Real Estate Quarterly — Reading Between Lines Belies Cleanup Success Stories

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The recent history of cleaning up and redeveloping contaminated sites might lure the casual observer into thinking that the dark days of the past are dead and gone. Sadly, such reports are premature.

Despite legislative and regulatory efforts over the past several years, the process of redeveloping contaminated sites remains a difficult and tenuous proposition.

Certainly, things have improved from the nadir of a decade ago, when a developer faced a grim prospect in trying to squeeze profit out of a contaminated parcel. Back then, many projects languished in the planning stages as property owners haggled with regulators and serious liability issues hung in the air like a specter ready to smother potential profits.

In California, government officials and stakeholders finally came to the table in the mid-1990s to put together a series of tools in an attempt to tackle the problem of “brownfields” the industry term for contaminated sites slated for redevelopment. To some extent, the parties succeeded in producing some workable regulatory relief.

Today, the Prospective Purchaser Policy allows a potential buyer of contaminated property who was not responsible for causing the contamination to limit liability by entering into an agreement in which the Department of Toxic Substances Control will issue a covenant not to sue. The Voluntary Cleanup Program permits the expedited cleanup of a contaminated site by an owner who funds DTSC’s oversight and participation. For less-complex sites, the Private Site Mitigation Program allows landowners to use qualified individuals to oversee site assessment and cleanup.

The federal government also pitched in with several programs directed toward funding and technical assistance.

Partly as a result of these programs, the perception of brownfield development changed toward the late 1990s. Suddenly, by using the new tools to minimize risks and costs, a developer could pick up a contaminated parcel and turn it into a handsome profit in no time.

Brownfield development proponents can point to several large projects (e.g. the California Speedway in Fontana) to bolster the optimistic outlook.

Still a tough process

The occasional success story, though, hides the reality that brownfield development remains a daunting task. The regulatory tools may reduce the scope of risk for developing brownfields, but they are not a panacea.

One need look no further than the recent concerns related to the gasoline additive known as MTBE to realize that minimizing risk does not equate to eliminating risk. Even without contamination “surprises,” site cleanup can often result in significant cost overruns.

At times, the cost overruns result as much from the well-intentioned assistance of regulatory agencies as from the vicissitudes of project engineering. With these pitfalls still lurking on the horizon, a prudent brownfield developer will proceed cautiously and, if he or she decides to pursue development, carefully select the appropriate strategy.

First and foremost, before deciding to proceed with a brownfield project, a developer should carefully evaluate the demand and market conditions that will exist once the cleanup is done and the project constructed. Typically, even with the recent regulatory changes, this will require that the proponent factor in additional time to deal with brownfield-related issues.

When and if a developer concludes that a site exhibits sound fundamentals, the challenge is to use the new tools correctly and appropriately. Depending on the characteristics of the site and of the development deal, certain tools will be more helpful than others. Under some circumstances, certain safeguards may even be eliminated, leading to savings in time and money.

Obviously, one should not regard risk lightly, but more sources of protection do not always lead to better protection.

Significantly, of the several brownfield regulatory initiatives discussed above, all require reaching some type of agreement with the regulating agency.

Regardless of agency involvement, environmental insurance should always be considered as part of a project strategy. In fact, for many projects, environmental insurance and risk-based corrective action will be a preferable route to using the agency’s regulatory tools.

Getting government on board

The regulatory relief and favorable judicial opinions, however, ignore the larger problem of brownfield development. It is one thing to ease the job of processing a profitable brownfield development, it is quite another to facilitate development of marginal or clearly unprofitable brownfield sites.

Other than token grant programs at the federal and state levels, government has done little to promote development of brownfields in impoverished urban areas. These areas, which likely comprise the majority of brownfields, require more than a little flexibility and some additional security these sites require incentives.

Local government has offered little to induce a reluctant developer to take a risk on a marginal site. Unlike programs for low-income housing, a developer receives no density bonuses for pursuing a brownfield project. Local governments also offer little in the way of expedited assistance to process brownfield projects.

Without more than a nod in the direction of brownfields by local government, the problem will not be solved and the long-anticipated renewal of inner cities will not be forthcoming.

Rather than lauding the modest efforts of the state and federal governments, brownfield proponents should focus efforts on getting local government into the picture.

Benjamin M. Reznik is chair of the government, land use, environmental & energy department at the law firm of Jeffer, Mangels, Butler & Marmaro. He specializes in zoning, land use and environmental law.

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