Home Builders Mine for Green in Brownfields

Is brown the new green? It is, and in more ways than one. Untouched land is scarce and when found, NIMBYs complain of sprawl. But brownfields can alleviate the space crunch. The federal government and some states and local municipalities offer a degree of liability protection to builders and developers who purchase, clean and build on brownfields and turn them into productive, tax generating property. And environmentalists favor brownfields development because it preserves unspoiled land and open spaces.

It's not always quick or easy, but Giants who educate themselves on the process, assemble an experienced consultant team and can afford to be patient (it can take years to acquire, get approvals, clean up and build on a contaminated site), can reap high margins in the promised land of brownfields.

Why Go Brown Now?

Greenfields, particularly in large metropolitan areas, are rare. And despite the slowdown in the last few quarters, overall demand for housing is still high.

"It applies particularly to the market that I'm in — Orange County, Southern California," says Dan Flynn, director of land acquisition at John Laing Homes. "It's extremely land constrained. There's not a whole lot of developable or vacant land. So in order to provide housing — and there's still tremendous demand for housing — you have to take other underperforming sites like old commercial, industrial or manufacturing and convert it to residential."

Contamination could be a leftover fuel tanker or asbestos-ridden buildings, says Michael Greenberg, professor and director the National Center for Neighborhood and Brownfields Redevelopment at Rutgers University. Builders are more likely to take on brownfield sites than they were 10 years ago because of advancements in technology that allow for better detection and cleanup of contamination, as well as laws and insurance regulating their liability.

"The mystery of brownfields has been removed for our home-builder clients," says Jeff Masters, an attorney and partner with California firm Cox, Castle & Nicholson who advises builders on liability issues. "They are much more comfortable going forward with a brownfield site under the right conditions."

Digging In

"At least a third up to 50 percent of our houses are built on a site that requires some level of remediation, depending on the year," says John Laing's Flynn. "In one case, it may be slight; in other cases like the Anaheim site, the clean up was extensive."

John Laing recently completed The Boulevard, a community in Anaheim, Calif., of 36 attached affordable townhomes and 20 single-family detached market-rate homes that were once the site of a truck depot and storage facility. It was the first site approved in the Anaheim Boulevard Corridor redevelopment plan.

The builder got approval last fall from the Anaheim city council for development of a second community, this time at the former site of the Quikset lock manufacturing plant. The plan calls for 135 attached homes that includes a portion set aside for affordable housing. The new community has provided workforce homes for city employees who couldn't otherwise afford to buy in Orange County.

The Boulevard is the first redevelopment project in Orange County to implement the Polanco Redevelopment Act. The Act allows a public agency to transfer land to a developer, and once the site has been certified clean, it provides indemnity to the developer against any other clean up requirements by other local and state agencies. It's similar to the indemnities offered on the federal level by the Small Business Liability Relief and Brownfields Revitalization Act of 2002 (see sidebar).

Taking A Measured Risk

David Pitts, vice president of acquisition for Centex Homes' Los Angeles/Central Coast division, says 60 percent to 70 percent of his division's infill development has been on land that has undergone some degree of brownfield mitigation.

"The types of projects that our division has looked at have quantifiable cleanup situations," says Pitts, "whereas there are probably other development opportunities out there where you may never know until the end of cleanup what the actually costs are."

The Breakers and The Bungalows are two such projects Centex completed in the city of Torrance, Calif. They worked with the Torrance Fire Department, appointed the lead governmental agency, and came up with a risk assessment plan. An oil company was the underlying property owner at that time and was held responsible for remediation to unrestricted residential for-sale standards.

Centex has partnered with Shea Homes on the development of Tustin Legacy, a master-planned community on the site of a closed military base in Tustin, Calif. John Laing Homes is also one of the builders in this community.

"Bringing in partners at many levels can make sense in order to bring those projects to reality," says Pitts.

Forest City Residential Group has been involved in urban redevelopment projects for about 80 years, says Greg Vilkin, president of Forest City Residential West and Forest City Stapleton, the development company transforming the former Stapleton International Airport in Denver into a community of 12,000 new homes with more than 1,100 acres of parks and open space. Forest City will redevelop 2,935 acres at the site into a mixed-use community. It is one of the country's largest urban redevelopment projects.

