Brownfields: Attractive, Prime Redevelopment Opportunities

04/03/2006 |

Available funding and insurance are making revitalization of these blighted properties ideal

 

While many developers have avoided brownfields because of the necessary environmental clean-up and liability risks, these sites are prime real estate redevelopment opportunities. Available funding and insurance that reduces the risk of lawsuits and cost overruns are making revitalization of these blighted properties even more ideal.

According to the U.S. Environmental Protection Agency (EPA), a brownfield is a property where the expansion, redevelopment, or reuse may be complicated by the presence or potential presence of a hazardous substance, pollutant, or contaminant. “The prototype of a brownfield site is a rusting, hulking, abandoned industrial facility that had been an active tax-paying, revenue-generating property in the past, and for different reasons, the site has now either been abandoned or is under-performing from its best value,” explains David Bennink, managing director of Aon Environmental, an industry specialty of Chicago-based Aon Corp.

For 10 years, the EPA has encouraged and empowered developers and communities to work together to revitalize contaminated properties nationwide. Funding is available through the agency’s Brownfields Program. The EPA’s Brownfields Assessment Grants and Brownfields Revolving Loan Fund Grants can help with the costs of environmental assessment and clean-up. There are 10 regional EPA offices throughout the United States, each of which is responsible for the execution of the agency’s programs. To find out who to contact in your area, visit the EPA website (www.epa.gov/brownfields).

Seek out other sources of funding as well. “Anyone interested in looking at brownfield redevelopment will first want to consider which local grants and waivers of liability are being offered by their local or state governments, in addition to the federal EPA programs,” explains Bennink.

Building owners and developers have viewed brownfields as a risky proposition in the past; with the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA, also known as “Superfund”) stating that a new owner may be held liable for environmental wrongdoing that happened at the site before its purchase, it’s no wonder. “Rule No. 1 for a real estate developer in the past was always to steer completely away from any site with an environmental stigma because, once you take title to that site, any contamination that is at the site is essentially, by definition, yours,” Bennink explains. However, many states and the federal government have since instituted legislation that minimizes liability risks.

“In the past - and still today - some buyers and sellers are relying on indemnities (where the seller will agree to indemnify the buyer if they find any contamination or if there are any lawsuits down the road),” says Bennink. Unfortunately, this tethers the seller to the property indefinitely and, should the seller declare bankruptcy, leaves the buyer financially responsible. In lieu of indemnities, insurance policies can reduce the unforeseen risks of brownfield redevelopment.

The remediation cost-cap insurance policy limits remediation costs. Cost overruns are due to either greater concentration, a greater spread of contamination, or a change in regulatory requirements for clean-up. Bennink explains the latter by saying, “You may negotiate a clean-up standard based on the current standards that are in place today in 2006, and then 2 years into the project, regulations change and you find out you have to clean to a much more stringent remediation standard. As such, your remediation costs increase exponentially.”

Another insurance tool is a fixed-site pollution policy, which covers the clean-up of additional (unknown) contamination found on-site, third-party liability claims, and defense coverage. The third-party liability claims could range from bodily injury, property damage, natural resources (e.g. water or wildlife) damage, or diminution of value.

Bennink warns that these policies should not be confused with pollution coverage that was sometimes included under liability policies in the past. “It was never the intent of those general liability policies to offer pollution coverage,” he explains.

The growth pattern in cities has traditionally charted outward, with concentrations of new construction activity occurring in the suburbs. However, brownfields offer the urban address and zip code desired by many companies. If the cost and liability risks can be controlled, redevelopment of these sites is not only possible, but also practical.

Jana J. Madsen (jana.madsen@buildings.com) is managing editor at Buildings magazine.


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