Management Strategy: Brownfields' New Allure, Site Selection Magazine, March 2003

From Site Selection magazine, March 2003

MANAGEMENT STRATEGY

Corporate real estate is gradually making the move from disposition
to reposition of abandoned or derelict properties.

by ADAM BRUNS

ABOVE: In January 2003, crucial green lights from both the city council and the U.S. Environmental Protection Agency enabled brownfield redevelopment work to move forward on this bundle of some 250 former industrial properties along the Rio Salado in downtown Tempe, Ariz. – the largest piece of undeveloped land left in the entire city.

ut with liability, in with opportunity.
As brownfield redevelopment has evolved from a Superfund-era idea to an urban renaissance tool to what is now a federally backed driver of business opportunity, the world of corporate real estate has evolved too. Today, instead of looking askance, corporations are looking around at what they can do to optimize, rather than hide, their aging, contaminated and derelict properties.
A US$30.8-million redevelopment of vacant buildings that belongs to American Seating Co. in Grand Rapids, Mich., was helped along early in 2002 by approval of a Brownfield Redevelopment Credit by the Michigan Economic Growth Authority that will account for up to 10 percent of the total investment. The project – encompassing 230,000 sq. ft. (21,367 sq. m.) of residential space and 100,000 sq. ft. (9,290 sq. m.) of commercial space over 11 acres (4.5 hectares) – is the biggest brownfield project to date in the area. A new company called American Seating Park LLC, formed by American Seating and Pioneer General Contractors, will now officially get its work under way. Perhaps most indicative of a new corporate view on aging properties is the fact that American Seating will be the first tenant, moving its corporate headquarters into 60,000 of those redeveloped square feet (5,574 m.).
That is just one example from Michigan. General Motors will receive a brownfield redevelopment tax credit to rehabilitate a part of its functionally obsolete metal casting facility, retaining 191 jobs in Saginaw. In Detroit, the Michigan Economic Development Corp. is approving tax increment financing for demolition and site preparation of the 153-acre (62-hectare) I-94 Industrial Park in Detroit, and for the redevelopment of a former CSX railroad depot in Ludington, which will allow Whitehall Industries to expand and create 30 new jobs.
A total of 48 states now have voluntary cleanup programs for the sites. Michigan has 20 Renaissance Zones. New Jersey has 30 Urban Enterprise Zones. On and on grows the litany of urban redevelopment programs, and most, if not all, of them are supplemented by the presence of brownfield credits of one sort or another.

Detail Work Eases Headaches

Have you ever secretly wondered, in the middle of sorting your household recyclables, whether it's all worth it in the long run? That's a thought familiar to the land recycling business as well. But the landscape is growing clearer by the day.
The 2002 XL Environmental Land Reuse Report, issued in October 2002, found that there has been a 43-percent increase since 2001 in land being cleaned up and reused. Based on media coverage of such projects, the report from the Exton, Pa.-based provider of environmental insurance found that at least 160,000 acres (64,752 hectares) in 43 different U.S. states were in the midst of redevelopment.
"Growing problems with suburban sprawl – combined with advances in remediation technology and environmental insurance – make brownfields redevelopment an increasingly attractive solution to an array of land use and economic problems," says Bob Hallenbeck, senior vice president of risk management for XL Environmental. "Whatever the combination of reasons for increased land reuse activity, it is clear that sites once considered real estate eyesores are now viewed, through a completely new lens, as exciting opportunities."
Although the numbers may reveal as much about media habits as real estate practice, total sites discussed in media reports were most numerous in California, followed by Ohio, Pennsylvania, New York and Wisconsin. In fact, five of the top 10 states in the report also rank among the Top 10 in new plants for 2002, according to the Conway Data New Plant database.
Of particular note to corporate real estate professionals: approximately 70 percent of the projects mentioned were formerly put to industrial use, but only 14 percent have industrial use in their future, with the most prevalent goal being mixed use.
But in a competitive business attraction environment – not to mention one where the word "environment" packs such an image wallop – the benefits of brownfields can multiply quickly for all stakeholders: municipalities, tribes, developers, environmental attorneys, lending institutions, insurance brokers and vendors .... even corporations themselves.

