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Second Hand Dirty Land

At first glance, the Atlantic Steel Co. mill didn't look like a promising site for development. Sure, it was located on a huge parcel of land near two busy highways in the heart of Atlanta, not far from Turner Broadcasting, Coca-Cola's headquarters and Georgia Tech. But it was also laden with diesel fuel and other petroleum-based contaminants that had been spilled during a century of steel manufacturing.

Where others saw an unmanageable mess, though, Hilburn Hillestad saw opportunity. He was familiar with the 138-acre site after working on it years earlier as an environmental-engineering consultant. Now a senior vice president with Jacoby Development Inc., an Atlanta-based commercial real estate developer, Hillestad was looking for environmentally compromised land to clean up and develop. And the Atlantic Steel site had definite advantages.

It was ideally located in a small valley surrounded by granite, says Hillestad. That meant contaminants from the site didn't migrate, so there would be no off-site problems and no exposure to third-party complaints. And the site's “hot spots” could be identified more easily, since the steel operation remained active.

It wasn't easy to sell the idea to Jim Jacoby, the company's chairman, but Hillestad succeeded. “All of sudden I was taking on the biggest project in the U.S.,” he says.

That project is now called the Atlantic Station, a $2 billion mixed-use development of hotel, office, residential and major retail spaces, comprising one of the country's largest brownfield redevelopment efforts. In September it was awarded the Environmental Protection Agency's 2004 Phoenix grand prize for brownfield redevelopment. Working with AIG Global Real Estate Investment Corp., Jacoby has sold off parcels for a high-rise office building, a hotel, apartments, town houses and single-family homes.

About 1 million square feet of retail space — including a 360,000-square-foot freestanding Ikea, a 270,000-square-foot Dillard's department store and a 100,000-square-foot Regal Cinema — will be open and operating by October 2005.

Despite the site's tarnished past, the project has received widespread support in Atlanta, according to Mitch Jacoby, senior vice president with Jacoby Development. “It was kind of a lovefest. Everyone was for it. The city commission voted for it 17 to zero,” says Jacoby. “That's unheard of in development.”

Development of the nation's brownfields — abandoned, idled or underused industrial and commercial facilities where expansion or redevelopment is complicated by real or perceived environmental contamination, according to an EPA definition — is growing.

Several factors are driving it, says Don Nanney, an environmental attorney and a partner with Santa Monica, Calif., law firm Gilchrist & Rutter Professional Corp. In many states, land is scarce. “In Los Angeles, there is the ocean on one side and mountains on the other,” says Nanney. “There's a lack of land and a lot more pressure to recycle.” Ever-increasing property values also contribute. When land is at a premium, the additional costs of cleaning up a brownfield “pencils out” better, says Nanney.

California, in particular, has many brownfield redevelopment projects. An early example is the shopping mall in Los Angeles's Atwater Village neighborhood, which was started in the early 1990s. It was built on 45 acres of land that was once used by Franciscan Ceramics before the company went out of business. The manufacturer left behind 100,000 cubic yards of contaminants that took six months to haul away.

“There were synchronized 18-wheelers that would leave every six minutes,” says Hamid Saebfar, a division chief with the California EPA's Department of Toxic Substances Control. “We had to put in a traffic light. It was very sophisticated.”

Another California site, the MetroMall, now under construction in Carson, is even bigger than Atlanta's Atlantic Station. The site once was a 157-acre landfill and state Super Fund site and is now being cleaned up and turned into a 1.2 million-square-foot outlet mall that the city hopes will create 5,000 new jobs and bring in tax revenues on annual sales of $30 million.

Additional tax revenues are one incentive for local and state governments to encourage brownfield redevelopment, particularly for retail that will bring in not only property and income taxes, but also sales tax. California, for example, under a plan proposed by Governor Arnold Schwarzenegger to streamline the state's government, is trying to ease the regulatory process for brownfield development by consolidating the agencies that oversee it.

But the biggest change that has made brownfields more attractive, says Nanney, took place in 2001, when the United States Congress passed the Small Business Liability Relief and Brownfields Revitalization Act. “That tried to encourage development of brownfields,” Nanney says. “No one is completely satisfied with it, but it is a step in the right direction.”

The act allowed the federal government to stop entering into the so-called prospective-purchaser agreements that developers felt protected them, says Nanney. Some states still do enter the agreements; California's DTSC approved such a pact for the MetroMall, which releases the developer from liability once a majority of the remediation is done. States may also issue no-further-action letters guaranteeing that the developer won't be sued by the state. The Atlantic Station, for example, obtained one from Georgia's environmental protection agency, according to Hillestad.

The greater threat comes from third parties that can claim contaminants have migrated to their sites, says David Perry, project director with American Geosciences Inc., an environmental-engineering firm in Pittsburgh. “That's a pretty big hammer that keeps people from buying property.”

There's a thriving market in all kinds of liability insurance. Perry says there is cost-cap insurance, which covers the cost of cleanup if it exceeds a set amount, but such policies are pricey. There's also unknown-liability insurance, which covers unforeseen liabilities. And there is what some call liability buyouts. “If we think cleanup will cost $250,000, for example, we'll say, ‘Give us $300,000 and we'll take on the liability,’” says Perry. The engineering firm then gets a policy written to cover its assumption of liability.

Then there is the remediation of the site. Brownfields require research into the property's prior uses, called Phase I, as well as testing and identification of pollutants, called Phase II. A cleanup plan is devised and put in place, with continual testing often required by regulatory agencies. The additional time and costs vary. Otherwise, the property is handled like any other real estate deal.

The Atlantic Station project is a case in point. The buyer and the seller negotiated a deal in which the steel company would pay for remediation. The deal was to pay for any costs up to $25 million; the final price tab, $10 million, was less than half of that. “We thought the site was not as dirty as they thought,” says Hillestad.

With Hillestad overseeing the project, Jacoby Development and its environmental engineers undertook the actual cleanup. “It took a little less than a year,” says Hillestad. “We removed 9,000 truckloads of contaminated dirt.”

The commercial sections were paved or landscaped, and the residential sections of open land were covered in two feet of new topsoil to eliminate pathways to exposure, says Hillestad. Finally, groundwater-intercept wells were put in, and the groundwater is continually tested.

Since the remediation was completed, developers have begun work on an office building and a hotel, as well as apartments. The retail space is now under construction too, while it is being marketed to retailers.

In addition to the Ikea, Dillard's and Regal Cinema, space has been leased to Banana Republic, Joseph A. Bank, Victoria's Secret and Publix, which is opening a 30,000-square-foot grocery store. Developers are also in final talks with a large general merchandiser, according to Denver McGarey, president of the McGarey Group, a Coronado, Calif.-based firm that is in charge of the retail leasing.

“We've leased several hundred thousand square feet and have a big pipeline of deals,” says McGarey. Leasing rates range between $35 and $45 per square foot on an annual, triple-net basis.

McGarey says retailers aren't worried that the site is on once-contaminated land. “We disclose it but don't need to talk about it. It's for a good purpose, and it's a hell of a piece of real estate.”

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