How Environmentally Contaminated Sites Can Be Converted to Beneficial Uses
Brownfields are often an untapped market of potential for future uses… as long as the buyer understands all that comes along with these unique properties.
June 2021
By Matt Winefield, Founder, Winefield & Associates in Long Beach, Calif.
By Matt Winefield, Founder, Winefield & Associates in Long Beach, Calif.
How many times have you driven by that fabulous corner with the vacant lot that used to be a gas station and wondered why someone hasn’t done something interesting with that property in umpteen years? Finding great land for redevelopment is challenging to say the least. However, there are at least 300,000 unique sites in the Western U.S. that should be considered. Think brownfields.
A brownfield is a property – the expansion, redevelopment, or reuse of which may be complicated by the presence, or potential presence of a hazardous substance, pollutant or contaminant. Typical brownfields include gas stations, strip malls with dry cleaners, plating shops and petroleum storage/processing facilities.
A transaction involving brownfields can be a win for all stakeholders, as:
Finding a Brownfield Owner
One of the biggest challenges surrounding the acquisition of a brownfield is finding a brownfield owner who is pragmatic and willing to sell at a reasonably discounted price. Local and federal contamination databases are woefully incomplete, and owners of contaminated properties aren’t exactly eager to tell you about their environmental problems.
The best way to find environmental diamonds in the rough is to develop relationships with the owner’s trusted advisors, such as commercial/industrial brokers, real estate attorneys, environmental attorneys and environmental consultants. Moreover, it is always best for the owners to have been fully advised of their options before considering a sale.
Addressing the Brownfield Aspect
If the buyer receives a substantial discount from market due to contamination, you can bet she’s buying as-is, will need to provide meaningful indemnifications and will soon embark on an environmental project. Tens of thousands of sites have been decontaminated and brought to beneficial use throughout the U.S. The technologies can be as simple as excavating and removing soils or as complex as installing a network of wells, extraction devices and emission scrubbers.
The most important step to take when remediating a site is to hire a consultant with relevant experience and a track record with the environmental agency in charge. Unfortunately, mistakes are very costly in this realm. For example, selecting the wrong remediation technology is more likely to cost you $400,000 than $40,000. And to complicate matters further, states change their cleanup standards regularly, so the investor needs to incorporate an appropriate factor of safety. They should also note that cleaning up the last 10% of a brownfield takes up half of the costs (yes, it’s asymptotic).
Unique Components to a Purchase & Sale Agreement
The standard commercial/industrial purchase and sale agreement (PSA) will need to be supplemented with detailed addenda. There will be some conflicting needs between buyer and seller, but it shouldn’t become a zero-sum game. The buyer wants a significant discount and to be able to tap responsible parties, grants and old insurance policies that may contribute to the cleanup costs. The PSA needs to be written so the buyer is not precluded from chasing these sources. For example, recovery from old insurance policies typically has strict exclusions related to indemnities that the buyer provides the seller. The seller wants the PSA designed so it helps her sleep better at night. The sales price may be significantly less of a factor (I’ve had sellers pay me!) than protection from future agency action and third-party claims.
Respect for Environmental Justice is Important
One has to understand that there will always be a portion of the population unwilling to accept converted brownfields for residential or commercial use. The secret is to accept that fact and ensure you are not selecting a location with parties who want to make an environmental justice example of your development. Having said that, most people realize that the true environmental injustice is a blighted, contaminated site that is sitting dormant with toxins continuing to migrate. For success, make every effort to work collaboratively with environmental agencies. Do not cut corners, and effectively communicate your remediation results with stakeholders, including the community.
The Price of a Brownfield
When I lecture on brownfields at universities or professional organizations, I always present contaminated sites to the audience and ask the question, “How much would you pay for this site?”
Here are a couple examples.
A contaminated former gas station at a very high-traffic corner is ideal for a multifamily development in Hollywood, Calif. The clean value was $4 million. The estimated remaining remediation liability was $1.5 million. The purchase price was not $2.5 million because the environmental risk increases the necessary return substantially. Plus, you need to put a factor of safety on the remediation estimate. We bought the site for $1 million, and had a 40 percent annual return for a four-year project. The seller was delighted because environmental consultants had been taking advantage of him for 10 years, and he was a retired teacher who preferred to relax. The site is currently being redeveloped for 70 residential units.
An industrial facility in Orange County, Calif., which used to have an industrial launder and dry cleaner. The clean value was $2.1 million. The estimated remaining remediation liability was $1.8 million. At first glance, there is not much room to work here. We bought the site for $100,000 because we thought we could either clean it up efficiently or successfully sue a previous insurance carrier to take over the environmental project. The latter occurred. Once again, the seller was happy to be rid of the albatross. We are currently holding/leasing the site as the insurer remediates with minimal disruptions to our tenant.
