Turning brownfields green is a team effort

By CHARLES R. WOLFE
Foster Pepper & Shefelman

While land use laws encourage redevelopment and growth in urban areas, potential and actual environmental contamination still can discourage people from reusing urban properties.

In less than six months, Triad Development transformed the former American Tar Co. site -- just north of Gas Works Park on Lake Union -- from a brownfield to prime property suitable for an upscale condominium complex. Triad removed decades-worth of paint thinners, solvents and creosote from the 1.3-acre site, in what Ecology officials say was one of the most rapid cleanups in the agency's history.

Historically, contamination has presented difficult issues in the purchase, development or financing of property. Under federal and state environmental laws, the current owner of a property may be held strictly, jointly and severally liable for all costs to clean up contamination on the property. Investigating a property for contamination is time-consuming, expensive and inexact. Attempts to define the extent of contamination and estimate the cleanup costs can sometimes exceed the value of the property.

A “brownfield” is an area which is historically associated with uses that might create contamination. Brownfields became a widely used term in the 1990s, in contrast to “greenfields.” Greenfields in undeveloped suburban or rural outlying areas are traditionally more attractive properties to develop because of the low likelihood of contamination and environmental liabilities.

As growth management and other land-use tools seek to discourage sprawl and encourage redevelopment of urban and industrial areas, governments have tried to facilitate brownfields redevelopment.

In recent years, a number of factors have combined to improve the regulatory and business climate for this effort. As the pressure to reuse properties within urban growth boundaries has increased, entities with substantial economic resources have become interested in brownfields, thanks to increasingly flexible approaches to liability avoidance by the U.S.

Environmental Protection Agency and the Washington Department of Ecology. Grants at the federal and state level have increased the willingness of local government to undertake remediation to enhance employment opportunities and other local economic benefits.

In Washington, recent legislative amendments and rulemaking have also enhanced opportunities for successful brownfields projects. In 1995, the Growth Management Act, the State Environmental Policy Act (SEPA), and the Shoreline Management Act were amended to better integrate long range planning and site-specific environmental review and to explicitly allow development agreements as a tool for assuring long-term project phasing. The same legislation also created the basis for permit coordination among all agencies with jurisdiction over a given site.

In addition, the Model Toxics Control Act (MTCA), was amended in 1994 to allow preemption of certain agency and local government permits which would be otherwise required for cleanup activities. Finally, recent amendments to SEPA regulations allow for a flexible approach to integration of review of a cleanup action under MTCA which will occur as part of a development project.

The 1994 amendments to MTCA also enabled prospective purchaser agreements, which have become an often cited component of successful brownfield redevelopment. The 1997 MTCA amendments relaxed the “public benefit” qualifying standard for such agreements and clarified the assignability of the associated consent decree device.

Prospective purchaser agreements have been successfully implemented in the Puget Sound area, most recently at the J.H. Baxter site in Renton, the Triad Northlake site in Seattle’s Wallingford neighborhood and the Juanita Village site in Kirkland.

In Washington, the ongoing MTCA rulemaking slated to be finalized in late 2000 may increase focus on future land use as a driver of remediation scope.

The major impediments to successful brownfields redevelopment -- and therefore of the perceived value of such properties -- regularly greets the practicing lawyer.

The traditional redevelopment disincentives have moderated but still remain: joint and several liability, lender reluctance based on uncertainty and impaired collateral, time and complexity of environmental and land use approval processes and delayed return on initial investment.

While some opportunities will still prove too complex, risky and costly to pursue, the lawyer can play an innovative role on the brownfield development team advising the client on components of risk and value and avoiding traditional black and white approaches to environmental liability. The lawyer works with the developer, environmental consultant, architect, appraiser and environmental insurance broker to recast traditional liability avoidance through integration of remediation and development.

In this context, the lawyer can contribute to the value of a brownfield property by participating in the integration opportunity best described by local consultant John Ryan of Thermoretec, which stresses how regulatory initiatives have resulted in a business opportunity which can reduce both cleanup and redevelopment costs.

