State Legislatures Magazine: February 1999

Editor's Note: These articles appeared in the February 1999 issue of NCSL's magazine, State Legislatures. To order copies or to subscribe, contact the marketing department at (303) 830-2054.

Realistic Redevelopment

The Basics on Brownfields
Involving Business
The Bottom Line
Into the Next Century

Realistic Redevelopment

Cleaning up industrial property can rejuvenate run-down inner city neighborhoods. With more relaxed rules, it’s becoming easier.

By Jeff Dale

Ask an average citizen what he thinks a brownfield is and you will probably get a blank stare. Ask the same question of a council member of a large, populous city, and you may catch a smile and a few encouraging words.

Brownfields are abandoned industrial properties found in inner cities and older industrial neighborhoods—and they represent a promising building block for successful urban redevelopment. A property that is cleaned up and put back into productive use creates jobs, tax revenues and a healthier environment in a neighborhood that may desperately need a boost.

"When I was a kid, we would call these places the ‘bums’ jungle.’ Now, brownfields cleanup brings businesses, jobs and taxpayers back to the city," says Pennsylvania Senator David Brightbill. He was the chief architect of legislation in 1994 that created a landmark redevelopment program that subsequently won an award for Innovation in State and Local Government from the John F. Kennedy School of Government and the Ford Foundation.

In recent years, all levels of government and business have begun to address the barriers to redeveloping brownfields. State legislatures have created programs that offer financial incentives, allow cleanup standards to be tailored to the new use of the property, and provide protection against future liability for parties that responsibly clean up and redevelop these areas.

By most accounts, however, nearly 500,000 brownfields exist across the country. Despite many success stories, even highly recognized state programs can count reclaimed property only in the hundreds of sites, and some warn that these represent the most economically promising prospects.

THE BASICS ON BROWNFIELDS
A brownfield is a deserted or little used industrial site that may be contaminated with relatively modest levels of hazardous or toxic waste. Some accuse strict environmental laws for creating the phenomenon, mainly Superfund (the federal Comprehensive Environmental Response, Compensation and Liability Act), passed in 1980. Superfund was Congress’ response to public outcry over the potential hazards of toxic waste seeping into groundwater. It requires cleanup of the most severely polluted sites across the country.

Pushed by public advocacy groups and environmentalists, Superfund required cleanup to strict, nearly pristine, conditions and made those responsible for the pollution pay for cleaning up the mess. Many states established programs modeled after the federal law for the remaining hundreds of thousands of sites that weren’t polluted enough to qualify for the federal program.

In practice, the strict standards and prescriptive requirements of both federal and state Superfund programs resulted in expensive and lengthy cleanup processes. "There was a stigma attached to any property that appeared on a government list," says Barbara Coler, a division chief in California’s Department of Toxics.

Selling a contaminated property became increasingly difficult. Buyers were leery of environmental contamination because Superfund laws included strict joint and several liability clauses.

"In the 1980s, there was extreme paranoia over becoming involved at a contaminated site," says Jerry Stahnke, who has worked in Minnesota’s award-winning voluntary cleanup program since it was established in 1988. Liability clauses essentially allowed state and federal governments to hold a current owner, multiple owners or former owners liable for cleanup even if they hadn’t done the polluting. Those not responsible for the problem then had to go to court to seek restitution from those who were.

Financial institutions also feared being caught in the liability web. Lenders were reluctant to loan money for redevelopment of a potentially contaminated site since they too could be held financially responsible for cleanup. Likewise, municipalities were unwilling to foreclose on brownfields and assume responsibility.

If an old warehouse, gas station or manufacturing plant was no longer useful, many owners simply abandoned the property rather than face strict and expensive cleanup. Contaminated, useless brownfields began popping up in cities across the country while new industrial real estate projects were being built on fresh, undeveloped land outside the city. As businesses left the inner cities, jobs and tax revenues followed. People started commuting out of the city to work, placing extra demands on transportation infrastructure.

INVOLVING BUSINESS
In the late 1980s and early 1990s, state governments recognized that their hazardous waste programs could clean up only a portion of the thousands of abandoned sites that scarred the inner cities. So they focused on removing institutional and legal barriers and providing incentives for volunteers to conduct cleanups. It seems to be working.

