Brownfield Redevelopment: Hidden Hazards and Financial Incentives

As the economy slowly recovers from the deepest downturn in decades, interest in redevelopment projects is also reviving. Credit markets are thawing out and state and local government revenues are at least stabilizing. With the private and public financing picture improving, developers and local governments are seeking to restart Brownfield redevelopment projects. Investors and developers, however, must deal with a changed landscape. The new rules of engagement require even stricter due diligence and scrutiny of the property as well as greater attention to financing, regulation, risk management and viable end uses or exit strategies.

The good news is that a wide variety of financial incentives are still available.  Many states offer Brownfield tax relief, and there are a range of federal and state-sponsored government funding sources for redevelopment. The American Recovery and Reinvestment Act, for instance, includes Brownfield incentives. In 2011, the Environmental Protection Agency authorized a non-competitive $50 million grant program  to establish and enhance state and tribal response programs, addressing assessment, cleanup, and redevelopment of Brownfield and other actual or perceived contaminated sites. Some state programs even provide financing for environmental risk insurance premiums associated with Brownfield redevelopment. Redevelopers are well advised to research financial incentives that many states and major cities have for Brownfield cleanup and assessment activities, including community grants and loan guarantees. In addition, there are often a variety of tax incentives available, such as property tax abatements.

These financial incentives make sense for private developers, as well as state and local governments. Brownfield redevelopment projects help to reclaim underutilized land, and support new business growth with accompanying new tax revenues. As an example, the 1,600-acre site of the former Bethlehem Steel plant near Bethlehem, Pa., has been redeveloped into a commercial distribution center, casino and arts center. This award-winning redevelopment has created thousands of new jobs, has drawn more business and visitors to the site as well as businesses in the city center, and helped turn what could have become an eyesore into a source of civic pride and additional tax revenue.

Of course, the financial incentives go hand in hand with the intensifying challenges associated with the developing of a Brownfield site. Initially, developers need to understand what they’re getting into when they evaluate a potential investment in a Brownfield property. For that reason, a redevelopment site should be assessed for environmental exposures before purchase. Such an evaluation can help investors decide whether a particular project meets their expected rates of return and at what price they would consider proceeding. The environment site evaluation can also assist with establishing “innocent landowner” protection under the Superfund law, or the Comprehensive Environmental Response Compensation Liability Act (CERCLA). 

This is crucial because environmental regulations continue to tighten and enforcement is stricter now more than ever. New landowners may potentially be held liable for property-related contamination, regardless of whether they played a role in causing the pollution. However, if the current property landowner or facility operator has had an appropriate site evaluation performed before purchase, and contamination was not identified, they may be able to avail themselves of the “innocent landowner” defense, provided pursuant to CERCLA and other analogous state liability regimes. Otherwise, they can face financial consequences that include substantial remediation liability and associated defense and administrative costs. These costs may be compounded by extensive and expensive environmental contamination and remediation investigations as well as the loss of redeveloped property income during remediation.

Redevelopment project owners and investors also need to consider changing environmental regulations and stricter enforcement that may require costly remediation work on property that had previously been deemed not to need remediation. This can include liability from regulation that develops after the property has transitioned to a new owner and was not included in the pre-sale evaluation. For example, the U.S. EPA is considering a new policy to include vapor intrusion threats among its priorities. This could impact sites where vapors from subsurface contaminants concentrate in new buildings and pose a health risk to residents or workers.

Savvy prospective Brownfield buyers often ask an environmental consultant to include in their assessments additional risks that may not normally be considered. Additional testing can include asbestos and lead-based paint, drinking water analysis for contaminants, and assessment of other regulated or potentially hazardous materials in building components, such as polychlorinated biphenyls (PCBs) and equipment containing mercury or chlorofluorocarbons (CFCs).

Requesting an expanded scope of environmental testing usually increases the assessment price. However, understanding the costs to abate or mitigate regulated materials prior to demolition or full scale renovation is critical to understanding the overall cost of purchasing and restoring a site to a productive end use. It also is an important tool for determining a prudent level of environmental risk insurance.

Changing regulations and heightened enforcement are just two reasons for owners of Brownfield sites, commercial, mixed-use or industrial facilities, and other potentially contaminated properties, to purchase environmental pollution liability insurance.  In addition to on-site pollution damage lawsuits, the coverage is a means to guard against third-party lawsuits for bodily injury and property damage, which are often overlooked.

Environmental premises liability insurance typically provides clean-up coverage for gradual as well as sudden and accidental pollution releases.  Such coverage can be triggered through the insured’s discovery of a pollution release. Coverage can also be provided for third-party claims, including claims made by governmental entities. 

Associated coverage can include exposures including bodily injury, property damage, and/or remediation costs, along with the costs to defend those third-party claims. Insurers often can provide tailored coverage using endorsements for mold-related exposures, liability from contingent or first-party transportation and non-owned disposal sites, first-party business interruption, loss of rent exposures, known pollution conditions, and natural resource damages. 

Risk management tools, such as pollution liability insurance, coupled with thorough environmental assessments, can protect a Brownfield owner or operator from known and unknown liabilities, whether current, historic or future.

As they consider a redevelopment project, owners and investors need to understand the potential hidden risks associated with a contaminated site. With a thorough property assessment performed by a qualified environmental consultant and appropriate environmental risk insurance, owners and investors can be well-positioned to protect their bottom line and manage known and unknown risks. There are also government financial incentives at their disposal to offset the upfront cost of redevelopment. With these coordinated tools, Brownfield owners can manage their overall risk and reap the rewards of redevelopment.