For most developers and investors, the word "brownfield" evokes nightmarish visions of cost overruns, endless paperwork, long-delayed openings and, worst of all, serious litigation. However, the experience of other developers shows this need not be the case.
William McHale, vice president of Minneapolis-based Ryan Cos. US Inc., reports that his company has completed about a half-dozen retail, industrial and office projects on contaminated land, including a 420,000 sq. ft. power center on a Minneapolis industrial property that had been built over a limestone quarry later used as a demolition dump. Ryan Cos. US is currently working on creating a retail center from a 100-acre truck terminal that adjoins a regional mall.
"We've discovered [brownfields] make good development sites. They take more work, but we're not afraid of them," he says.
New York-based Dames & Moore/Brookhill was established specifically to acquire and clean contaminated sites, according to Charles Smail, the company's managing director. He says D&M/B has bought 30 properties with a total value of $130 million since the firm was founded last year. A large number are retail properties, including several small shopping centers in California and on the East Coast.
As its name implies, Brownfield Restoration Group LLC, headquartered in Canandaigua, N.Y., also buys and remediates contaminated sites. Because it exclusively buys real estate portfolios, mostly from corporations with excess properties, not all of the 200 properties it owns are contaminated, but a significant number of them are, according to company president Grant Cushing. The majority of retail sites are existing or former gas stations, but Cushing says the portfolio includes at least 100 industrial sites whose locations would make them candidates for conversion to retail uses.
Government cooperation These firms and others like them maintain that brownfield development, while not easy to pull off, is easier than it used to be. One of the major reasons, they say, is the changed regulatory atmosphere, with government at the local, state and federal levels more an ally and less the foe it used to be.
"They're offering a reasonable approach now," says Bruce Keenan, a partner in The Pyramid Cos., Syracuse, N.Y., in reference to regulatory agencies. "Which means they're no longer obstinate. In the past, they kept pushing until somebody bent. Finally, they've figured out they'll get a lot more done by cooperating."
Keenan contrasts the reception Pyramid got from the New York State Department of Environmental Conservation this year when it proposed a 3 million sq. ft. expansion of its 1 million sq. ft. Carousel Shopping Center in Syracuse with the reception the company got in the late 1980s when it proposed the original project. The original site served as a metal scrap yard and petroleum distribution facility. The expansion site encompasses 50 acres of oil storage and distribution facilities.
"We were going to do a project that would clean the property up, and they treated us like we had done the polluting," he recounts. "This time they gave us a lot of encouragement."
Others report similarly cooperative attitudes from the regulators they have dealt with. According to Smail, 44 states have enacted brownfield initiatives to encourage cleanup and reuse of contaminated sites. He says last year's change in policy by the federal Environmental Protection Agency also encourages this. The policy reduces bureaucratic red tape, he adds, by turning much of the responsibility for oversight and approval to individual states so property owners have one less agency to deal with. Many states have likewise reduced the number of layers at the state and local level.
The change in attitude makes a lot of sense, says Keenan. "There is similar real estate in a lot of communities that is polluted and will remain polluted unless there is the economic force of something like Carousel Shopping Center to speed up the climate," he explains.
'No more mysterious than a leaky roof' Along with the change in government attitude has come a willingness on the part of insurers to provide both liability and work-guarantee coverage for brownfields.
"Five years ago, insurance didn't exist," says Smail. "At this point, they have some underwriting history, and the industry has become competitive. The highest rated companies like AIG and Zurich have started to issue policies to cover work. Kemper has also come into the market."
What has made insurers more comfortable, according to several sources, is the advances that have been made both in cleanup technology and in identifying and quantifying contamination. In the view of some observers, the latter is the more important of the two.
"New technologies are being developed all the time, but adequate technologies have existed for several years now. What the new technologies do is refine our approaches so we can do things faster and cheaper," says Gary W. Keyes, vice president, real estate services, in the Richmond, Calif., office of ARCADIS Geraghty & Miller, a Denver-based environmental remediation firm that helps developers and investors complete real estate sales transactions involving contaminated sites.
But it is the ability to make reliable projections of costs and time that has put insurance companies more at ease, he says. "We take groundwater contamination and make it no more mysterious than a leaky roof," Keyes declares. "A leaky roof does not hold up a property transaction, and ground contamination doesn't have to either."
