Cleaning Up

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Cleaning Up
Arturo Sneider

On a property where faucets and other plumbing fixtures were once manufactured, there stands a Lowe’s home improvement store open for shoppers to buy those very same supplies.

The location is Plaza Pacoima, a nearly 30-acre power center in the working-class San Fernando Valley community.

Consider it an icon for future development in Los Angeles.

The project was only completed after contamination on the site was cleaned up, the local councilman successfully lobbied for redevelopment subsidies and developer Arturo Sneider spent millions more on construction than estimated.

But ask the developer was it worth it and he has no doubts.

“In a way, it really is almost the only form of responsible development,” said Sneider, chief of Beverly Hills’ Primestor Development Inc. and an opponent of suburban sprawl. “In the inner city and urban core, the reuse of a property and creating more efficient use of land and space is the way of the future.”

Sneider developed his shopping center on what is termed a “brownfield” site, usually old abandoned industrial property or closed landfills that have been contaminated, perhaps with hazardous materials, but could be cleaned up for redevelopment.

It’s the kind of location only an intrepid and patient developer would even want to tackle. But it’s also the kind of property more and more L.A. developers will have to deal with if they want to get anything built at all.

There’s a limited supply of virgin, so-called “greenfield” development land – and it’s often in neighborhoods where residents fear more congestion. But there’s a bounty of brownfields.

No single public agency maintains a list of brownfield properties in Los Angeles, but a 2004 report by USC researchers put it at more than 4,000 acres. As local manufacturers continue to close, or move operations offshore and to other states, that figure is bound to grow.

“They are not only on the outskirts of town,” said Sara Russell, brownfield project manager for the federal Environmental Protection Agency. “It’s a corner lot that’s vacant and no one knows why it’s been sitting there for years.”

Scores of such sites have been developed in Los Angeles County over the past 20 years. Among the most notable have been offices and shops built in Burbank on land contaminated by aerospace company Lockheed Martin Corp., which moved from the city in the early 1990s.

In Los Angeles, brownfields range from tiny lots with capped oil wells to vast tracts such as the former Howard Hughes Aircraft headquarters in Playa Vista. There, the Ratkovich Co. is developing a campus of creative offices.

But the development challenges aren’t getting easier, and are probably getting worse.

Not only do developers have to work closely with government agencies to clean up sites, but many of the projects require some public funding to pencil out. Budget cuts are drying up federal funding, while local redevelopment agencies, another key source of money, are losing money to local school districts and the cash-strapped state.

Private-sector lenders, meanwhile, remain leery of funding the projects, even though their role is critical.

“The government may have some bridge money, but until the private sector releases the purse string, no brownfield (site) is going to get developed,” said Steve Andrews, a senior economic development adviser to Mayor Antonio Villaraigosa, who has pushed hard for redevelopment of contaminated industrial land around downtown.

Deep contamination

The Plaza Pacoima project showcases the challenges a developer faces in building a brownfield project.

The site, at 13500 Paxton Ave., was formerly the location of a foundry operated by Price Pfister Inc. that employed hundreds of local residents for decades. But in 1997, parent company Black & Decker Corp. closed operations and moved the facility to Mexico.

The site then sat vacant for several years upsetting residents, who pushed Richard Alarcon, their councilman at the time, to do something about it. Then, about six years ago, the Los Angeles Community Redevelopment Agency entered into negotiations to find a development project for the site from Black & Decker.

Those negotiations prompted an environmental review that confirmed that the top soil was contaminated with metals such as lead, heavy-duty cancer-causing industrial solvents, and an assortment of other chemicals found in oil and grease. Some of the contamination had even reached the groundwater.

However, unlike some other brownfield sites, where there can be extended litigation over who will pay for cleanup, Black & Decker agreed to pay the roughly $30 million costs.

The remediation involved carting away tons of topsoil, treating contaminated groundwater and installing a system that extracts solvents from the soil by sucking up evaporating fumes.

The redevelopment agency, meanwhile, sought out a developer and settled on Sneider, whose Primestor had developed other shopping centers on brownfield sites. He was intrigued by the site but needed it to pencil out. He only decided to move forward after purchasing the property for $14 million – at what he called a significant discount – and after the City Council approved $18.7 million in redevelopment subsidies in August 2008.

The power center finally opened in May 2010 at a cost of $70 million.

How did it work out for Sneider?

