Imagine you’ve found the perfect location for your next commercial real estate development. In the course of due diligence, however, you find out the land used to host a factory, and toxic chemicals from that business have seeped into the property’s soil and air. It’s disappointing news. No one wants to hear that their new acquisition might be dangerous to human health.
It’s also an opportunity for transformation. The space might be a brownfield, and if so is eligible for multiple economic incentives.
These perks include tax breaks for all stages of the real estate development timeline, and assistance with environmental remediation. What was once dangerous can, with the right tools, become a commercial property that has great returns for investors and benefits for the surrounding communities.
Brownfield redevelopment programs are available nationally from the United States Environmental Protection Agency (EPA), and through state and local government agencies in almost all 50 states. Here’s what you need to know before you apply.
What Are Brownfields?
Brownfields are properties or vacant land whose reuse, redevelopment or expansion are complicated by the presence of substances that are harmful to the environment and/or human health. The term is also used to describe any land formerly occupied by industrial or commercial businesses like dry cleaners, factories or gas stations with soil contamination or other pollution due to hazardous waste.
There are 450,000 brownfield sites in the United States, according to the EPA.
Why Invest in Brownfield Redevelopment Programs?
Funding and technical assistance from state, local and national redevelopment programs make buildings and land that were formerly written off as dangerous viable for a variety of uses that make them great investments. As the EPA noted, “Cleaning up and reinvesting in these properties increases local tax bases, facilitates job growth, utilizes existing infrastructure, takes development pressures off of undeveloped, open land, and both improves and protects the environment.”
Access to Desirable Land in Prime Locations
As an EPA spokeswoman told Leverage, “Typically, brownfields are centrally located in metro areas with good connections to local infrastructure, including road ways and stormwater utilities.”
Redeveloping brownfields expands the amount of buildable land, which is a gift everywhere, but especially in desirable cities and towns where most of the non-brownfield land is already occupied.
Brownfield redevelopment is an opportunity to integrate environmental cleanup with construction, and EPA funding makes that integration financially feasible. Developers and real estate investors, through the remediation process, can be active partners in making their communities safer and cleaner.
Brownfield redevelopment is also associated with improved air and water quality. The water quality increase is due to reduced runoff from stormwater and pollutant sources. The improved air quality reduces greenhouse gas emissions. For example, factories aren’t polluting the air as much.
They also encourage more sustainable choices for the people living or working in the new developments, as brownfields are often in urban and suburban areas with reasonable transit access.
Opportunities for Adaptive Reuse
When developers use existing infrastructure on brownfields rather than demolishing older buildings on vacant land, brownfield redevelopment programs are also an example of adaptive reuse, the practice of repurposing an existing structure for new uses.
As the EPA stated, “Being able to reuse existing infrastructure is an important advantage to brownfields redevelopment.” As with adaptive reuse on non-contaminated sites, “this saves on infrastructure expense and prevents additional environmental degradation from building on [non-brownfields].”
Multiple Economic Benefits
The EPA spokesperson cited multiple studies indicating the economic benefits of redeveloping brownfields. They include:
Brownfield properties may be less expensive to acquire than comparable properties: The contamination means the original owners might be willing to sell the property at a lower price compared to a non-brownfield.
Rising property values when rehabilitated: A 2017 independent study concluded that remediation and redevelopment “led to residential property value increases of 5 – 15.2% within 1.29 miles of the sites.” You’re likely to pay less for the property upfront, and while the costs of clean up and remediation are high, the property values trend upward once that clean-up is over.
Local and national tax revenue: The EPA spokesperson referenced another study that analyzed economic indicators near 48 brownfield sites and found “an estimated $29 to $97 million in additional tax revenue for local governments in a single year after cleanup—2 to 7 times more than the $12.4 million EPA contributed to the cleanup of those brownfields.”
According to Mark McIntyre, Director of the New York City Mayor’s Office of Environmental Remediation, “the remediation and redevelopment of underutilized property through OER’s programs creates about $100 million in new property taxes each year,” for New York City. He added, “Since OER opened in 2009, projects that have completed our program have generated more than $1 billion in net new property tax revenue for the City.”
