When a commercial or industrial property becomes contaminated with toxins, chemicals, and other pollutants and abandoned, the result is a brownfield. A brownfield can stand as an ugly blight on the area and deter prospective buyers and developers from taking a closer look. Fortunately, the Environmental Protection Agency (EPA) has created a program to encourage the expansion, reuse, or redevelopment of brownfields that provides incentives to invest in these properties. But before committing to a brownfield site, it’s important to know what you’re getting into and prudently ponder:
- What is a brownfield?
- How the EPA’s program works
- The pros of investing in a brownfield site
- The cons of investing in brownfields properties
- Steps involved in the brownfields redevelopment process
- Other considerations
Armed with the right knowledge, resources, and government backing, you may be able to transform a brownfield into a thriving new development that generates healthy income.
What is a brownfield?
The EPA defines a brownfield as "a property, the expansion, redevelopment, or reuse of which may be complicated by the presence or potential presence of a hazardous substance, pollutant, or contaminant." These properties are more common than you think, with estimates totaling over 450,000 across the country.
Bryce Linden, attorney for Cook & James, a real estate closing firm in Roswell, Georgia, says many brownfields were created after companies and landowners abandoned property contaminated with hazardous waste and tried to shirk any cleanup responsibility before the federal government passed laws in the early 1980s prohibiting this.
"Explained in the simplest terms, brownfields are ‘dirty sites' located in areas where the demand for land is often high," says Suzanne Hollander, a Florida International University real estate faculty and Miami-based property attorney.
Picture an abandoned and obsolete manufacturing plant located on a large parcel of land in the middle of an urban center.
"This property, despite its A-plus location, is underutilized," Hollander notes. "That’s because investors and developers are afraid to buy or redevelop it due to the regulatory, legal, and financial risks of environmental contamination, or even an assumption of contamination, may carry with it on the local, state, and federal level."
How the EPA’s program works
Thankfully, investors have a friend in the EPA, which instituted its Brownfields Program 25 years ago.
"The brownfield program is designed as a cleanup path to reuse land previously contaminated and return it to something that would be economically beneficial to the community," Linden says.
This program aims to make it easier for investors, communities, and states to collaborate in assessing, cleaning up, and sustainably reusing brownfields. The EPA provides generous grants to eligible applicants, including:
- Assessment grants up to $300,000, used to evaluate brownfield sites
- Cleanup grants up to $500,000, used to conduct cleanup and environmental protection activities and remediate toxins and pollutants
- Revolving loan fund grants of up to $1 million; per the EPA, "the fund 'revolves' when entities lend funds to public and private borrowers to finance environmental cleanup activities at brownfield sites and then use loan repayments and interest to provide new loans."
- Multipurpose grants up to $800,000, used to conduct a variety of eligible endeavors, such as assessment, cleanup, and development
For more information, including a map of brownfield sites across the nation and details on the grant application process, visit epa.gov/brownfields.
The pros of investing in a brownfield site
A carefully evaluated brownfield that meets favorable criteria can represent a great investment opportunity.
"They are often large tracts of lands in top locations where it can be difficult to find this quantity of contiguous property upon which to build," says Hollander. "A savvy investor can tap into the EPA’s program, as well as state and local programs that may be available, to reduce the cost of acquisition. And they may obtain a type of special insurance to further allocate risk."
What’s more, at the acquisition stage, you may be able to negotiate a price reduction on the property from the seller due to the environmental risks.
"To ensure that the price reduction is sufficient to offset the costs of remediation, you should quantify all the costs to remediate and comply with all laws and regulations," Hollander recommends.
Linden says many sites ripe for brownfield redevelopment are controlled by environmental covenants, which create a legal servitude.
"This servitude prevents parties from taking action against you that would endanger or destroy your remediation and cleanup efforts put in place, giving you some peace of mind," explains Linden.
The surrounding area will benefit from your investment, too.
"Cleanup and development often activate an area of the urban center that has not been used. Your investment can also boost the local economy by creating jobs, lifting property prices, and increasing tax revenue," adds Hollander. "It improves the environment and creates a safer, healthier space to live and work in, as well."
The cons of investing in brownfield properties
Make no mistake, however: Brownfields can be risky investments that require a lot of hard work to properly vet and prep.
"A lot of technical due diligence and reports from third-party experts are required. There are also uncertainties related to third-party or toxic tort liability, final costs to remediate, complying with strict environmental regulations, and the time it will take to develop this complicated site," cautions Hollander.
"Understand the risks and unknowns associated with this kind of property," advises Rajeh Saadeh, a Somerville, New Jersey-based real estate attorney. "Sometimes the contamination is more extensive than you and the EPA may initially believe. That can make the cost of cleanup much higher and result in a poor overall investment."
Steps involved in the brownfield redevelopment process
Finding and readying a brownfield often requires several steps:
- Enlist the aid of an agent or broker who specializes in commercial real estate properties to help you locate a brownfield that could be ripe for development and reuse.
- Carefully evaluate and appraise the property. "Consider hiring an environmental consultant as well as an attorney who specializes in brownfields," suggests Hollander.
- Research what’s required to properly remediate, develop, and insure the site, and shop around for contractors and vendors. "Obtain a Phase I, II, and III Environmental Site Assessment before committing to purchase," Hollander adds.
- Contact your local and state governments as well as the EPA to learn more about what’s involved and how and when you can apply for grants and other financial assistance.
- Negotiate a fair price and purchase the land.
- Remediate the site, cleaning it of any contaminants and preparing it for reuse/development.
Before deciding to proceed with a brownfield purchase and redevelopment, weigh all factors thoroughly.
For example, think long and hard about the challenges of marketing the property and acquiring buyers or tenants.
"Say you’re planning to develop multi-family residential units. Will buyers want to purchase a home on a previously dirty site?" asks Hollander. "And what will COVID-19’s impact on the demand for urban infill sites be -- will it increase demand for land in more rural areas where there is low risk of land contamination and, therefore, no or fewer costs for environmental remediation prior to development?"
The bottom line? Don’t rush into any decision. Perform your necessary due diligence, and don’t be afraid to back out of a brownfield deal that has too many question marks.