National Push Backed by
Local Knowledge

"Brownfields is starting to emerge as a robust business and environmental initiative, and it has manifested in various forms," says Ed Ricci, senior vice president, national clients, for Atlanta-based engineering firm Brown and Caldwell. He says that cities and states are taking advantage of increased government grant and loan programs, girded by the local history surrounding the land in question.
"Knowledge of local and state programs is critical for pursuit of work in discrete geographies," states Ricci.
But the real sea change is in the minds and strategies of the private stakeholders involved, especially developers and contractors, as Ricci noted after attending the Brownfields 2002 conference in Charlotte, N.C., in November 2002.
"They rarely were involved in deals where federal funds made the deal go," says Ricci. "Rather, their acquisition and divestment of brownfields properties were based on the end-use financials of the property to be developed. The developers did take advantage of tax incentives and credits, including remediation tax credits, and tax income financing including tax exempt bonding. One example from a New Jersey site was that 75 percent of the qualified remediation cost was deducted from future non-property sales taxes."

New Jersey As Dense With
Brownfields As It Is With People

To get an idea of how many contaminated sites are ripe for redevelopment in the Garden State's 21 counties, one only has to catch a glimpse of the 1,211-page 2001 report on that very subject, compiled by the New Jersey Department for Environmental Protection. One estimate says it contains around 12,000 parcels.
"New Jersey faces unique challenges," says former economic development head Gil Medina, now director of the Technology Enterprise Group for Cushman & Wakefield of New Jersey. "We have a 100-percent metropolitan population. The U.S. average is 80 persons per square mile – New Jersey has 1,135 per square mile."
So it makes sense that New Jersey was at the forefront of brownfield redevelopment, passing the nation's first industrial site cleanup law in 1983. Oddly enough, the surname of State Commissioner of the Dept. of Environmental Protection Bradley Campbell also happens to be the name of one of the state's oldest industrial citizens. At Campbell Soup Co., where around $300 million was spent in a recent fiscal year on an equipment upgrade, they're remaking a lot more than their alphabet soup.
Two of Campbell's oldest buildings, used for soup, bean and juice making, had been closed in 1988 and 1989. Working with a redeveloper, the City of Camden and the State of New Jersey, Campbell's corporate real estate director Robert Zane and his colleagues hashed out an agreement to demolish the plants and see them redeveloped.
Today, minor league baseball stadium Campbell's Field, completed in 2001 at a cost of $24 million (including $7 million in remediation costs) sits majestically on the Camden waterfront, beneath the picturesque backdrop of the Ben Franklin Bridge. Nearby, contiguous redeveloped property has attracted corporate tenants, including L-3 Communications Systems East, a leading supplier of intelligence, surveillance and reconnaissance products for military and commercial use.
With so much industrial land to reuse, it figures that brownfield expertise would cluster in New Jersey as well. One of the most prominent national authorities is Dr. Ira Whitman, whose Whitman Companies provide site assessment and remediation, brownfields and groundwater-related services. In fact, the company not only moved its headquarters onto a brownfield site, but recently provided lead abatement services to the governor's mansion in Drumthwacket. Asked if corporations are paying more attention to brownfield possibilities for their own projects, Whitman says it's all relative.
"It's a matter of the practical reality of the marketplace, where the brownfield sites take on a higher value because there is just not an abundant supply of land," he says. "Then they learn quickly it's something they need to consider."
Whitman points out that aesthetic concerns may keep companies from pursuing a campus or high-tech location, but the same concerns do not apply to warehouse and distribution projects – which by their very nature may find brownfield sites high on their lists.
"The capping of the site can be used as part of the remediation," he points out. "So that if you're building a large warehouse facility where a third of the property is a concrete slab and parking, then you're building the cap – the solution to the contamination problem – as part of what you're building to operate."
In November 2002, the state announced a new brownfields policy, to be administered by the newly created Office of Brownfield Reuse. Among the pledges by Gov. McGreevey and NJDEP Commissioner Campbell are liability reform, more flexible conditions for issuance of "no further action" letters, "letting developers get to closing," more intensive use of market tools to manage financial uncertainties surrounding such projects and a promise to offer "zero tolerance" for industrial warehousing.
Indeed, the only recalcitrant parties continue to be private landholders who mothball properties.
"They'd rather discontinue the use of the property, put a fence around it, pay the taxes – hopefully for them, at a lower rate – and let it sit, because of the liability associated with marketing and redeveloping it themselves," says Whitman. "For the mothballed prope rties owned by companies that are viable financially, there's a certain economic depressant associated with the properties – they depress the market and the economy. There is clearly a 'higher and better use' in most cases.
"And there's another factor that ties into the liability angle," he adds. "More and more, we are seeing brownfields considered for residential development. That thought freaks out industrial owners – 'My God, you build 50 townhouses here and they'll have 10 cancer cases and they'll be suing us.' So that's another factor that leads to the mothballing of these properties."
However, Whitman thinks the natural fear of regulators is being gradually overcome by the implementation of good policy.
"One of the good things about brownfield policy in New Jersey and other states is the regulators have made a commitment to facilitate the redevelopment," he points out. "So it may be easier to redevelop a property in an industrial city in New Jersey than in another place for the same purpose 25 miles into the country."