How Does the EPA Brownfields Program Work?
The EPA provides funding and technical assistance to nonprofit organizations and state, local and tribal governments interested in cleaning up brownfield sites. There are six types of EPA brownfield grants available, one specifically for government agencies, another for covering assessments, cleanups, one specifically for job training, and a multipurpose grant that covers multiple situations, sometimes on the same site.
Private developers or investors are not eligible to receive EPA brownfields grants directly, but instead partner with nonprofit organizations or state and local government agencies that have received one of the types of grants.
The public or nonprofit entity sponsors the project and, through the EPA, provides the funding, site assessments, cleanup and studies on infrastructure to support future development. Private developers then fund and manage post-cleanup predevelopment activities and the actual construction process.
This division of labor leverages both parties’ expertise: the non-profits community relationships and experience working with government agencies, and the developer’s ability to manage the construction process and obtain any additional funding from banks or private lenders to cover construction costs beyond clean up.
In addition, the EPA stated, developers can access low-to-no interest loans for brownfield site remediation through connecting with a Brownfields Revolving Loan Fund grantee. The EPA added that “an RLF grantee is able to negotiate terms with potential eligible borrowers to meet local market conditions and community needs.”
The Downsides of Investing in Brownfield Properties
While the EPA’s brownfield programs provide funding for the grant recipients’ clean-up, conflicts can still arise over whether the original owner or the party responsible for contamination in the first place should also be liable for at least contributing to the process. Sometimes the original party may be deceased or otherwise difficult to locate, and developers and the nonprofits or government agencies they partner with should decide whether they want to invest that additional effort in tracking them down and asking them to contribute funding.
Lack of Regional Financing in Your Area
While the EPA programs are available nationally, that funding may not be enough to cover all of the steps of the redevelopment process. Without additional state and local funding, developers have to consider whether the funding from the EPA or other government entities is enough, or if loans from banks or private lenders are available to make up the difference.
The environmental studies alone could take months or a year, and there is additional work to apply for the financial incentives, not to mention remediating the land, removing the chemicals, completing predevelopment activities and finally starting construction. As noted before, the clean up has a good chance of leading to higher property values, but the road to get there can be long.
While many brownfields happen to be in desirable areas where real estate costs would otherwise be high, some are located in cooler markets where the demand for land isn’t as high. In those cases, the appetite for remediation and clean up may not be as strong, especially if there is plenty of other non-contaminated land.
Next Steps: How to Begin Redeveloping Your Brownfield Site
There are three main stages of brownfield redevelopment, according to the EPA, with a number of substeps in between. For the purposes of this article, we’ve focused on the broader categories.
Stage 1: Predevelopment
As a private developer, your first step should be searching EPA’s brownfields grant fact sheet and Cleanups in My Community to find a potential grant recipient to collaborate with on a development project.
Next, conduct as much due diligence as possible.
“When considering a project on a brownfield site, a developer should learn what they can about the site’s history,” McIntyre said. “Ideally they should do a formal Phase I Environmental Site Assessment,” he added, “which involves a search of records related to historical land uses and chemical spills and has the added benefit of providing liability protection under federal environmental law if it is done within 180 days’ of site acquisition.”
Once the due diligence on the site is completed, it’s time for analysis, outreach and insurance. At the very least, McIntyre said, “a prospective developer should evaluate historic maps, search nearby spills,” and consult with an engineer to determine whether the property can handle the proposed redevelopment.
Research Additional Funding Opportunities
Once you find the right government or nonprofit partner, both sides may be eligible for other non-EPA grants or tax incentives from your state or local government, which the EPA has a database of here. All fifty states have some kind of brownfield remediation program, and even some local governments, like New York City, have grants for both non and for-profit developers.
Create a Redevelopment Plan and Site Map
This is a visual representation of the redevelopment plan, with computer renderings, drawings and text to describe the construction and redevelopment plans for the site. It also might include a description of the clean up process that community stakeholders can understand.
Start Community Outreach and Engagement
Developers need buy-in from community residents, business owners, elected officials and other stakeholders. The process can include: community meetings to present the redevelopment plan, design charrettes, and one-on-one meetings. Getting this step right can reduce delays and minimize risk and opposition during later stages of the project.