"We actually liked brownfield development when nobody else knew about it," Vilkin says. "These projects were considered so difficult that not a lot of people participated. Now it's becoming more de rigueur. It's becoming more accepted, more lenders understand it, and more insurers are willing to provide insurance, but for us it's old hat."

Stapleton was a Superfund site, so it had a much higher degree of contamination. "We negotiated with the Colorado Department of Public Health and Environment and the regional EPA to get it removed from the list," says Vilkin. "There were 149 separate contaminates, and you had to negotiate a safe standard for each one. The cleanup was $110 million. And then there's $4 million insurance in case somebody made a mistake."

Acceptance reflects effective risk management strategies available to builders pursing brownfield development.

Do You Really Want to Build Here?

All brownfield sites are not equal. As with all land purchases, careful consideration must be made to the viability of the site in terms of cost and type of product that can be built there.

"You have to run a very preliminary pro forma," says Flynn. "If the site were clean, what kind of houses could I build here, how many of them and what are they going to sell for? Establish how much revenue you think the site can generate. Prior to doing your extensive due diligence, you have to make some assumptions for what the costs are going to be, not only the cost for building the houses and infrastructure, but for cleaning up whatever's there."

Count the Cost

Giants should conduct extensive due diligence on a brownfield site before moving forward with planned development. Assembling an experienced environmental consultant team is critical.

"The developer community has a general understanding concerning brownfields," Pitts adds, "but they are by no means experts in the field of environmental remediation, so obviously there's a need for well-experienced environmental consultants and contractors to be involved in the process to guide the developer through the myriad governmental oversight regulations, legal requirements, and frankly governmental personnel issues. ... Those folks typically have the relationships with the regulatory authorities and are critical in moving the developer through that process successfully."

Don't Rush to Close

Because of the complexity of buying and developing a brownfield site, it's best to not commit to a purchase contract until due diligence is complete.

"We've certainly seen builders who have taken an option on the land to give them the opportunity to characterize the site [i.e., assess its environmental condition] and then make a decision if they want to go forward based on the results," says Masters.

Centex takes it a step further.

"Our policy is to not close on property until the environmental remediation work has been completed and whatever state or local authority that has oversight has produced in writing a "no further action" letter on some other form on documentation is produced that allows the project to move forward," says Pitts.

Time to Clean Up

When due diligence is complete, an appropriate remediation plan can be developed and submitted to the lead governmental agency that provides oversight for your particular type of cleanup in your jurisdiction. Once approved, the plan can be implemented.

Ideally builders want to be in a situation where the government or an underlying owner will pay for the actual remediation. But sometimes a builder will purchase a brownfield and be responsible for its cleanup. John Laing Homes voluntarily cleaned up the brownfield site before being selected to develop the Anaheim property.

"Having the right remediation contractor lined up is key," says Masters. "Somebody who's prequalified, has the right experience and is willing to give appropriate risk transfer in the builder's favor. By that I mean indemnity performance standards and environmental insurance."

Added Security

Environmental insurance protects a builder when it has done all due diligence to the best of its knowledge and ability, yet something unforeseen happens and the company is held liable for insufficient cleanup or for someone who gets ill due to contamination on the site.

"It is possible to secure meaningful coverage even where you have brownfields," says Howard Tollin, managing director of AON Environmental Service Group. "The policies cover everything other than what is a known pollution condition, which is something that is being cleaned up, so it picks up a lot of risk. And the cost is not thought to be prohibitive."

"One of our biggest infill developers uses environmental insurance on virtually every infill project," says Masters. "It's another example of demystifying brownfields over the years. Better safe than sorry."

Lay Cards on the Table with Your Buyers

Full disclosure of the prior condition and subsequent clean up work at a former brownfield site is smart risk management and good business practice.

"Our suggestion has always been to take the knowledge that the builder acquires during site acquisition and remediation and get that to the people who prepare the disclosures for the consumers," says Masters. "There needs to be a really tight feedback loop so that consumers are adequately informed."

"There is eternal tension between the sales and marketing effort and corporate," Masters adds. "Corporate always tries to manage its risk and disclose as much as possible, whereas sales and marketing may say, 'Geez, we can't put all of this in the disclosures!'"