Lowering the developer's risk ARCADIS makes transactions possible by assuming the liability risk associated with contamination. The company analyzes a property, devises a cleanup plan, then does the cleanup work at a guaranteed price. The guarantee is the key to the company's success, says Keyes.
"Because we take on the primary risk, we can obtain supplemental insurance for the client at a low cost that will cover third-party liability," he says. This includes current liability, as well as liability for undetected contamination that is discovered later, and any regulatory procedures that result from such future discoveries.
He says his firm's participation allows an owner to obtain insurance with a triple-A rating for the entire cleanup process. The cleanup could in fact have a higher rating than the property itself, he notes, but what is most important is that contamination problems do not diminish the rating of the property or its financing. The high rating in turn enables the mortgage to maintain a high tranche position in Wall Street securitizations, which means the borrower has access to financing at competitive rates.
Keyes says the firm has been involved in $560 million of transactions involving contaminated sites, including a number of shopping centers. He reports that ARCADIS recently helped a purchaser close on a $25 million shopping center in California's Central Valley, where dry-cleaning solvents had leached into the town's drinking water aquifer.
Although responsibility for cleanup typically lies with the property seller, says Smail, D&M/B takes on that responsibility for the properties it buys. The selling price consequently is lower than it would be for a similar unpolluted property because it reflects the cost of cleanup.
In a recent deal involving an 88-acre industrial site in Sarasota, Fla., owned by a spin-off of Lockheed Corp., appraisers estimated the property would be worth $13 million if it were clean, says Smail. D&M/B determined cleanup would cost $3 million and bought the site for $10 million. It then obtained $5 million in stop-loss insurance that will cover the company if the cleanup exceeds the $3 million budgeted.
"The insurance company underwrote our remediation plan. They were comfortable with what we planned," he says.
In the end, probably the most important factor in making investors, developers and retailers more willing to take a chance on contaminated sites is the absence of alternatives. Opportunities to build on so-called virgin land are diminishing. After all, even agricultural land can have serious contamination problems from the use of fertilizers and pesticides.
But more importantly, the majority of retail development today involves reuse of or expansion on existing properties, either of which is likely to raise at least some environmental questions. Most problems will be minor, but many, particularly inner-city projects and projects entailing redevelopment of industrial sites, will have significant levels of contamination. And if contamination problems exist, you can be all but certain that no project will go forward until a program to remediate those problems is in place.
Members of the "Green Team" at BSW International, an architecture and engineering firm in Tulsa, are high on phyto-remediation, the use of plants and other elements of the natural landscape to clean polluted environments.
"Phyto-remediation is probably the safest and most efficient way to handle ground and water contamination," says Charles E. Bell, a senior design architect for the Green Team, a group of architects, engineers, computer specialists, specifiers and communications professionals whose primary task is to devise and implement design solutions based on sound ecological principles.
According to Bell, botanists have identified some 400 different species of plants and trees that have the ability to clear contaminants from soil and water. The most common and most versatile are cattails and poplars, each of which can eliminate problems caused by a number of different pollutants. Every region of the country, they note, has indigenous plants with pollution-clearing properties.
Plants accomplish cleanup in two different ways: bioaccumulation and biodegrading. In the former, the plant draws the pollutant from the soil or water, after which it is harvested and burned or otherwise disposed of. Many harvests may be necessary to reduce the pollutants to an acceptable level. In the latter, the plant breaks the pollutant down into more basic chemicals that are nontoxic.
Insects and marine life can also be incorporated into the process, with snails and crawfish particularly useful. For example, says Green Team manager Dru Meadows, small portions of a development site could be turned into a structured wetland, where sludge is run through a series of natural "chambers," each of which is designed to remove specific types of contaminants.
The main drawback to phyto-remediation, other than its novelty, is that the process typically takes longer than mechanical methods of cleaning, says Meadows. On the other hand, she adds, it costs less and can do double duty by being included as an element of the landscaping program.
In addition, not all contaminants are candidates for phyto-remediation, though most common ones are, says Meadows. "Plants are certainly capable of treating petroleum products," she emphasizes.
Phyto-remediation is only one of several ecologically sound technologies available to deal with site contamination. Most are still in their infancy, but the two Green Team members believe it won't take long for their use to become widespread. Among the other innovative approaches is the use of dredge to create building products, paving materials and even outdoor furniture.