Obtain Environmental Insurance
This is not a requirement, but investors should consider purchasing environmental insurance, including Pollution Legal Liability that can cover any previously unknown pollutants that arise during the clean up process.
Stage 2: Development
This stage can take just as long as predevelopment, but has fewer steps. They include:
Permitting and Approvals
Just like in any other construction project, you’ll need approvals from your local Department of Buildings and similar agencies to start and end the construction process. In between, there may be additional inspections and required permits from environmental agencies too.
After all of the studies and assessments, it’s time for the cleanup itself. With technical assistance from the EPA and other government programs, plus your connections as a developer, you’ll contract environmental and engineering firms to physically remove the harmful chemicals in the water, soil and air, and prepare the site for the next step, construction.
Once clean up is underway, you can begin the actual process of either renovating an existing building or creating an entirely new project on the brownfield site. This process will follow the same steps as any other construction project: building the foundation, vertical construction, completing the building envelope and the roof, plus continuing to work with appropriate government agencies to secure the Certificate of Occupancy that makes the place habitable for people.
Marketing and Lease-Up
The developers and non-profit partners develop a marketing plan to attract potential tenants for leases — or, if they’re selling, a buyer.
Complete Construction and Move In (or sale)
Once construction has ended and the property has received a Certificate of Occupancy, leasing can begin.
Stage 3: Management
This is when the developer decides whether to keep the property and lease it or sell it.
Holding the Property
If the developer or investors plan to keep the property, they’ll continue lease-up and be responsible for managing and operating the property.
Selling the Property
If they plan to sell the property, this is the stage where marketing will be geared toward finding a new buyer, and eventually making a sale.
3 Brownfield Success Stories
Now that we’ve tackled the challenges of brownfield, let’s look at some successful redevelopment projects from around the United States.
As part of a 2007 statewide inventory of gas stations along Route 66, the EPA targeted four stations in Sunderland for redevelopment and reuse. After extensive environmental assessment and engagement with local government officials, community leaders and other stakeholders, the sites were rehabilitated with a variety of uses.
For one site, the town and the EPA were able to leverage the cleanup efforts to receive $160,620 in U.S. Housing and Urban Development (HUD) Community Development Block Grant funding to preserve and rehabilitate five homes for low-income families. Other sites were transformed into a cafe, a rest stop for tourists and a museum.
Wilmington Brew Works, now a craft brewery and taproom, was once a chemical laboratory, a manufacturer of black powder and dynamite and, in its last industrial incarnation, an electroplating company. That company left in 2000. A new developer was supposed to take it over, but then the property entered the Delaware Department of Natural Resources and Environmental Control (DNREC) Voluntary Cleanup Program for remediation. That project fell through.
It wasn’t until 2006 that the cleanup process started. And there was a lot to clean — according to the EPA, from subsurface and surface soil, to tanks of harmful chemicals that were on the property years after the last manufacturer left. 10 years later in 2016, after more delays, the brewery finally opened, and remains a popular hangout today.
A former commercial laundry and auto body shop in Queens, NY will soon be home to the Charles B. Wang Community Center’s Healthview project. It’s a Federally Qualified Health Center (FQHC) that provides internal medicine, pediatric care, gynecology services, dental, mental health and social work services to the community, no matter the patients’ income level.
This example of a public-private partnership model was started with a mix of funding, including from the EPA’s Revolving Loan Fund, and a New York City Brownfield Incentive Grant. Charles B. Wang received funding from the EPA and from New York City, which they then used to partner with multiple legal, environmental, architectural and construction companies, including Proskauer Rose, WSP, Edelman Sultan Knox Wood Architects and Ryder Construction.
Brownfield Redevelopment Requires Partners and Patience
For private developers, choosing the right government agencies and/or nonprofits to partner with is a critical first step toward starting your brownfield investment journey. Once you have the partner, you can then begin applying for funding necessary to complete the remediation and development work. There is a lot of work required to redevelop brownfields, but that work has extensive rewards, both for the environment and your bottom line.