Philly Project Emblematic of Collaboration

Just across the state line, Brown and Caldwell is involved in another project. Philadelphia Electric Co. (PECO), now a part of Exelon, has successfully pursued the redevelopment of an old power station site in Chester, where the adjacent land was long occupied by now long-departed boatbuilding concerns. (A PECO archival photograph shows the building emblazoned with a neon sign reading "Electricity Is Cheap in Chester.") Now the redeveloped site will house mixed-use development as well as a marina. Renee Gelblat, EPA project manager for the region, says her office and three others received a gold medal from EPA national headquarters for a brownfields pilot project of which the PECO site was a part.
"It's good when there's a big corporate influence, because you have someone to talk to and someone to respond when things happen," she says. "A lot of times you do the cleanup and then they sell the property. PECO found the buyer a lot faster than anybody thought they would. One interesting thing about this particular one is we have the redeveloper and the company doing remediation in the same place at the same time, so that makes things a little difficult."
But not so difficult that developer Preferred Real Estate Investments couldn't find tenants. In fact, even as the project continues, there are a handful signed up already, expecting to move in during the summer of 2003. Now there is talk of another buyer coming in to buy the rest of the contiguous property on the overall 90-acre (36.4-hectare) parcel.
One complication, says Gelblat, has been that some of the redevelopment actvity can cause the contamination underneath to move. But the stakeholders have worked together to address such issues as they come up.
"We meet once a month – the EPA and the state and PECO and the redeveloper sit around a table and try to hash out any problems that might have arisen," says Gelblat. "The project is dynamic. You blink and something else is happening."
One reason for the speed has been the dovetailing of state laws and federal laws, which allowed PECO and the EPA to bypass the "onerous" process of writing orders and then asking PECO or the developer to comply, says Gelblat.
"In general, it got the area characterized faster, which is part of what made it attractive to Preferred," she says, "because when they started looking at the area, we already had a six-volume evaluation report, okayed by the EPA and the state, so they knew what they were getting into. That streamlined it quite a bit – by about eight months to a year. We went straight to the technical. You only do that with companies with a history of being cooperative and responsible."
Gelblat says a corporate sense of commitment, or lack thereof, is obvious from the outset.
"There are cooperative companies in general, who are willing to come to the table, committed to doing the cleanup and doing it well," she says. "They tend to hire reliable consulting firms, submit plans that are pretty much complete the first time around. There is a general commitment within the corporation to do the cleanup – they see it as a cost of doing business."

New Concerns Highlight
New Business Area

Ah, but there may be a new project driver: transparency. Bill Lynott, president of Colorado-based LandBank – a company that buys, cleans, restores and resells environmentally damaged properties – says that the ramifications of Sarbanes-Oxley are just as potent for contaminated properties as they are for synthetic leases.

