Developing Distressed Property: Desirability and Viability

Zarwin, Baum, DeVito, Kaplan, Schaer, Toddy P.C.
Paul M. Schmidt

July 25, 2017

Location, Location, Location. This remains one of the critical aspects of real estate development. The other is that “it’s not about the money, it’s about the money.” So, while the redevelopment of Brownfields makes people feel good, at the end of the day, a Brownfield site has to be in the right location for a redeveloper or buyer, and has to make economic sense. Currently, a number of trends in real estate desirability are making Brownfield sites the perfect location for redevelopment and reuse. At the same time, as programs concerning cleanup, funding and risk management have become more favorable, the return on investment, or economic viability, of properties has also increased. This article will examine some of the key aspects of desirability and viability that are working together to make Brownfield redevelopment increasingly attractive in today’s real estate market.

Market Desires

A Brownfield is “real property, the expansion, redevelopment, or reuse of which may be complicated by the presence or potential presence of a hazardous substance, pollutant, or contaminant,” Small Business Liability Relief and Brownfields Revitalization Act, 42 USC Section 9601 (39). These are often former industrial properties located in areas of high density within urban limits and along river corridors. In part, increased redevelopment and reuse of Brownfields is simply a product of the overall economic recovery, and a product of the greater comfort project participants have in using contaminated property. But beyond that, to satisfy the criteria of future users, there are some definite advantages to Brownfields over greenspace. For example, for manufacturers who have experienced increased production, relocating to a larger, moth-balled factory can have significant benefits over constructing a new facility in a greenspace. These include existing utilities, an available workforce (i.e., cheaper labor than in a remote area), and perhaps even the ability to retain existing employees and avoid the costs of hiring and training new employees.

For residential and mixed use development, as William A. White, principle at Endurance Real Estate Group, notes, “another valuable feature of ‘infill’ development (which applies to many Brownfields) is that the locations are already surrounded by lots of amenities, unlike locations on the fringe where the new users often have to wait for more development to fill in around them.” Desirable amenities include stable school systems, public transportation, nearby shopping, and pedestrian-friendly infrastructure. Other favorable features include proximity to the workplace, scenic waterways and riverfront recreation such as multi-use trails and entertainment facilities. In short, residents desire a place where they can work, shop, play, and sleep, without exhaustive commutes. That trend in lifestyle preference ultimately leads to an increased interested in properties that happen to be Brownfields.

Cleanup Programs

It’s been a number of years since the watershed legislative changes at the federal and state levels which introduced the statutory liability defenses now available to lenders, bona fide prospective purchasers, contiguous property owners and others. See, e.g., the Comprehensive Environmental Response, Compensation, and Liability Act, 42 U.S.C. Section 9607(q) and (r) (CERCLA or Superfund); the Hazardous Sites Cleanup Act, 35 P.S. Section 6020.701(b)(iv) (HSCA); the New Jersey Spill Compensation and Control Act (the Spill Act), N.J. Stat. Section 58:10-23.11g.d.2. Nonetheless, following these events, the regulatory arena has continued to become increasingly more favorable to developers. As most developers already know, “remediation” can often be accomplished not by removing contamination, but by creating physical and legal barriers to exposure (respectively, engineering controls and institutional controls, i.e., deed restrictions). Generally, developers experience improved (quicker) regulatory review of remediation plans and acceptance of these controls than they did in the past. In some states such as New Jersey, government oversight has been replaced with oversight by private site remediation professionals working directly for responsible parties, which has dramatically improved the process for developers. These factors have made the redevelopment of Brownfields significantly easier, faster, and more predictable.

Funding Sources

Private funding for redevelopment on Brownfields has also increased. Just as users and developers are becoming more comfortable with Brownfields, so too are banks and private equity firms. These entities have become adept at obtaining their own site assessments, engaging counsel for advice and negotiations, and securing insurance products to add predictability to future costs and risks.