"We've had several companies approach us asking if there's something that can be done with soils and sludge where it wouldn't have to be cleaned. And there is," says Meadows.
For example, she says, contaminated clay soils could easily be turned into brick or asphalt. The baking and compression would effectively lock contaminants in so they could not harm people or animals.
And as with phyto-remediation, some conversion of dredged material into useable products could be accomplished on-site, eliminating the labor and regulatory costs involved with removing it to another location.
There is also the possibility, Meadows and Bell suggest, that a third-party market for dredged material could develop as has happened with plastics. This would shift at least the removal costs onto other companies, which would use the dredge in their own manufacturing.
A mined-out limestone quarry called to do duty as a dump for construction debris from a razed slum is hardly what most developers would call a prize property.
But that is just what the Johnson Quarry in Minneapolis has turned out to be for Minneapolis-based Ryan Cos. US Inc. The company transformed the heavily contaminated inner-city site into a 420,000 sq. ft. power center anchored by Target, Rainbow Foods, Office Max, Old Navy Clothing Co. and PetsMart.
The project was initiated by the city's Redevelopment Agency, which had selected a property about a mile from the quarry for development of the surrounding neighborhood's first supermarket. Ryan bid for the right to develop the project and beat out several competitors.
The site, however, proved too small to accommodate both a supermarket and enough additional stores to make the project economically viable. The city and development company scouted for an alternative site, eventually settling on the Johnson Quarry.
From the outset, it was obvious the project would not be easy. Not only had the site been used for landfill, but from the 1950s into the early 1980s, lax environmental laws had allowed various industrial buildings, including two truck terminals and an ice-cream factory, to be built there.
"It was about as polluted a site as you're going to find," says Ryan vice president William McHale. "You had a lot of problems with petroleum, PCBs, coal slag and huge amounts of methane."
That was the downside. The upside was location: Situated in the heart of a relatively dense urban neighborhood with few existing retail services, the eight-parcel property had a freeway on one side, a freeway exit on another, a county road on a third and single-family homes on the fourth. It also had all supporting infrastructure in place.
In addition, the city was eager to get the site redeveloped with uses that generated more jobs and tax revenues, nearby residents were desperate for close-at-hand shopping, and both the city and neighborhood were anxious to get rid of ground and water contamination they feared might already have leached into surrounding properties.
There were times during the development process, McHale says, when the negatives seemed to outweigh the positives, beginning with the fact that it took two and a half years to complete environmental testing of the site so the project could get started. Remediation took another year and cost between $8 million and $10 million, and the site will have to be intensely monitored for 10 years. Fortunately, he adds, the city shared the cost of inspection, and a combination of state grants and tax increment financing paid for the cleanup.
Signing up tenants also took work. According to McHale, Rainbow, a division of Texas-based Fleming Food Co., had two stores already operating in Minneapolis and had opened in other inner cities as well, so it was not at all reluctant to get involved. With Rainbow on board, Ryan and the Redevelopment Agency approached Minneapolis-based Dayton-Hudson about opening a Target there. That, too, was relatively easy once the company was convinced all environmental issues would be taken care of.
Luring other tenants was harder. As McHale explains, while many national retailers are now comfortable with urban locations, they still tend to avoid lower-income neighborhoods, and heavily polluted sites make them even more scared. "We had to go to a lot of meetings with prospective tenants. You're having to educate them about remediation," he says.
Ultimately, reports McHale, the project racked up a total cost of about $25 million. He estimates a similar project on a "greenfield," or never-developed, site would have run about one-third that amount.
Nonetheless, he insists, the project was worth the cost. Last year, the Quarry Center had generated revenues of approximately $100 million, which he says easily places it among the top quarter of all power centers in the Minneapolis-St. Paul metropolitan area.
"All the tenants are doing 30 percent over projections," he reports. "Rainbow had barely opened when they realized they would have to remodel to add more checkstands, business was so good."
Would McHale advise other developers to tackle a similar project? "It's definitely not for first-timers," he responds, "and it helped that we are a general contractor as well as developer and have in-house architects and planners. It would have been much harder otherwise. But I'm sure a lot of other developers could do it."
Which is good, because as McHale sees it, other developers are going to have to do it. As he points out, "As real good sites get tougher to find, everybody's looking more to inner-city and infill sites, which have already been developed. And if something is already on the site, chances are it has at least some ground or water pollution."