COVER STORY, MARCH 2006

ECO-SYSTEMATIC
The diligent investigation of potential development sites for environmental issues has become an increasingly important trend in commercial real estate.
Kevin Jeselnik

Completing a thorough assessment of the environmental issues that may impact a potential development site has become increasingly important to both developers and retailers in recent years. Knowing the history of the land is important for myriad reasons. The ability to identify possible environmental roadblocks early in the development process allows developers proper time to perform the necessary studies and remediation that will ready the site for construction and occupancy.

As standards concerning environmental conditions have become more stringent, companies are becoming more concerned with the issue of liability. “[Companies] are being extra cautious that the environmental conditions have been adequately addressed at state and local levels so that they are doing the right thing for the community and for the company, as far as not taking on undue liability,” says Dan McNulty, vice president, commercial services, with Atwell-Hicks, a Michigan-based development consulting firm. “I think that the development community is becoming more educated and sophisticated about environmental concerns — the retailers certainly are. It is one of the top three or four issues that everyone is looking at when they first start a project.”

When a developer or retailer settles on a site for a development, one of the first orders of business after securing a letter of intent or purchase agreement is a Phase I environmental site assessment. “The intent of a Phase I [assessment] is very simple,” McNulty explains. “It needs to offer a level of assurance that there aren't any environmental concerns, or it needs to itemize out what those concerns are.” Any issues that are discovered are referred to as “recognized environmental conditions” (RECs) and usually require additional investigation (Phase II).

The Phase I assessment entails research into the property's historical uses, and the historical and current uses of surrounding properties, as well as a preliminary physical site investigation. Many times, the developer also has an ALTA survey of the property completed at this juncture. “The survey serves to define the boundaries of the site and get a handle on any easements or other encumbrances that have historically been left there,” McNulty says. A good consultant should also meet with the developer or retailer to get a feel for what the end use of the property will be. From that, a quick concept plan is prepared, roughly defining what will fit on the site, given the particular conditions such as zoning and municipal approval. In addition, a wetlands assessment is often performed to see if there are any wetland features that could hamper development and a floodplain assessment is completed.

If the Phase I recommends additional investigation due to RECs, Atwell-Hicks typically does two things: begins a sub-surface investigation (Phase II) and starts discussions with the developer and potentially the municipality regarding any possible incentives or tax credits available for site clean up. The Phase II assessment is a more in-depth analysis of the property involving physical exploration of the site, including drilling for soil samples and pulling groundwater samples.

Many state and local government programs offer tax credits, grants and other monetary incentives to developers willing to remediate brownfield sites for new development. “If you have a site that comes back as a facility — facility is a term that each state uses to note that there is a level of contamination on the site that is above the state-regulated criteria — you must decide whether you can clean up the site and proceed, or cap the site and contain the contaminated ground,” McNulty explains. “In most cases, if it is a facility, there are going to be additional costs for construction activity or for additional environmental reports.” This is when it is essential to seek out possible means of obtaining additional finances. Environmental site investigations are key to unearthing some of these incentives that could provide substantial financial aid to a cumbersome development.

In the Midwest, McNulty notices a trend in the retail sector that is creating a need for greater scrutiny of potential sites' environmental impact. Recently, retailers have been actively pursuing infill sites in denser markets, absorbing vacant buildings and land with higher potential for environmental contamination. “A lot of retailers want to get into some of the more urban markets in the Midwest.” McNulty notes. “Traditionally, their growth has been fueled by the more rural markets. When the retailers [enter the urban markets], they are faced with sites that are more challenging environmentally.”

Smaller urban infill sites provide different challenges from the sprawling greenfield properties often sought after by the box retailers in the Midwest. For these sites, ranging from 1 to 20 acres, the issues are focused more heavily on site contamination and re-use issues, where one needs to discover what the site was used for historically and how that impacts the property. “Chances are, whatever [the site] was used for, it was used under different rules and regulations from those that are in place today,” McNulty says. “[Rules and regulations] that may have been acceptable 20, 30 or 40 years ago have changed dramatically.”

On larger greenfield sites, developers are dealing with ecological issues, such as wetlands and floodplains, or sometimes the existence of easements such as gas or power lines left on the site by previous users.

The sooner a developer or retailer can involve environmental consultants in the process, the more secure the acquisition and development of the property can be. “We strongly urge our clients to bring us in as early as possible — well before the land is acquired,” McNulty advises. “If we are able to do a little bit of research on the property, we might be able to help our client structure its purchase agreement to be a little more sensitive to the environmental issues. I think the developer or retailer is taking a pretty significant risk if it is closing on a property without having some level of due diligence, because, once the acquisition is completed, whatever the problem is, the new owner has to deal with it.”

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