On the public funding side, available vehicles have not changed significantly in recent years. These still include products like grants for municipalities and quasi-governmental entities to assess Brownfields, develop cleanup plans, and conduct community outreach, and Brownfield and economic redevelopment loans for developers. But, again, the process and creativity of public funding organizations have improved. These funds often leverage private financing and other government funding, and involved agencies are adept at providing guidance and support. As two examples, agencies are amenable to the creative segmentation of projects in order to use economic redevelopment loans on portions requiring little remediation and use Brownfield loans on portions requiring extensive remediation, and on identifying factors to improve an applicant’s qualifications such as being near an anticipated transportation terminal. Pennsylvania public funding sources include the Pennsylvania Departments of Environmental Protection and of Community and Economic Development, and the Pennsylvania Infrastructure Investment Authority (PENNVEST). On the federal level, the U.S. Departments of Housing and Urban Development and of Transportation, and the U.S. Environmental Protection Agency, have created the Partnership for Sustainable Communities, which offers a number of tools to help communities improve access to affordable housing, increase transportation options, lower transportation costs, and protect the environment. Risk

Management Tools

Other significant advancements in risk management at Brownfield sites are more favorable insurance products and easier liability transfer. With insurance, a growing smorgasbord of product lines are available, at lower rates for some lines of coverage. “Marketplace Realities 2017,” Spring Update, Willis Towers Watson. According to Marcel Ricciardelli, Senior Vice President, Environmental Division at Allied World, in part, the low-cost, widely available coverage is due in part to the entry into the marketplace of new carriers, agents, and underwriters. “Diggin’ In: A look at the Environmental Market,” Property Casualty 360, Phil Gusman, Feb. 23, 2016. Fundamentally, policies may cover future pollution conditions as well as both unknown and disclosed pre-existing conditions. In real estate parlance, Phase 1 and Phase 2 Environmental Site assessments are performed to instill sufficient underwriter confidence.

Insurance policies, of course, cover third-party claims for bodily injury, cleanup, property damage, and even natural resource damages. One especially helpful aspect of insurance is its application to voluntary first-party cleanups, such as under Pennsylvania’s Land Recycling and Environmental Remediation Standards Act, 35 P.S. Sections 6026.101, et seq. (Act 2). This enables policyholders to remove the cloud of cleanup liability even where no government agency is likely to take an enforcement action. Insurance can also cover contractual obligations to conduct cleanup or address third-party claims, such as if a seller defaults on its cleanup obligations, or where the obligated party never had any statutory liability. This latter aspect opens the door to an especially useful redevelopment tool—liability transfer to otherwise uninvolved parties.

Environmental liability transfer is a growing industry where a complete outsider guarantees to conduct necessary cleanup or to indemnify against future cleanup obligations and third-party claims. Like carriers, liability transfer entities are able to take on large environmental risks both due to a deep understanding of likely loss and an economy of scale unavailable to many developers. Some providers are also remediation companies that offer their services as “sweat equity” in a project, which can further improve its viability. For the developer or user seeking to place occupants on top of former industrial ground, the complete transfer of liability to a strong guarantor can provide great certainty in moving forward on a project. With this certainty, a developer, buyer, or investor can get to the crux of a Brownfield property—its economic viability.

Paul M. Schmidt chairs the environmental and energy practice group at Zarwin, Baum, DeVito, Kaplan, Schaer, Toddy. Schmidt represents clients in the assessment, remediation, investment and transfer of Brownfields sites throughout Pennsylvania, New Jersey, and rest of the United States. He can be reached at pmschmidt@zarwin.com or at (267) 765-9636

This article is being provided for informational purposes only and not for the purposes of providing legal advice or creating an attorney-client relationship. You should contact an attorney to obtain advice with respect to any particular issue or problem you may have. In addition, the opinions expressed herein are the opinions of Mr. Schmidt and may not reflect the opinions of Synergy Environmental, Inc., Zarwin, Baum, DeVito, Kaplan, Schaer & Toddy, P.C. or either of those firms’ clients

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