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Brownfields: Are They Worth The Risk?

Brownfields Are Being Noticed - In Many Cases They Offer A Company Free Land, But Not Without Serious Cleanup And Redevelopment Concerns.

By Thomas G. Dolan

BROWNFIELDS - abandoned industrial and commercial properties where contamination has been a barrier to expansion or redevelopment - are in the news. Bipartisan legislation signed by President Bush earlier this year will - further encourage the cleanup and redevelopment of brownfields, and has been attracting

media attention. In addition, the President's fiscal year 2003 budget will - double the funds available from - $98 million to $200 million. This will be channeled through the Environmental Protection Agency (EPA) to help states and communities clean up and revitalize brownfields.

For corporations engaged in the site selection process, do brownfields represent a good deal or not? Can they get a bargain by taking advantage of these funds, and present themselves as good neighbors as well? Or is the risk of building on a polluted site too high?

Cleaning up brownfields is not a new issue. Environmental disasters in the 1970s led to an awareness of the dangers of pollution, which, in turn, led to the creation of the federal Super Fund to help clean up these sites.

Brownfield-remediation activity has increased in recent years, but the impetus to this was court decisions in the early 1990s, according to Charles Bartsch, director of brownfield studies at the D.C.-based public-policy research organization, Northeast Midwest Institute. "These decisions held bank and other financial institution lenders liable," Bartsch explains. "So these people wanted out, and that resulted in an exodus of capital. That led to cities and states working directly with the EPA in trying to get these areas cleaned up."

Since then, Bartsch continues, subsequent rulings and legislation have removed lenders and other parties from liability, and the new legislation continues this trend. However, the movement was already under way for cities and states to take the initiative in getting these areas cleaned up.

For every dollar of federal money spent on brownfield-cleanup activities, cities and states produce or leverage $2.45 in private investment. To date, the EPA's brownfield program has leveraged more than $4 billion in public and private investments that have turned abandoned industrial properties into thriving economic and recreational areas. In addition, EPA brownfield pilots have created more than 19,000 cleanup, construction, and development jobs.

Brownfield Incentives

To return to the question as to whether or not brownfields represent good opportunities for corporations looking to relocate, Bartsch says, "This is not something [where] you can turn to page 12 of your cookbook and find a recipe. It's a very open, fluid situation."

How does a corporation end up locating on a brownfield? Not usually on its own initiative. "A company is not likely to say, ‘I'm looking for an eyesore, a toxic site filled with liabilities,'" says John Skowronski, senior manager at Deloitte & Touche in Parsippany, N.J. "What typically happens is that a company is steered to the site by the state economic and development agency."

One big attraction to brownfields is that they are often located in cities where people who want to go to work live, says Skowronski. "A corporation is putting in a facility where their potential employees are, so there's no transportation issue," he adds. "Often there is a lot of infrastructure, highways, sewers, water, and power that are already in place."

For companies willing to come in and help clean up the site there are a variety of incentives - including tax abatements, income tax credits, real estate tax exemptions, and federal tax credits - as well as access to the funds to help clean it up. Moreover, some states are taking a long-term view. If a new company puts in pollution controls that not only help clean up the present mess, but also represent long-term environmental controls, it will receive benefits on an ongoing basis. On the other hand, notes Skowronski, there's no helping hand extended toward the perpetrator. "If you're [a company that is] polluting the Hudson, you're left holding the bag," he says.

A key consideration is liability. "You can't blame companies from shying away from situations which could saddle them with millions of dollars of liability," Skowronski adds. But ongoing legislation has done much to define areas of responsibility. Michael Pawlukiewicz, director of environment and policy education for the Urban Land Institute in Washington, D.C., says, "There are now some good insurance products relating to brownfields. Certain insurance companies have gotten comfortable with this area, and good insurance can mitigate the risk."

Pros and Cons

No single factor can determine an issue as complex as whether or not to locate in a brownfield. Skowronski cites an example of a corporation that was being courted by both Indiana and Illinois. The sites considered in both states were contaminated, and in both cases the corporation was offered free land. Indiana, moreover, offered complete indemnification to the company for any contamination that might be traced back to the prior owners. Illinois was not willing to do this, yet the company chose Illinois. The Illinois site was right across the street from an existing facility, whereas the Indiana site was about a mile away from the existing facility, in a federal enterprise zone. "The indemnification became a very important issue," Skowronski says. "Yet it was ultimately outweighed by other issues."

Pawlukiewicz points out that just because a city or state offers a variety of incentives for a company to move onto a brownfield, that doesn't necessarily mean that it's a good idea to do so. "Many cites are overoptimistic, and tend to see themselves as areas for redevelopment when maybe they aren't as attractive as they think they are," he says. "Even if you overcome all of the contamination obstacles, there still has to be an actual real estate value to make it work.

If there is not an intrinsic value to the real estate, spending millions to clean it up will not add any real value. On the other hand, sometimes the real estate is so valuable that it's worth millions of dollars to clean it up - And there are all kinds of variations in between. If there is a real value there, then partnerships between private enterprise and government to clean it up can make sense."

Just as some cities are more realistic and can offer better values than others, the same is true of states, Pawlukiewicz says. Some are better at putting comprehensive and meaningful incentive packages together than others. New Jersey, Connecticut, Ohio, Michigan, and Illinois are strong in this area. "California is one of the weaker states in this regard," he says. "They just haven't been able to put it together." Also, there are some states that the EPA doesn't trust, Pawlukiewicz adds.

So there are, as Bartsch says, a number of "fluid" considerations on this topic. "The new law sets the stage for the authority for less-contaminated areas to go to the states," he adds. Clearly, the more the federal government can encourage the states to bear the burden of brownfields, the less responsibility the federal government has to carry.

Nevertheless, the EPA is still the driving force in this process. What will typically happen, Bartsch explains, is that a community will apply to the EPA for a site assessment. The EPA provides this, often along with technical assistance or help in the cleanup. With the results of the assessment, the community will look for local and state support and try to bring in a corporation via incentives. In addition to other benefits, the city and state may provide insurance for cost overruns.

Devloping Their Niche

Just as some cities and some states are better or worse at this sort of endeavor than others, the same can be true of developers. "Many developers have naturally stayed away from this area," Pawlukiewicz says. "But there are some smart people who have figured it out. They've solved a difficult problem and have established a niche for themselves. They make a good buck out of it, for they're not pressured with a lot of competition."

Corporations also approach this issue from a wide range of perspectives. "If the issue is driven by the corporate attorney who wants a 100 percent guarantee, the company won't go near it," says Bartsch. "A lot depends on the level of comfort and risk-management technique within a company. A few pay no attention to the stigma issues that stop many others. Those who have oriented to taking advantage of these opportunities are out there building sites on brownfields, and making a lot of money. One example is Home Depot, which has moved aggressively into brownfield sites in about a dozen states and is doing very well, for it knows how to deal with them."

Are brownfields forever? Bartsch points out that most of them are the result of the 1950s, when companies were in compliance but the danger of dumping toxic materials was not that well known. With the laws now in place, Bartsch doesn't believe that there will be any significant addition of new brownfields. On the other hand, he notes that some 10,000 to 15,000 brownfields have been reclaimed in the past five to six years - but that's out of a total of about 500,000.

"There are a lot more brownfields out there than there is demand for real estate," Pawlukiewicz says. "It's a question of finding the right place and creating the right value." In other words, there are no simple recipes.

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