Landbank Environmental Properties subsidiary Gaffey Street Ventures, LLC purchased this 88-acre (36-hectare) brownfield property in San Pedro, Calif., in 1999. Since 1923, it had been home to a host of oil refineries, terminals, storage and transfer facilities. Since remediation work was completed in June 2001, the three-parcel property is being developed with 1.9 million sq. ft. (176,510 sq. m.) of flex industrial warehouse and distribution space to support Port of Los Angeles activities.

"The impact we anticipate is better disclosure relative to environmental liabilities, particularly for publicly traded companies," says Lynott. "They are under-reported, and somewhat understandably, relative to a large corporate player. We deal with a lot of corporations that have multiple surplus assets, and are faced with the conundrum of how to report the liability properly."
When it comes to legacy properties, says Lynott, some are suspect, while some are completely unknown. He expects that Sarbanes-Oxley will put more pressure on companies to come up with some sort of assessment. His firm, long established in helping corporations manage risk, hopes to capitalize on the trend by continuing to work closely with insurers like XL on developing innovative products tailored to the particularities of each brownfield project. At the same time, working out entitlement issues can be just as testing, especially with regard to railroad and utility easements. LandBank's 120-acre (48.6-hectare) project in Santa Clarita, Calif., is a case in point.
"There are a lot of properties where the California Aqueduct goes underneath," he says. "There are AT&T transcontinental lines. Then you always have to be careful to understand the oil and gas and mineral rights. We spent a year on the Santa Clarita property, with multiple lease interests relative to oil and mineral rights. The title issues relative to brownfieds properties are definitely non-trivial."
What often makes those headaches worth suffering is the existing infrastructure. And Lynott says it's that ready-made status, as well as these properties' customary urban locations, that is making the retail world swarm to brownfield redevelopment, led by Wal-Mart and Home Depot, and, to a lesser extent, pharmacy and restaurant chains.
That kind of clientele has been strong in Florida, says Michael Goldstein, an attorney with the Miami law firm Akerman Senterfitt who has been involved in brownfield policy formulation and implementation on the metro and state level for many years.
"I can't tell you how many times I've picked up the phone and heard someone say, 'We've run out of clean land, can you find us a brownfield to build on?'" he says. He cites homebuilders, Wal-Mart, Home Depot and industrial warehouse park developer Codina Group. "There are a number of projects where manufacturing companies have sited or expanded to brownfield sites. In Florida, there is a good reason for that. Manufacturing requires lots of employees, and one of the most significant incentives is the brownfield job bonus – up to $2,500 cash per job, as a refund against certain taxes."
Goldstein is equally cognizant of the subtle human relations factors involving community populations, especially in what are commonly referred to as "environmental justice" communities. To that end, he and his allies are developing a model plan for environmental equity and justice that brings all players to the table.
"So when a developer goes into an environmental justice community where the residents are highly mobilized, there is a template for working through those issues that results in a mutually acceptable solution," he says.
Goldstein says the state is gradually increasing funds available for such projects, an issue he and the Florida Brownfields Association, which he chairs, are pushing in the guise of a $500-million brownfield bond, while also pushing for a $100-million bond issue in Dade County. He hopes that such funding will align such programs with what he calls the "innovative, flexible and committed" excellence of the Florida Dept. of Environmental Protection staff.
"They get it," he says. "That's saying a lot, because it's a huge sea change in the way regulators approach these types of properties."
Lynott says that no matter what type of legislative guidance is offered, it's the real world of real estate that matters.
"Basic economics ultimately really drives what happens, and what's happening now is I'm drinking from a firehose relative to the availability of product," he says.
As for corporate disposers, Lynott notes one successful repositioning in San Pedro, Calif., where LandBank worked with the Port of Los Angeles and Pacific Coast Capital to purchase 90 acres (36.4 hectares) from Coastal Petroleum that was home to a former refinery and "tank farm."
"We cleaned it up, pursued soil and groundwater cleanups to 'no further action' [status]," he says, "and there is now 2.1 million sq. ft. [195,090 sq. m.] of warehouse that is 90-percent complete with the tenants being port users."