Though brownfields can provide opportunities and, oftentimes, solid investment returns of 25 percent or more, they are not for the faint of heart. Many have lost their shirts – not to mention their entire investments – in this game. If you decide to buy a contaminated property, ensure that your due diligence is thorough and that you have the best professionals on your team.
A brownfield is a property – the expansion, redevelopment, or reuse of which may be complicated by the presence, or potential presence of a hazardous substance, pollutant or contaminant. Typical brownfields include gas stations, strip malls with dry cleaners, plating shops and petroleum storage/processing facilities.
A transaction involving brownfields can be a win for all stakeholders, as:
- The seller eliminates a liability
- The buyer gets a discount
- The community eliminates an eyesore and hazard
Finding a Brownfield Owner
One of the biggest challenges surrounding the acquisition of a brownfield is finding a brownfield owner who is pragmatic and willing to sell at a reasonably discounted price. Local and federal contamination databases are woefully incomplete, and owners of contaminated properties aren’t exactly eager to tell you about their environmental problems.
The best way to find environmental diamonds in the rough is to develop relationships with the owner’s trusted advisors, such as commercial/industrial brokers, real estate attorneys, environmental attorneys and environmental consultants. Moreover, it is always best for the owners to have been fully advised of their options before considering a sale.
Addressing the Brownfield Aspect
If the buyer receives a substantial discount from market due to contamination, you can bet she’s buying as-is, will need to provide meaningful indemnifications and will soon embark on an environmental project. Tens of thousands of sites have been decontaminated and brought to beneficial use throughout the U.S. The technologies can be as simple as excavating and removing soils or as complex as installing a network of wells, extraction devices and emission scrubbers.
The most important step to take when remediating a site is to hire a consultant with relevant experience and a track record with the environmental agency in charge. Unfortunately, mistakes are very costly in this realm. For example, selecting the wrong remediation technology is more likely to cost you $400,000 than $40,000. And to complicate matters further, states change their cleanup standards regularly, so the investor needs to incorporate an appropriate factor of safety. They should also note that cleaning up the last 10% of a brownfield takes up half of the costs (yes, it’s asymptotic).
Unique Components to a Purchase & Sale Agreement
The standard commercial/industrial purchase and sale agreement (PSA) will need to be supplemented with detailed addenda. There will be some conflicting needs between buyer and seller, but it shouldn’t become a zero-sum game. The buyer wants a significant discount and to be able to tap responsible parties, grants and old insurance policies that may contribute to the cleanup costs. The PSA needs to be written so the buyer is not precluded from chasing these sources. For example, recovery from old insurance policies typically has strict exclusions related to indemnities that the buyer provides the seller. The seller wants the PSA designed so it helps her sleep better at night. The sales price may be significantly less of a factor (I’ve had sellers pay me!) than protection from future agency action and third-party claims.
Respect for Environmental Justice is Important
One has to understand that there will always be a portion of the population unwilling to accept converted brownfields for residential or commercial use. The secret is to accept that fact and ensure you are not selecting a location with parties who want to make an environmental justice example of your development. Having said that, most people realize that the true environmental injustice is a blighted, contaminated site that is sitting dormant with toxins continuing to migrate. For success, make every effort to work collaboratively with environmental agencies. Do not cut corners, and effectively communicate your remediation results with stakeholders, including the community.
The Price of a Brownfield
When I lecture on brownfields at universities or professional organizations, I always present contaminated sites to the audience and ask the question, “How much would you pay for this site?”
Here are a couple examples.
A contaminated former gas station at a very high-traffic corner is ideal for a multifamily development in Hollywood, Calif. The clean value was $4 million. The estimated remaining remediation liability was $1.5 million. The purchase price was not $2.5 million because the environmental risk increases the necessary return substantially. Plus, you need to put a factor of safety on the remediation estimate. We bought the site for $1 million, and had a 40 percent annual return for a four-year project. The seller was delighted because environmental consultants had been taking advantage of him for 10 years, and he was a retired teacher who preferred to relax. The site is currently being redeveloped for 70 residential units.
An industrial facility in Orange County, Calif., which used to have an industrial launder and dry cleaner. The clean value was $2.1 million. The estimated remaining remediation liability was $1.8 million. At first glance, there is not much room to work here. We bought the site for $100,000 because we thought we could either clean it up efficiently or successfully sue a previous insurance carrier to take over the environmental project. The latter occurred. Once again, the seller was happy to be rid of the albatross. We are currently holding/leasing the site as the insurer remediates with minimal disruptions to our tenant.
Though brownfields can provide opportunities and, oftentimes, solid investment returns of 25 percent or more, they are not for the faint of heart. Many have lost their shirts – not to mention their entire investments – in this game. If you decide to buy a contaminated property, ensure that your due diligence is thorough and that you have the best professionals on your team.
Click here to read this article on the Wester Real Estate Business website.
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