The developer had calculated that the project, even with discounted land costs and Black & Decker picking up remediation costs, would run him an extra $7 per square foot to build. That’s because the Plaza Pacoima project needed, for example, a cap on the land to prevent any toxic fumes from filtering up to the stores.

However, the extra expenses amounted to even more than he expected – about $10 per square foot. Still, Sneider said the project penciled out for him.

He said the experience was typical of building on brownfields.

“Every single site is like its own world,” he said. “It really is a case-by-case basis of getting in there and being creative in the way that you try to resolve the situation.”

Downtown struggles

As difficult as the Pacoima site was to build, it was finally completed in no small measure because of community pressure. Alarcon championed Plaza Pacoima in City Hall.

But around the east side of downtown Los Angeles there are multiple abandoned properties in industrial neighborhoods where there is no constituency to push things along.

Consider a 208-acre tract at East Slauson Avenue and Avalon Boulevard. Part of the site was occupied by a now-closed Goodyear Tire & Rubber Co. plant. There also were scores of small industrial businesses and depot for freight trains. It is owned by multiple parties.

The property has been contaminated with metals, chemicals and industrial solvents, some of which have been cleaned up.

“This is a piece of good productive land (and) it’s just mothballed,” said Andrews, who also sits on a state board that promotes development of brownfields.

The site serves as an example of why the city developed the Los Angeles Brownfields Program six years ago. Today, it comprises the local redevelopment agency, the Department of Public Works, the Community Development Department and the Mayor’s Office of Energy and Environment.

Since its inception, the program has pulled in a total of $60 million in federal community block grant funds, U.S. Environmental Protection Agency grants, and redevelopment agency and other funds. The program has helped fund cleanups at an apartment complex site in Venice, an affordable-housing project in South Los Angeles and other locations.

The program has $12 million set aside to clean up the Goodyear property, but that is not enough to complete even testing, much less remediation. And with the site’s splintered ownership, it has been difficult to work out if the cleanup will be funded by public or private money. Today, more than half of the property remains vacant and presumably contaminated.

Public funding for brownfield development always has been hard to come by. One key source has been the EPA, which has three grants to developers to cover testing, cleanup and some construction.

“There are economic benefits when you clean up a property,” said Sara Russell, the EPA’s brownfield project manager for the L.A. region. “Values increase especially if good development follows.”

However, the EPA estimates that, at best, 30 percent of grant applicants receive any money. And in Los Angeles, where abandoned manufacturing sites dot the city, it’s even worse.

“With L.A. being so big and really the EPA grants being a drop in the bucket there, it’s hard to spread that money around,” said Evan Reeves, of Center for Land Use Recycling, a San Francisco non-profit that helps developers find money for brownfield sites.

One solution would be, of course, to have private lenders make up for the lack of critical public funding, something that has occurred at the Ratkovich’s Hercules project, which involves renovating 11 old Howard Hughes Aircraft buildings into 530,000 square feet of creative offices.

Penwood Real Estate Investment Management of Hartford, Conn., has partnered with Ratkovich and put $40 million into the project. It’s the first brownfield site that the lender has backed. Managing Director Rick Chase said that the unknowns in brownfield sites typically make them too risky.

“Anytime you have contamination on a site you have a can of worms,” he said. “There’s no hard and fast threshold. It’s really a question of the amount of contamination and kinds of contamination.”

The Howard Hughes site was different. Ratkovich and Penwood were able to buy the property for a bargain price of $32.4 million last year. That compares with $200 million spent in 2007 by the prior developers, who later defaulted on a $155 million loan.

Also, remediation had started on the site, so the contamination was well defined.

“The real trick on that is to make sure there are no unknowns, that the site has been fully characterized,” Chase said.

What’s more, the new developers were able to secure an insurance policy that would cap any extra expenses they may incur.

“It gives comfort frankly to buyers of an asset so they know insurance is in place,” said Alex Glickman, an attorney at downtown L.A.’s Arthur J. Gallagher & Co., who brokered the insurance. “Let’s assume its $1 million (estimated cleanup costs), the insurer will look at all the plans and dig into engineering and then they might say, ‘Fine we will insure you for all expenses over $1.25 million.’”

Emily Murray, an environmental attorney at Allen Matkins Leck Gamble & Mallory LLP’s downtown office, said that for developers who are willing to be creative, good brownfield opportunities are there.

“There are many properties that can be had at a competitive rate,” she said. “The existence of environmental contamination should not scare everyone away from doing anything.”

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