Masters says that when the market was very strong, consumers would accept virtually anything in the way of a disclosure.

"When values are rising slowly or not at all, buyers are much more edgy about anything about a project they feel is questionable," Masters says. "They are more willing to make a claim against a builder for non-disclosure due to market conditions. So we counsel our builders on this process so that disclosures are customized for the particular project."

Disclosures should include caveats on what buyers can do to their property.

"If you have contaminants that are relatively close to the surface and have been mitigated effectively, you'll want to make sure that your buyers don't go dig a swimming pool or excavate without having their own environmental review of that particular lot," Masters says."

Community Support and Approvals

Solicit zoning approvals early.

"You're going from an industrial or commercial use to a residential use, or with a military base, you're going to have to get the property back from the federal government, which can take decades," says Michael Mittelholzer, NAHB's assistant staff vice president of regulatory affairs, "That makes the environmental part seem easy."

"As much due diligence you do on the physical side of the property to test the soil and groundwater," says Flynn, "you have to do the same with public and political outreach to the city. You have to educate them on what you want to develop and solicit input. We don't like to just come in and say this is what we're going to build, whether you like it or not."

EDAW, an architecture and environment consulting company, was selected by Lennar Corp. to plan the community portion of the former El Toro Marine Corps Air Station, now called The Great Park, in Irvine, Calif. Lennar placed the winning bid at the city's online auction and purchased the property for almost $650 million. The city had a certain plan in mind when it originally split the site into four parcels for four different builders. But Lennar ended up purchasing the whole thing.

"We asked if we could change some things without exceeding traffic levels specified in the master plan," says Smith. "The city is going through an analysis to consider allowing more residential and less industrial and commercial in exchange so that we arrive at a similar balance."

But with an expected 10- to 15-year build out, plans will mostly likely change again before all is said and done.

"We will face a changing economic environment," says Smith. "Master plans have to be flexible and should allow maximum economic growth out of the property for both the developer and the city. You have to be very careful that you don't wholesale throw the plan out and start over. But your basic urban design structure can be the same for a plan that is different as time goes on."

The Green Side of Brown

Brownfield development is the ultimate example of recycling.

"Urban brownfield development is the most sustainable thing you can do," says Forest City's Vilkin. "At Stapleton, we've recycled 6 million tons of concrete and 600,000 tons of asphalt at zero cost. It's being dug up, crushed and used as aggregate in new projects. The sixth runway at Denver International Airport is made from recycled concrete that came from the runways at Stapleton."

Sometimes old infrastructure can be salvaged on a brownfield to save money and materials on new construction.

"The backbone infrastructure supporting utilities are usually immediately adjacent to the property line," says Pitts. "So you're not in a situation where you have to go add a half a mile of sewer to the project as you might in a suburban location. But in urban locales the issue is capacity. Depending on how built-out the community is and how dated the sewer facilities are, the sewer may be undersized for your project."

"The use of the ground in the past and the use the builder wants to put to it are so different and the intensity probably so much greater that the pipes, the wires and streets aren't necessarily the right size," says Smith. The infrastructure is usually not adequate, or it's outdated.

But there is a "green" benefit in that most urban brownfields bring residents back into the cities, reducing some very costly, fuel-consuming commutes.

The Bottom Line

When housing values were high, it was an easier decision to splurge for the cleanup required to reuse brownfields. As values have leveled off, the investment in some sites simply wouldn't be worthwhile.

"Brownfields will slow down in proportion to the slowdown in the market overall," says Flynn. "When in boom cycles, brownfield development works very well; in down cycles, it's more challenging."

"There is that trade-off," says Masters. "The front-end expense and the increased risk versus the ultimate reward. What our builders are finding is that all things being equal, it is worth that additional cost and risk because it permits them to build in areas where they can maximize their densities and as a result net more yield per acre and more potential profit. Plus the local jurisdictions — cities and counties — are strongly encouraging builders to come back closer to the city centers and create more affordable attached housing closer to the jobs. Smart infill brownfields development allows us to do that."

"Brownfields are a key tool for urban redevelopment," says Greenberg. "Builders and developers who are serious, have capacity and can wait a little bit — who don't have to have a return immediately — they are the ones that should be involved in this. This is definitely not for the faint of heart."