Investing and Due Diligence in Brownfield Properties

November 29, 2021

Brownfield development continues to be a hot topic for developers and investors, and they offer excellent opportunities – when you do your homework. SCS Engineers, an environmental consulting firm with 40 years of experience, offers a few tips when considering a Brownfield site.

Although we’ve successfully redeveloped hundreds of properties, one of SCS’s most visible Brownfields projects is the San Diego Padres Petco Park in downtown San Diego, completed in the early 2000s. The site for Petco Park was once a commercial and industrial area with former land uses such as auto repair facilities and gas stations, laundry facilities, and paint and lumber storage facilities. On top of that, it also stored petroleum hydrocarbon and hazardous materials.

What is a Brownfield?

Brownfield land is any previously developed land that is not being used or is under-utilized and may require environmental mitigation to redevelop. These properties are common in many urban areas and often present cost-effective, profitable redevelopment opportunities.

The development of Petco Park is a classic example of a brownfield project, which brought the San Diego Padres to downtown San Diego within a 26-city block portion of the East Village area now known as the Ballpark District. Before developing this beautiful stadium, as well as the new hotel, residential, and commercial development that blossomed around it, this area of East Village San Diego was underutilized. The area housed various commercial and industrial properties dating back to the 1800s, many of which had a legacy of environmental issues.

Because of the aggressive development schedule, and to streamline the redevelopment of the Petco Park and the Ballpark District, SCS and the local health department (the County of San Diego Department of Environmental Health) worked together to create a dynamic approach to its redevelopment of contaminated properties. This approach, embodied in the Property Mitigation Plan (PMP) (also known as a Soil Management Plan), is tailored to the specific property uses as an efficient means to address and mitigate environmental issues (such as dealing with contaminated soils) during the property construction and development process. If enrolled under oversight by the appropriate regulatory agency, the PMP serves as the blueprint for mitigation, soil management, and soil reuse. And when followed, it is designed to result in the closure of environmental cases for the site’s approved uses.

Overall, brownfields typically have environmental issues that can impede new development. But suppose these issues are identified during the due diligence process and integrated into the development and construction processes. In that case, redevelopment protecting future occupants and the environment is achieved while often presenting cost-effective and profitable redevelopment opportunities.

What can you put on a brownfield? Can it be used for residential units?

A brownfield is potentially useful for any structures – including residential. San Diego has numerous examples of brownfield redevelopment, including former burn dumps and landfills, railroad facilities, gas stations, automobile repair facilities, dry cleaners, and more. The feasibility and cost are dependent upon the environmental issues unique to each site. Cleanup standards will be stricter for residential uses, and in some cases, it may not be cost-effective to achieve those standards. Evaluations determine what uses are feasible.

How do you evaluate a Brownfields site?

One should proactively address environmental issues to reduce the risk of cost and schedule overruns or future liability issues while operating these properties as-is or during the due diligence or pre-development process. Identifying environmental risks before acquiring properties is critical, as is assigning potential costs to these risks. Depending on the nature of the transaction, these items are often useful as leverage during negotiations.

Brownfields are normally evaluated by performing a Phase I Environmental Site Assessment (ESA) to first study historic site information and previous uses. A Phase II study may be performed if the Phase I ESA identifies potential issues (known as Recognized Environmental Conditions). Phase II includes collecting and analyzing samples (i.e., soil, soil vapor, and groundwater) to assess whether environmental impacts are present. If enough sampling is completed, the extent of impacts can be estimated.

The American Society for Testing and Materials (ASTM) has standard protocols for Phase I ESA studies. However, as an integral part of your team, your environmental consultant can do more than meet these technical standards. The result of the evaluation provides you with an understanding of how this information will impact your project.

If contamination exists, what do I do?

Your first concern is to get an estimate of how much contamination is present and what it will cost to address, which will affect your bottom line and project feasibility. It’s also important to know that cleaning up contamination is manageable and can even be left on-site during construction and through your planned use in some cases. Your environmental consultant helps you mitigate any risks.

Is funding available to help pay for the site investigation and remediation?

The U.S. Environmental Protection Agency has grant programs that can pay for the assessment and cleanup of brownfields, but these programs are only available to governmental and non-profit organizations. However, a private entity may be able to team with these eligible parties. In addition, grants are available from agencies such as the California State Water Resources Control Board or the Department of Toxic Substances Control for certain soil and groundwater contamination types from gas station or dry cleaner releases. Each grant has its eligibility criteria, and in general, the entity that “caused” the contamination is not eligible. Federal, state, and local tax incentives may also be available.

Obtaining a grant or loan with the help of a qualified environmental consultant or an environmental attorney can be the difference in acquiring, cleaning up, and redeveloping a property. The grants don’t typically cover all the costs associated with the necessary cleanups, but they can cover most of these costs.

I hear insurance can help pay for cleanups as well as help protect buyers.

It can. A new property owner can obtain an environmental insurance policy to cover cleanup requirements, third-party claims for bodily injury and property damage, and associated legal expenses resulting from pollution or contamination. These insurance policies are available with various term lengths, and deductible amounts to satisfy the concerns of lenders or equity investors.

Other solutions include “insurance archaeology” to find old insurance policies that may have coverage for “pollution conditions.” Many firms, including SCS, do this type of work, sometimes on a contingency fee basis.

What are some good risk management strategies for brownfields?

The most important risk management strategy is to have a thorough understanding of the environmental issues on the site and how those issues can impact your redevelopment plans and bottom line. It is critical to have environmental and legal support experienced in strategies for identifying, anticipating, and managing risks on Brownfields.

Are brownfields sites good investment opportunities?

Brownfields can be excellent investment opportunities if you perform thorough due diligence and understand the risks of each site. Many potential sites exist in desirable locations or emerging areas. They should be available below market value and may have been on the market for a long time.

With proper planning and the help of a qualified environmental consultant, the mitigation or remediation of these impacts can be incorporated into the acquisition and development processes and result in a vibrant, profitable project that is protective of human health and the environment.

 

luke montagueAuthor Luke Montague is a vice president with SCS Engineers in its San Diego office. 

 

 

 

You’ll find resources for funding brownfield redevelopment here.

 

 

 

Posted by Diane Samuels at 6:04 am