International Brownfields
Activity On Rise

Of course, if New Jersey has brownfields galore, then it goes without saying that the original Jersey must have some too. Not to mention the rest of Europe.
"Great Britain and Germany are two countries where a lot of activity is talking place," says Dr. Ira Whitman, citing an exchange program between German officials and the U.S. EPA, as well as technical assistance programs with countries in Eastern Europe. "There is a major program taking place in Melbourne, in the state of Victoria in Australia" he adds.

Dr. Ira Whitman says progressive policy-making and progressive corporate attitudes can find common ground on brownfields.

In fact, it's Australian David Higgins, former managing director of global property firm Lend Lease Group, who will take the reins this spring as chief executive of Great Britain's English Partnerships, the official agency for "regeneration" in the United Kingdom that is aggressively pursuing its own redevelopment agenda. A recent survey revealed that some 44,000 acres (17,000 hectares) of previously developed brownfield land in England has been abandoned for nearly a decade.
One branch of the agency is the National Coalfields Program, which counts 98 parcels in its portfolio. It seeks to create 40,000 job opportunities on former coalfields by achieving goals that include 21.5 million sq. ft. (2 million sq. m.) of commercial floor space, 6,500 homes and $1.6 billion in private sector investment. A $19-million effort called networkspace ltd., designed to appeal to small companies, is one arm of the program.
One might think that the large-scale availability of land in Canada would preclude much brownfield redevelopment, but in its industrial cities, there are projects and programs seeking to do just that.
At a brownfields conference in Toronto in late 2002 sponsored by the Canadian Urban Institute, Quebec environment ministry official Michel Beaulieu said that more than 137 sites have been cleaned up in the province since the mid-1980s, which have cost the government some US$66 million, but have netted some US$1 billion in economic activity. In Toronto, several efforts to redevelop former railyards have garnered awards. And in Port Hope, on the northern coast of Lake Ontario east of Toronto, new tax incentives have just been put into place that relate not only to the properties' industrial heritage, but their historical character as well.

Tempe Turns Blight Into
Attractive Sites

Along the Salt River in Tempe, Ariz., next to another major redevelopment called Tempe Town Lake, sit around 250 parcels of land that make up what is the largest piece of undeveloped property left in the whole city. The City of Tempe, with the help of attorneys, developers, financial institutions, insurance firms and engineers, has undertaken the task of changing that land's profile from a legacy of heavy industrial to mixed use and recreational. In January, the city council approved the Brownfield Redevelopment Plan submitted for the property.
Phil Lagas, vice president and the environmental services practice leader for Brown and Caldwell's Southwest region, had an interest in the property dating from his days working for the city. His client Brad Wilde, founder of a company called Miravista Holdings, LLC , came to him three years ago, wanting to get the city interested in redeveloping the land. One major problem was that federal brownfield redevelopment money was not available for any land within a Superfund site, as this property is. But in January, the EPA agreed to submit the public notice for a Superfund deletion.
Lagas says the city was anxious to get the property redeveloped, but nobody wanted to take on such an eyesore. Now, using about $5 million in funds from Brownfield Economic Development Incentive grants and loans administered by HUD, the team is moving forward with the makeover.
"What you end up with is a cooperative development between the City of Tempe, a developer they can contract to and the regulatory agencies who really want to get this site cleaned up," says Lagas, "and the only way is to get it out of the Superfund – otherwise there isn't enough of an economic incentive to do it."
One tool Lagas says has been important is a GIS database of the entire site, where Web browsers can point and click on any parcel and get a full environmental summary. Another crucial tool has been insurance.
"One of Tempe's biggest fears is if the developer finds something unexpected, they will walk away from the project," he says. "We've been working with AIG for a long time to get several products to protect Tempe should the developer come across something he can't handle. Insurance will definitely be a piece of this thing."
Wilde has brought about two-thirds of the property owners on board, promising to indemnify them by purchasing that insurance.

As many are finding across the nation, the endorsement of those private property owners – whether a family-owned electroplater or a multinational corporation - is key to greenlighting brownfields projects. As Lagas' colleague Ricci says, the preferred path is "working where there's a reasonable end use in mind and it's driven by the economics. "
"Developers and financial dudes could care less about EPA money," Ricci says. "It's real estate that drives the project."