A brownfield project can offer certain advantages to both owners and prospective purchasers or developers:

• Obtain more favorable cleanup standards which are consistent with future land use
  
  
• Reduce long term care requirements by placing the property into productive use
  
  
• Obtain double duty for cleanup and redevelopment costs (“twofers” such as remediation cap and building foundation)
  
  
• Overcome regulatory inertia by obtaining local support for job creation and increasing the tax base;
  
  
• Recover the asset value of the property in the marketplace
  
  
• Address liability concerns

In order to obtain these advantages, remediation and development processes must be integrated at or before the feasibility study stage of a project. Historically, most redevelopment projects did not commence without a form of final agency cleanup certification which adequately addressed liability issues. By moving the redevelopment focus (including future land use determinations) to the feasibility study stage of remediation, both seller and buyer are better able to take advantage of brownfield approaches.

As Ryan has indicated, several critical issues must be resolved as the remediation and development processes are integrated, such as:

• Complete a site characterization to properly allocate liability and determine the likely residual contamination after cleanup and redevelopment is complete
  
  
• Prepare a preliminary site development plan to define future site use and potential pathways of concern;
  
  
• Prepare a risk-based corrective action plan, with the goal of satisfying regulatory agencies, eliminating pathways of concern for future development and removing significant sources of contamination;
  
  
• Obtain permits and approvals for both the cleanup and redevelopment projects, taking advantage of permit
  
  
• Establish an agreed-upon valuation of the property based on the fair market value of the property, the cost of
  
  
• Develop a financial plan identifying potential financing and tax advantages for the proposed project; and
  
  
• Obtain environmental insurance, an increasingly available tool which can insure against cost overruns for remediation work and unanticipated future legal liability for additional site cleanup.

Clients faced with a purchase or investment decision regarding a contaminated property can often benefit from a simple reminder that property, even if unusable in its present condition, may have speculative or investment value based on future potential. In many situations, the cleanup obligation and associated agency scrutiny have not matured based on incomplete site characterization and/or low site rankings and/or human health risks.

The trade in contaminated real estate is common, ranging from the corner gas station and strip mall to small and large industrial concerns. As indemnification clauses and more flexible regulatory devices have helped balance risks until they pass muster, the market experience of increasingly sophisticated purchasers, investors, partners and lenders have enhanced market experience and the ability to assign value to contaminated property.

"Despite improving market conditions, a stigma is sometimes attached to the reuse of contaminated properties. A prospective brownfield redeveloper should consider hiring an appraiser to measure the potential aversion to the property at issue."

Despite improving market conditions, stigmas are sometimes attached to the reuse of contaminated properties. Stigmas can be mere emotional apprehension or an authentic discount factor on the value and marketability of a contaminated parcel.

Plaintiffs and property tax appellants have championed the concept’s cause, but no exact definition or application has emerged other than the general notion that the general public and market desires are often both adverse to locating adjacent to contaminated property.

Rather than accept stigma outright, a prospective brownfield redeveloper should consider commissioning the aid of a qualified appraiser to measure the potential aversion to the property at issue. The appraiser may help distinguish the impairment of property value based on direct costs of remediation from the impairment based on stigma (often attributable to impaired mortgageability, aggravation costs and fear of the unknown).

As noted above, the development team approach to a complex contaminated property transaction allows the lawyer innovative advisory roles over and above traditional liability concerns. It remains critical to work with an environmental consultant, architect, appraiser and/or others to identify the nature and extent of contamination, likely required cleanup scenarios, development potential and market value.

To aid in the creation of pro-formas and other decision tools, it is often possible to quantify the risks created by contamination through indemnification and/or contribution agreements with caps or formula shares, reliable estimates of consultant and cleanup costs and “cost cap” and/or “pollution legal liability” insurance products. The appraiser can work with the lawyer and environmental consultant to evaluate the impact of successful application of this effort on the market value of the property at issue.

In the final analysis, the nature and extent of the contamination on a site drives numerous other factors, such as the extent of liability for future owners and operators, the degree of complexity of agency negotiations to ascertain appropriate remedies, the likely restrictions on land use (deed restrictions/institutional controls) during and after cleanup, the extent of marketplace knowledge about the parcel and associated stigma and the portion of the eventual revenue stream which must be spent on the cleanup and later monitoring.

Working with an environmental consultant, the environmental lawyer can assess soil and groundwater contamination through appropriate site assessments to provide the client with the nature and extent baseline. This traditional process can serve as the basis for the valuation of a brownfield property, its circumstances, its associated risks, its market and limitations and its possibilities and potential as land use pressures continue to encourage the reuse of urban lands.