Developers nationwide are finding fresh promise in obsolete industrial sites, reinventing them in every way imaginable. Often these sites offer attractive locations near mass transit, waterfronts or urban center, yet they often carry an unwelcome legacy of soil and water pollution.
Some states are offering alternatives to costly, time-consuming remediation, while in other states, regulations pose a higher hurdle to brownfield redevelopment. Three industrial real estate veterans offered updates on remediation policies and strategy in their states.
MICHIGAN: Risk-Based Solutions
Q: How is the recent shift toward risk-based solutions playing out in your state, and how has the approach to remediation changed since 1995?
Chip Hurley, SIOR, CCIM, managing director at Newmark Grubb Cressy & Everett, Grand Rapids, Mich.: Previously, if you had a contaminated site, regardless of whether it was a gas station, a dry cleaner, or an industrial plant, you had to clean the property to residential standards. The new due diligence process is now risk-based, allowing developers and end users to use engineering controls to use or redevelop the site.
In the case of an industrial property, new concrete flooring can act as a cap to prevent water from percolating through, picking up contaminants and transporting them further on the site or an adjacent property. Also, one can use parking lots as a cap and barrier. Another option is to (install) a clay barrier between the contaminated soil and the soil used for landscaping.
Q: How did Michigan enable risk-based solutions for brownfield sites?
Hurley: About 20 years ago, Michigan created a tool called a Baseline Environmental Assessment, or BEA. We put a different spin on the whole process.
Q: How does that work?
Hurley: Generally, an industrial site has a Phase I (assessment). The Phase I generally consists of historical data and information gathered from public records. A Phase II assessment is recommended next if the buyer wants to continue with the transaction and the consultant identifies Recognized Environmental Conditions, or RECs, which generally involve groundwater and soil sample collection.If the samples are clean, or the concentration of contaminants is below the cleanup criteria for that type of property, the due diligence process is done and the site can be approved for redevelopment.
Q: What if contamination levels exceed the limits for cleanup criteria?
Hurley: The buyer then has the option of either terminating the transaction or opting to continue. If the buyer wants to continue, they will want to document the current condition (a baseline condition) of the site prior to occupancy. If (documentation is) done correctly, the state protects the buyer from liability of the past releases.
Q: Are there any other issues?
Hurley: The state considers overlaps (between) the proposed and previous uses. Take the case of an old gas station. If another gas station owner wants to use that site, the new owner would have to prove how they would either mitigate or (avoid) exacerbating the contamination. Maybe the tanks and the lines were on the south end of property but there is (room) to put new equipment on the north side.
Q: This still sounds like a heavy lift. Does it chase away potential buyers and redevelopment?
Hurley: Even though some of this process might seem imposing, the state has allowed investors and developers to be creative and use logic.
Q: What risks are developers assuming, and how can they mitigate those risks?
Hurley: (By utilizing) a due-care plan, which assures the state that they won’t exacerbate the existing contamination. If that happens, you potentially end up inheriting the pre-existing liability, whether you are the responsible party or not.
SOUTH CAROLINA: Protective Measures
Q: How has South Carolina limited liability for developers of contaminated sites?
Chuck Salley, SIOR, vice president & director for Colliers International’s industrial brokerage team, Columbia, S.C.: When South Carolina adopted federal brownfield regulations about ten years ago, the state created a voluntary clean-up contract (VCC) that is available to a purchaser who is a non-responsible party and wants to buy a contaminated piece of property. The VCC provides an additional layer of liability protection, because it indemnifies the prospective owner from third-party lawsuits as well.
Q: How does that work?
Salley: The purchaser typically has had a Phase I environmental audit (that identified) Recognized Environmental Concerns (REC). The purchaser then works with the staff of the South Carolina Department of Health and Environmental Control (DHEC) to agree on a scope of work for further site investigation and/or remediation.
Q: How is the scope of work determined?
Salley: Each VCC is specific to a site, and the scope of work is measured by the severity of the impact and potential health risk to the public. Sometimes the scope is as simple as putting a deed restriction on the property for residential uses, or it may be more complex, such as drilling test wells or remediating contaminants.
Q: What happens after the scope of work is completed?
Salley: That work is then incorporated into the voluntary clean-up contract. Once the contract is finalized, the buyer has no further responsibility for the environmental contamination. In addition, any non-responsible party who buys that property in the future, and lenders for the site, are also protected.
Q: What about nearby property owners who may have been affected by contamination at that site?
Salley: The contract also protects against third-party litigation. If you have a site that is badly contaminated, and you go into it with a VCC contract, you are then immune from third-party lawsuits. This is only available to the non-responsible party.
Q: How has this affected the South Carolina market?
Salley: It has been very effective because of the immunity from third-party lawsuits. My team and I have done transactions over the past decade that would not have closed otherwise. For example, last year we did a deal for a sale/leaseback with a printing company that had bought a building once owned by Litton Industries. Contamination occurred back in the 1970s when solvent got into water wells.
I had an investor who bought the property, but to complete the deal, it had to go through the voluntary clean-up contract process. The key to successfully navigating the VCC process is to have a good environmental attorney with extensive knowledge of the procedures and experience working with DHEC on these contracts.
CALIFORNIA: Challenging Climate
Q: How are regulators approaching contamination issues in Los Angeles and California in general?
Jon Reno, SIOR, CCIM, managing partner & senior vice president, Kidder Matthews, Commerce, Calif.: We are seeing regulators (raising) significant and overwhelming concerns over perceived risks of vapor intrusion from carcinogenic compounds, typically VOCs or volatile organic compounds, in soil or groundwater.
The U.S. Environmental Protection Agency has identified screening levels to (determine) whether concentrations of various contaminants are of concern. California’s Department of Toxic Substances has typically established even more conservative levels for many compounds, such as perchloroethylene (PCE) and trichloroethylene (TCE), commonly associated with industrial degreasing and dry cleaning.
Q: How would you characterize the process?
Reno: It has been extremely challenging. The screening levels have been moving over the past 10 years as regulators reconsider risks, typically to a more conservative position, and new levels appear to be forthcoming shortly.
Q: What technological advancements are you seeing to help accelerate cleanups?
Reno: Vapor extraction and excavation still remain the primary focus of remedial action to clean up soils. Excavation can be quite costly … with deep contamination, and issues of vapor intrusion can remain. Vapor extraction, therefore, is a good and proven method of removing volatile contaminants while also allowing use of a property to continue.
Many developers are also utilizing sub-slab vapor barriers for new construction to … keep VOCs from rising up into the occupied space. Such a barrier can be very effective for lower-risk sites and presumed longer-term mitigation of liability.
Q: Repurposing industrial sites to highest and best use such as office, retail and work-live places a higher burden on cleanup, yet this trend continues across major markets. Thoughts?
Reno: This is a major trend occurring in downtown Los Angeles. Often the cleanup costs are factored into the final purchase price, or other arrangements can be worked out between buyer and seller. The important consideration is that cleanup/screening levels are more conservative for residential sites than for commercial/industrial sites.
This can be significant for sites that have been remediated and closed based on a commercial/industrial use, but can then be reopened for additional review or actions based on the new use. Most closure letters in the recent past have included language requiring a notification if the use changes. Given the regulatory concern over vapor intrusion, site design can be critical in determining what actions may be required.