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EPA easing clean-up regulations
Move helps spur redevelopment of brownfields

By Kevin Kenyon

After years of frustration over the typically arduous and often unrealistic process of redeveloping contaminated properties, it appears that a more common sense-based approach to cleanup and redevelopment is finally taking hold -- and not a minute too soon in the eyes of shopping center developers.

The Brookhill Corp. redeveloped the environmentally tainted Huntsville (Ala.) West Shopping Center.

The about-face can be attributed to a variety of factors, including the Environmental Protection Agency's easing of strict rules regarding cleanup of these areas, state-mandated legislation designed to speed up the process, and the growing availability of specialized insurance.

"The situation has improved tremendously," said Ronald Bruder, president of The Brookhill Group, a New York-based developer that specializes in bringing contaminated properties back to life. "It's much more healthy than it used to be, and that's going to result in the redevelopment of a significant number of shopping centers."

Developers have been reluctant to get involved with contaminated areas, called brownfields by the EPA, for myriad reasons.

Under the implications of the federal Superfund law and similar state programs, developers who acquire contaminated sites could be found liable for civil or even criminal penalties, even if they had nothing to do with the original contamination.

That fact -- combined with unrealistic cleanup standards, repeated delays and unexpected costs, has left developers skittish.

By some estimates, there are more than 400,000 brownfields -- defined as abandoned, idled or underused industrial and commercial facilities where expansion or redevelopment is complicated by environmental contamination -- in the United States. Many of these are located in old industrial zones in inner cities -- potentially prime locations for retail development at a time when land is at a premium.

Many of these properties remain undeveloped, due mainly to what some observers describe as draconian policies and laws which had little in common with common sense.

On the federal level, the EPA is now working on a number of levels to promote the redevelopment of brownfields, according to Lauren Mical, a spokesperson for the EPA's Washington, D.C., Outreach and Special Projects office, which handles brownfield initiatives.

"Our basic goal is to empower states and communities to work together for economic development, and to give them the best opportunity to redevelop brownfields," she said.

Among its initiatives, the EPA is sponsoring an annual brownfields conference, which awards up to 250 brownfield assessment pilot grants (each up to $200,000); and works with the Treasury Department to offer tax incentives to developers, Mical added.

In recognition of the stifling effects of some environmental laws on redevelopment, 41 states have passed some type of brownfield legislation in recent years, and many actually are competing with neighboring states to resurrect their blighted properties.

This more reasonable approach on behalf of federal and state authorities is making success stories more common these days, according to Bruder, whose company redeveloped 32 properties last year alone.

Take the case of the Huntsville (Ala.) West Shopping Center, an environmentally tainted community center redeveloped by Brookhill officials in 1996.

Faced with asbestos problems and a leaking underground storage tank, the center had gradually fallen into disrepair, and its main anchor -- a Hills department store -- went dark.

After the center's redevelopment, Huntsville (Ala.) West's net operating income more than tripled to $1.4 million.

After solving the environmental problems later that year, a re-leasing effort brought creditworthy tenants such as Office Depot, Goody's Family Clothing and Campo Electronics on board, Bruder said.

Today the center's net operating income (NOI) is $1.4 million, more than three times ($450,000) than when it was initially acquired.

"The EPA has finally realized that it's not always necessary to clean up these projects to a 100% standard," Bruder said. "Statistically, removing the last 5% of the contaminates in the ground costs 50% of the entire cleanup, so that's a big step forward."

Joe Richards, Esq., an attorney with the Miami-based law firm White & Case, who specializes in environmental issues, said there's been a nationwide push over the past few years to do away with environmental laws that were viewed as too strict and onerous.

"The result has been realized in a more common sense-based approach to clean-up standards," he said. "The EPA had always operated on the theory that they should protect to the highest degree, but when you're dealing with commercial properties that can be paved over it's not always necessary,'' Richards said.

Another boon for developers has been the availability of specialized insurance, which can create comfort for all parties involved.

"We've created products which can attack a brownfield transaction in any of three ways -- by insuring the buyer, the seller, or the creditor," said Brad Maurer, Esq., director of underwriting for Kemper Environmental, Princeton, N.J. "The key is to just unmark the deal."

Numerous past real estate transactions, he added, have been scuttled by a lender's reluctance to take the associated risks that brownfields can bring, because lenders simply don't like surprises.

With the situation improving, however, projects that weren't viable just a few years ago are possible today, Maurer said, explaining that the cost of environmental insurance also is much more affordable.

Since 1997, when President Clinton mentioned that brownfields were going to be a priority in the State of the Union Address, Maurer said that states have taken the lead in creating brownfield recycling programs.

"What we've seen in the past few years is an incredible proliferation of government programs which have made it easier for regular developers to tackle contaminated sites."

One state at the forefront is Pennsylvania, which adopted a program called Act 2. Act 2 mandates that a regulatory agency give approvals in a short time-frame, Maurer explained, adding that the program also provides liability relief for developers.

"States like Pennsylvania will see brownfields converted more quickly and will benefit economically, because lenders feel more comfortable knowing that a regulatory agency is taking an interest in development and actually signing off on it."

As evidence that the situation is improving, Maurer said, his company completed 300 such transactions last year, and expects to complete more than 500 this year.

In markets that are heavily saturated with development, such as the Northeast, a developer's ability to redevelop properties in a reasonable amount of time is nothing short of critical, according to Lewis Ceruzzi, president of Starwood Ceruzzi, Westport, Conn.

"I really can't think of a project that we've worked on in the past two years that didn't have some sort of significant environmental impact associated with it, so you can't overestimate the importance of that," he said. "We develop mainly in the New York metropolitan area and other industrial areas like Pittsburgh, and you just don't come upon sites that weren't previously developed in this region."

Back in 1990, when he first got into the business, Ceruzzi said there was a much greater degree of concern exercised by both lenders and tenants.

"I think a lot of that had to do with the fact that there were these relatively new environmental laws -- these almost draconian statutes that could require a lender to clean up an environmental problem, even if they didn't cause it," he explained. "There was also a severe lack of experts, specialists, and consultants."

Today, however, there is a burgeoning field of experts that can assist a developer every step of the way, Ceruzzi added.

And with the prototypical size of stores growing each and every year, it is becoming increasingly important for developers to find enough space to accommodate their requirements, Ceruzzi said, adding that anything that helps to that end is a big plus.

"The improving situation is creating new opportunities for developers, especially in urban areas, and it allows us to take advantage of some of these brownfield development programs," he said. "Many projects that were not feasible several years ago are now feasible today."

"They don't shut down, but they also don't move forward," Bruder said, referring to the properties. "The owners are afraid of putting capital into them because of the specter of the environmental problem, and without capital they fall into disrepair, the tenants leave, and revenues dry up."