Experience Takes the Risk Out of Brownfield Redevelopment
Multifamily Executive Article Sponsored by PNC, here.
Not long ago, the risk that a piece of land might be tainted with environmental contamination was enough to frighten most apartment developers away. Today, cleaning up contamination—from underground storage tanks to asbestos—has become almost commonplace.
“Contamination isn’t what it used to be,” says Jim Andersen, senior vice president for High Street Residential. “Any prime site currently available and not developed likely has issues.”
Experience has taken most of the uncertainty out of cleaning up environmental problems. Many common problems now entail relatively predictable costs to fix that won’t dissuade many investors. And government programs and some environmental insurance may help with more serious problems.
All the Best Sites Are Contaminated
Over the past 10 years, developers have rushed back to urban areas and downtowns. In fact, most new-development sites today are in the urban core. Nearly all have been repurposed from some earlier use, many of which may have left toxic material behind. Asbestos insulation, for example, is common in many old buildings and must be removed before renovation or new development can begin. Similarly, soil tainted with contaminants such as gasoline, lead, or old heating oil often needs to be trucked away.
“Environmental conditions that require some level of remediation are commonplace, especially in the Northeast,” says Russell Tepper, senior managing director for Mill Creek Residential.
In the past, environmental issues like these could often prevent a development from going forward. “As urban sites available for redevelopment become more and more scarce, developers have no choice but to bid up the price of sites that have ‘hair,’ ” says Tony Lenamon, national apartment practice leader, valuation and advisory services, for CBRE.
Regulators have helped make some sites easier to redevelop by recognizing widely accepted environmental solutions. If necessary, developers can also access environmental insurance to protect themselves as they purchase land.
Perhaps most importantly, the cost of cleaning up problems has become much more predictable. “Our ability to forecast potential cleanup costs is much better,” says Andersen.
Sometimes the cost of cleanup is modest enough to be absorbed. Mill Creek, for example, has discovered asbestos and contaminated soil that needs to be removed in at least two of its residential developments currently under construction in New York and New Jersey.
“Our budgets contain adequate contingency, and it hasn’t affected the overall design of the communities,” says Tepper.
The High Cost of Uncertainty
Unpredictable environmental problems are the most troublesome to developers, who are generally happy to take on cleanup projects when they can reliably forecast the cost.
“I’ve seen developers willingly tackle a large-scale but moderate-risk project such as removal of asbestos from a large vacant office tower, because they can define the cost within an expected range with less chance of the cost doubling or tripling,” says Lenamon.
Larger cleanup projects are more difficult and may require government help to finance. “Massive undertakings are still daunting and expensive and will almost assuredly require governmental participation to offset those massive costs,” says Lenamon.
Potential contamination can also prove toxic for a seller trying to sell a property before a potential buyer has time to fully assess their risk. “On a quick sale, the discount would be substantial for serious and unknown or unquantified contamination,” says Andersen.
Developers should have a robust testing protocol when they consider taking on a contaminated site. “We conduct considerable subsurface testing of the land area, in and below existing buildings on the property,” says Tepper. Developers also should study historical information about the property and the surrounding area. If a promising site seems likely to have major contaminants, the developer should also research the viability of environmental insurance.
If a piece of land was once used as a gas station, a dry cleaning business, or an oil-change facility, the developer can safely assume the site will have environmental problems that will need to be fixed. “A prudent developer—or lender—wouldn’t conclude a transaction on these sites until the environmental aspects were completely vetted,” says Lenamon.
The right staff can also make a huge difference. “Hire top-tier consultants who are conservative and thorough, and reserve the dollars for potential cleanup,” says Andersen. These professionals should have knowledge of the area and the local regulatory landscape.
During any site disturbance or during the soil component of the construction phase, be sure to have the proper observers and professionals on hand. Often, surprises will pop up, such as contaminated soil that will need to be removed or an underground storage tank.
“These items need to be immediately jumped on,” says Andersen. “All of our urban sites use a soil management plan and observation to facilitate immediate identification of site issues and quick resolution.”
By Bendix Anderson Produced by Hanley Wood Strategic Marketing Services, sponsored by PNC Real Estate. PNC Real Estate is not responsible for the accuracy of the statements herein.