FROM A BROWNFIELD TO A PUTTING GREEN BY BRADLEY M. MARTEN Marten & Brown LLP It is a good time to own dirty property. Landfills, wood treating plants, Superfund sites and other once maligned properties are suddenly in demand. Savvy investors, encouraged by government officials, are scouring the inner cities to find attractive properties at bargain prices that can be cleaned up and returned to productive use. Some of the country's largest real estate development companies, along with smaller, specialized firms, are competing in what has become one of the hottest sectors of the real estate market -- brownfields redevelopment. Brownfields are abandoned or underutilized pieces of property -- often in urban areas -- that are contaminated by previous industrial use, but pose no serious threat to public health. They generally enjoy a superior location for commercial or residential development. They are often properties that others have looked at, paid an option for, and then fled. To traditional investors, these properties are problems. To sophisticated investors, they are opportunities. The opportunities exist because brownfields properties are generally cheap. Owners of brownfields properties often face liability for substantial cleanup costs. Confronted with the prospect of having to cleanup the property in order to sell it, many owners simply do nothing with their land. Some abandon it. Others lease it at a loss. A brownfields purchaser can offer a seller in this situation at least two advantages. The first is cash for property that otherwise has no near-term prospect of generating any. The second inducement to the seller is the opportunity to eliminate, or least minimize, its environmental liabilities. Because the buyer will generally either cleanup the property, or at least obtain government assurance that no further action is required, the seller is unlikely to have to cleanup the property itself. It can therefore turn a perceived liability into an asset. For these reasons, owners of contaminated lands generally welcome brownfields investors. The government encourages brownfields investors for at least three reasons -- jobs, taxes and environmental cleanup. In announcing federal brownfields grants to 20 cities in June, Scott Oki's Golf Club at Newcastle is one of several high profile brownfileds redevelopments in theis area. 1996, Vice President Al Gore underscored that brownfields development is "good for the environment and good for the economy. "This is a common-sense, cost-effective way to restore our cities, creating jobs and returning abandoned urban areas to productive use," Gore said. Locally, the city of Seattle and King County have sponsored a number of brownfields "demonstration projects" in the Duwamish corridor aimed at creating family wage jobs in an area economically "at-risk," but not yet abandoned. At the state level, the Legislature enacted brownfields legislation in 1994 to provide liability protection to "prospective purchasers" of contaminated land, and made it clear that one purpose of the legislation was to create or preserve jobs, especially manufacturing and light industrial jobs. Taxes are also a consideration to the government. Idle land produces little tax revenue. Indeed, property owners of contaminated land often succeed in convincing the assessor to lower the assessed value of their land. By encouraging re-use of contaminated property, local and state governments generate not only additional property tax based on higher assessed values, but sales and business taxes as well. Frequently, the assessed values of nearby properties will also be increased. Brownfields redevelopment is also attractive to government because it leads to cleanups that would otherwise not happen, or would happen much later. Brownfields redevelopment allows the government to leverage public dollars with private investment. Generally, it is much less resource intensive for the government to facilitate a private cleanup than it is to take enforcement action. Given the cuts that have been made in the budgets of both EPA and the Department of Ecology in the past few years, there simply are not enough resources to take enforcement action at the hundreds of contaminated sites that the government has identified. Private cleanups fulfill the environmental mission of these agencies with fewer public dollars. If brownfields development is so good for sellers, and so supported by the government, one may ask, why isn't there more happening? The fact is, a significant number of transactions have been completed, or are in the works. The newsworthy projects are the biggest ones: the Port of Seattle's redevelopment of Terminal 18, Scott Oki's Golf Club at Newcastle, Nitze-Stagen's Union Station project, Paul Allen's proposed development of the Quendall Terminal site on Lake Washington. There are, however, hundreds of sales of less-celebrated contaminated properties, and each can -- and should -- be structured to take advantage of government incentives for brownfields redevelopment. These incentives fall generally into two categories -- liability protection and more reasonable cleanup standards. Through a number of different initiatives, EPA and the state of Washington offer purchasers, and in some cases tenants, the opportunity to minimize (though generally not eliminate) their environmental liabilities on contaminated land. The most comprehensive protection comes through so-called "prospective purchaser" agreements, which are binding agreements between the potential buyer and the government setting forth the liability protection that will be afforded the buyer in return for an agreed upon cleanup of the property. The advantage of this type of mechanism is that the buyer can quantify the cost of the cleanup prior to purchase, and obtain maximum liability protection after closing. The disadvantage is that prospective purchaser agreements usually take months to negotiate, and require the prospective buyer to invest substantial time and resources upfront -- often six months and $200,000 or more -- in environmental investigations, negotiations and drafting. As a result, only a handful of these types of transactions have been completed. Fewer than 10 have been completed in Washington, generally at properties which have a substantial development potential, such as a terminal expansion, office complex or golf course. Prospective purchaser agreements, however, are only one of several mechanisms for minimizing environmental liabilities. The Department of Ecology has an Independent Remedial Action Program (IRAP) which allows potential buyers to have the state review the environmental condition of a piece of property, for a fee, and then render a non-binding opinion as to whether further action is required to cleanup the property. The issuance of a No Further Action letter is often sufficient comfort to a lender to make a loan on contaminated property. EPA has a similar program, which leads to a "comfort letter." Potential buyers can also take advantage of recent changes in cleanup standards which have lowered the cost of cleaning up contaminated properties. Ecology, for example, recently broadened the types of property eligible to take advantage of "industrial" cleanup standards. The state also is developing new cleanup standards for petroleum-contaminated sites, which represent by far the greatest number of contaminated properties. When put into effect -- which could occur as early as next year -- the cost of cleaning up former service station and other petroleum contaminated properties may drop significantly, making these properties more attractive as development opportunities. EPA has set up a web site which contains more information about brownfields. It can be found on EPA's Brownfields Home Page. Bradley Marten is an attorney with the Seattle law firm of Marten & Brown.