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Government important ally in brownfield development

By Steve Bergsman

The town of Butler, N.J., only 20 miles from New York City, had seen better days. Two disused industrial properties, a testament to Butler’s economic plight, flanked the entry to the tiny downtown. The town was able to turn the first, a warehouse, into an office-retail project. The second, an old rubber plant seated on contaminated land, was more troubling.

Help arrived with Heartstone Development, of East Hanover, N.J., which is building a mixed-use center there. But the state furnished the key to the site’s salvation, says Jon Mikula, senior managing director at the Florham Park, N.J., office of Houston-based Holliday Fenoglio Fowler, the mortgage banking firm that arranged a $12.5 million loan for the project.

The state takes a particularly aggressive approach to cleaning up brownfields, says Mikula, and that explains why the work on the retail-residential-office project, called River Place at Butler, is well under way.

“The developer received a reimbursement of up to 75 percent of the remediation in the form of tax credits,” he said. “If a pizza or coffee shop operates on that site, the state will take their taxes and pay the developer its taxes up until such a point the developer achieves 75 percent of remediation cost.”

Though there is an extensive federal structure for dealing with brownfield sites, it is the state governments that are proving to be the most effective, and developers are quickly realizing it, experts say. The problem with the federal grants is that they are available only to local governments and nonprofit redevelopment agencies, says Lawrence Schnapf, an environmental lawyer at Schulte Roth & Zabel, New York City. “Nonprofits can, in turn, create a revolving loan agreement where they can loan out money at a lower interest rate,” Schnapf said. “But what people are finding is that construction schedules are so tight there is no time to deal with the nonprofits, and the best place to turn is existing programs in place at the state.”

But this has not kept some developers from working with the feds. Brownfield Partners, a Denver-based real estate investment, development and advisory firm that works exclusively with brownfield sites, is redeveloping a Denver-area property using federal funding channeled through a nonprofit. The 8.5-acre site once housed the Value Square Shopping Center, built in the 1950s atop a landfill that began leaking methane.

“Unless you get to the source of the methane-producing material, then your only option is to vent it in some capacity,” said Doug Elenowitz, a partner at Brownfield. “In this instance, we are excavating the organic material producing the methane.” Brownfield has relocated tenants and demolished the buildings and is fixing up the landfill. When that is done, the site will be redeveloped as a mix of town houses and affordable housing, senior facilities and a health clinic. In the end the project will have cost $8 million, with the government providing $3.8 million.

Meanwhile, Brownfield is working at the state level on a project in New Jersey. Through investment partners, the firm has been designated to redevelop the second-largest brownfield program in New Jersey: the National Lead Co. site in the town of Sayerville. After a cleanup costing an estimated $42 million, the 430 acres will be redeveloped as a mixed-use site that will contain over 1 million square feet of retail.

New Jersey is not the only state with a streamlined brownfield remediation program. Michigan, too, has learned efficiency in dealing with the undesirable legacy of a rich industrial heritage, observers say. Michigan launched its Brownfield Grant Loan Program in 1988 and has since provided more than $120 million for 296 projects around the state. The bulk of the money comes from a 1988 bond proposal called the Clean Michigan Initiative.

“We work with local communities which apply for the funding,” said Robert McCann, press secretary of Michigan’s Department of Environmental Quality. “It gives them the tools they need to do brownfield redevelopment. The first thing that gets done is an environmental assessment which gives us an idea of what we are dealing with, and this is even something we can help fund through the brownfield program. Once we have an idea of what we are dealing with, the state will fund part of the cleanup.”

One particularly notable project was the redevelopment of the Traverse City State Hospital, a historic structure built in the 1880s to house the mentally ill, which had been vacant for 25 years. The 64-acre site, which included the 400,000-square-foot main building and some cottages around the periphery, was attractive enough. But developers were wary of dangerous substances in the building, asbestos and lead paint among them.

The locally based Minervini Group decided to take on the project, with a plan to create the mixed-use Village at Grand Traverse Commons — 25 percent retail, 25 percent commercial and 50 percent residential — at a cost exceeding $100 million.

“We are putting mercantile on the bottom floors, including eateries, such as a pub, coffee shop, deli, et cetera, because we want activity on the site all the time,” said Ray Minervini, the firm’s principal owner and manager.

To get even this far, Minervini Group needed help from the state. The company received a brownfield development grant in 2003 to get the cleanup started. Then in March last year the governor awarded the project a $1 million grant. “This money will provide crucial funding to clean up and convert vacant and blighted buildings,” said Gov. Jennifer Granholm at the award presentation.

“We got a couple of grants for the cleanup of the hazardous material,” said Minervini. “And that was one of the things that spurred the development.” State aid amounted to more than $1 million, he says.

Change is afoot for a long-vacant site in Los Angeles, too. Located in the community of Carson, the 157-acre former landfill was owned by a series of developers that for one reason or another were never able to get anything going. In 2004 Newport Beach, Calif.-based Hopkins Real Estate Group bought the property, with plans to put up a mixed-use development there consisting of 1 million square feet of retail, 1,200 residential units and a 250-room hotel, all by 2010. “This is the mother of all dump sites,” said Steve Hopkins, president of Hopkins Real Estate.

Using new technologies, the firm figured the best way to remediate the landfill was to take a three-prong approach: cap it using high-tech plastics, create a giant vacuum to suck the gases out of the landfill, and contain and treat the groundwater.

“The site has been owned by a small pension fund for the last 14 to 15 years, which has been trying to sell it,” Hopkins said. “Some people have had control of it, and for the past six or seven years there has been a sign on the property saying, ‘Metro Mall coming soon.’ ”

In the event, the community will be getting much more than just a mall. Mixed-use developments are a common format when it comes to redeveloping large brownfield sites, as evidenced by the Carson project. For smaller brownfield redevelopment, shopping centers are a particularly popular option, owing in part to their large parking lots, says Schnapf. “The parking lot acts as a barrier to contaminated soil,” Schnapf said. “Once the soil is covered, there is less of a chance the contaminants in the soil will migrate to ground water.”

Retail development, it would seem, offers not just an economic solution, but a physical one, too.