Managing the Environmental Risks of Redevelopment

21 Oct Managing the Environmental Risks of Redevelopment

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While the commercial real estate market in the New Jersey and New York metropolitan area continues to be robust, many developers and builders are finding it increasingly difficult to identify large tracts of available land that can be redeveloped into warehouses, data centers, or mixed-use commercial/residential complexes. As a result of limited land availability, some developers and builders are now considering — and, in some instances, purchasing — properties with unresolved environmental issues that would never have been considered previously due to risk management and concern from lenders. Evaluating environmental risk associated with a property that is an active New Jersey Department of Environmental Protection (NJDEP) Industrial Site Recovery Act (ISRA) Site, federal or state Superfund Site, or former industrial/manufacturing facility can be a complicated process. One must identify the risks, the short and long terms costs, and how best to amortize those costs to allow profitable redevelopment.

ESA not only offers clients a set of risk management tools that assess the viability of a property acquisition where unresolved environmental issues exist, but we also develop modestly priced strategies to expedite redevelopment. Such strategies may include:

• Comprehensive due diligence activities that encompass not only traditional Phase I ESA/PA assessments, but also a detailed review of all prior environmental investigation and remediation work, including prior regulatory approvals (i.e., NFA’s, RAO’s, USEPA Approval Letters, wetland permits, etc.). This level of review helps to develop a detailed understanding of current and potential future environmental issues that can be integrated into a conceptual site development model.

• Beyond the initial due diligence activities discussed above, collection of a limited set of additional environmental data (e.g., soil, groundwater, soil vapor, etc.) may be recommended as part of due diligence activities. The benefit of a Phase II investigation can significantly outweigh the cost, particularly on larger sites, by establishing a baseline and/or eliminating data gaps. This Phase II investigation can then be used by ESA to develop a comprehensive remedial road map and cost estimate that can be used in the sales negotiation process to get the seller to either reduce the sale price or escrow funds to pay for future remedial costs.

• Use of the purchase and sale agreement as a mechanism to allocate environmental risks including retention of environmental liabilities by the seller, indemnities, escrows, etc.

• Identification of sites where a third party may be responsible for a portion of the known environmental liabilities. This may be the case on large former manufacturing sites where smaller manufacturing/industrial companies have historically been acquired/merged with larger companies.

• Development of a comprehensive road map to address short-term and long-term environmental liabilities (e.g., soil remediation vs. groundwater remediation) in association with future end land usage. For example, a former industrial site that has an intended end land use as a commercial warehouse or data center and has PCB contamination in soil could potentially be redeveloped utilizing primarily engineering (e.g., capping) and institutional controls (e.g., deed notices) rather than expensive excavation and offsite disposal due to limited occupancy rates.

While there are certainly risks when purchasing contaminated properties, by using ESA’s expertise and risk management tools, you will identify properties in desirable locations that can be profitably redeveloped. Here is a summary of the tasks that will help brownfield purchasers succeed:

• Evaluate the known and unknown environmental risks associated with a specific property;
• Prepare a redevelopment model based on end land usage by factoring in short- and long-term remedial requirements;
• Prepare detailed remedial cost estimates that can be amortized into future development costs and long-term operations and maintenance, and;
• Help purchasing properties that can often be obtained at steep discounts from market rates.

Call ESA to discuss your development plans. We’ll help you make better and more profitable buying and selling decisions.