiar with the basics of environmental due diligence, which typically begins with a Phase I Environmental Site Assessment (ESA). This type of inquiry has become standard practice, especially for high-profile projects or sites where there is a high probability of encountering environmental concerns. The process consists of a regulatory records review, site inspection and research into the property development history. As a developer, there are a number of key points to understand in this process:

1. As an initial inquiry, a Phase I ESA generally only provides a qualitative evaluation of the site. In other words, a Phase I ESA does not actually determine if contamination is present at the site, rather it simply identifies the scope and nature of potential concerns.

2. The Phase I ESA should be completed by a competent environmental consultant with a high level of experience in the areas of environmental inquiry, remediation, and land redevelopment issues. Pursuing a high-profile brownfield development is not the time to retain a low-cost, inexperienced service provider.

3. Phase I ESA findings are usually grouped into Recognized Environmental Condition (RECs) and Potential Concerns (PCs). Not all RECs or PCs are necessarily significant with respect to a redevelopment project, so the developer needs to take an active role in evaluating these issues. It is especially important for lenders to be involved in this evaluation to gauge their level of concern regarding identified issues.

4. The environmental consultant should provide the developer with insight into the significance of identified environmental issues, and should discuss the relevance and potential risks each issue poses to the redevelopment process.

Completing the initial inquiry is the first milestone in the brownfield redevelopment process, and is an appropriate time for the development team to conduct a project reality check, assessing whether the inquiry revealed concerns that might jeopardize the economic viability of the project or issues that have the potential to materially affect the conceptual redevelopment plan. In a commercial setting, the team must ascertain whether the nature of environmental issues potentially dissuade future tenants from considering the project site.

Step 3: Building Project Support and Obtaining Funding

To continue with the process, we will assume at this point that results of the initial environmental inquiry were acceptable and identified environmental issues appear to be manageable. This is an opportune time to begin building community support for the project. Many developers are unaware of this step and consequently miss an opportunity to leverage financial assistance.

Generally, the use of public funding for brownfield development requires a formal redevelopment plan that promises job creation, increases in tax revenue, or some other type of community enhancement or benefit. This is where the public sector team members play a key role. From economic development and planning departments to elected officials and neighborhood associations, a solid base of community support provides a means to access valuable financial resources for moving forward with the development.

Step 4: Follow-up Investigation

Assuming the initial due diligence inquiry revealed manageable environmental issues and the developer has obtained financial assistance to continue the environmental inquiry, the fourth step focuses on validating and quantifying previously identified concerns.

You will recall the initial environmental inquiry only identified the concern. In step four, follow-up investigation is conducted to determine if identified concerns are valid (confirmed), or whether the concerns can be disregarded (refuted). Follow-up investigation is typically referred to as Phase II Investigation, and consists of sample collection and testing. Phase II investigation might consist of asbestos, soil, groundwater or sediment sampling.

If contamination is confirmed, the investigation process is expanded to determine the full extent of contamination. Accurate estimates of the contamination extent can then be developed, and they are used to begin formulating cleanup alternatives and attendant cost estimates.

Defining the contamination extent is a key milestone, and needs to be communicated and thoroughly understood by the entire development team. The nature and extent of contamination can significantly affect development plans with regard to future land use possibilities, facility layout, budget and the project timeline.

As a milestone point, this is a second opportunity for the development team to conduct a project reality check and determine if the location, nature and extent of contamination significantly interfere with the development plan, or if the estimated cleanup costs outweigh the projected economic return.

Step 5: Cleanup

This final step in the development process is where the most progress has been made toward successfully redeveloping brownfields. In years past, cleanup usually meant physically removing all contamination from a site. Whether removal was accomplished through excavation or the installation of an engineered extraction/treatment system, costs were usually very high and often doomed a redevelopment effort.

Beginning in the 1990s, a regulatory policy shift has evolved in which cleanup strategies are driven by potential contaminant exposure risk. Recognition that different cleanup standards can be applied to different land use scenarios is one of the single most important developments to affect brownfields. For example, relatively low-level contamination that once required removal can now be left in place by simply applying certain restrictions to future land use. In most cases, these restrictions have very little effect, if any, on standard commercial redevelopment endeavors.

Other developments in the area of contaminant mitigation include a growing comfort level and acceptance of environmental risk, the ability to effectively manage risk, and innocent landowner legislation that significantly reduces a developer’s liability. Advances in environmental science and engineering have also brought about a much better understanding of the actual risk posed by contaminant migration and exposure.

Brownfields are providing challenging but increasingly profitable opportunities for developers without the degree of risk and liability once attributed to these endeavors. The key to a successful redevelopment project lies with assembling an experienced team of environmental, legal, and financial professionals with an in-depth knowledge of brownfield issues. After conducting an initial environmental inquiry, and determining the project remains viable, attention should focus on garnering financial assistance, which is available on the federal, state, local and private levels. Once funding is arranged, further environmental evaluation is conducted to determine the full extent of contamination, after which cleanup alternatives and costs can be developed. The application of risk-based decision-making can significantly reduce final contaminant mitigation costs and directly contributes to the economic viability of brownfield development.

David L. Nystuen is president and senior project engineering manager with SES Environmental. Based in Indiana, SES is a full-service, professional environmental, health and safety firm, providing nationwide services.

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