California has a voluntary program that so far has returned 245 sites to productive use. "We enter into agreements with both responsible [for the contamination] and nonresponsible parties," says Coler. "The market is very hot right now. We’re seeing a lot of return business in our voluntary cleanup program because people like what we’re doing." California offers state oversight and expedited approval processes that are sympathetic to the time-sensitive nature of real estate projects.

Brownfield programs often are not as strict as state-enforced Superfund requirements. Program staff work with a volunteer to define cleanup levels tailored to the property’s new use. Senator Brightbill points to revised standards as the backbone of Pennsylvania’s program. "We worked to establish a system that has realistic standards...a property that will be turned into a bank or light manufacturing plant requires less cleanup than one destined to be a child care center."

States have also come up with answers for liability problems and created financial incentives to encourage participation in cleanup projects. Environmental contamination used to represent a liability risk that killed any real estate deal even before it was seriously considered. Now states offer assurances that cleanup completed under a voluntary program will release a party from any further liability at the site. Some states have taken it a step further, signing agreements with the Environmental Protection Agency that allow the state to offer exemption from both federal and state Superfund liability.

States call liability assurances by different names: covenants not to sue, "no further action letters" or certificates of completion. They provide liability release to businesses willing to redevelop a brownfield, removing the potential for additional costs down the road. "In California, we offer no further action letters and certificates of completion. Neither is a full release from liability, but participants really want them. It says to them ‘we’re done,’" says Coler.

Similar sentiments are expressed in Minnesota. "The biggest draw is our assurance packages. We provide a wide range of options, and something is right for everybody," says Stahnke.

Minnesota’s Voluntary Investigation and Cleanup program was the first of its kind in the nation. With 800 sites cleaned up and another 400 under way, the seasoned program has served as an example for many other states. Redevelopment projects such as the "quarry site" show us why.

"It’s simply made a huge difference to the people of North Minneapolis," says Rick Jolly, an environmental official with the Minnesota Pollution Control Agency. Originally a limestone quarry, the 42-acre parcel is located on the northeastern outskirts of Minneapolis along Interstate 35. The site was home to a lot of heavy industry over the years, and soil and groundwater became heavily contaminated with petroleum and chlorinated solvents. Truck terminals, sandblasting operations, automotive repair shops and chemical manufacturing companies contributed in varying degrees to a laundry list of hazardous pollutants that poisoned the earth and threatened surrounding residential neighborhoods.

In the early 1990s, the Minneapolis Community Development Authority condemned the site as a health hazard and removed the remaining industrial tenants. The development authority enlisted the services of Ryan Companies, US Inc., a private developer. "The site was seriously polluted, but the location next to the freeway and the need for a major grocer in the community made the project attractive," says Ryan’s Marie McCallum. Businesses responsible for the pollution disappeared long ago, so the redevelopment authority and Ryan shared the cost of assessing the site. The authority footed the bill for cleanup.

"We began recovering our costs through the eventual sale of the property to Ryan for roughly $6.8 million in 1996," says Jim White, an MCDA senior project officer. Before that, however, the state had received a grant for $1.4 million from the Minneapolis Development Council and the state Department of Trade and Economic Development. A tax-increment financing scheme also is in place, allowing tax revenues currently generated from the businesses on site to flow back to cover the remediation costs.

One of the primary reasons that 13 local community groups supported the development was the need for a major grocery store in the area. Rainbow Foods signed on while the site was being cleaned and was eventually joined by major retailers such as Target, Home Depot and Office Max. "It’s now one of the hottest shopping centers in the state," adds White.

California has its share of major redevelopment projects, including cleanup and restoration of a 220-acre railyard into open space, a state-of-the-art intermodal transportation center and residential, office, retail and entertainment projects. Just as important, however, are the smaller plans that may not be candidates for large amounts of state and federal funding.

A school district recently entered the state’s volunteer program when officials discovered lead contamination on a 10-acre property where Lee Richmond Junior High School was to be built. Following testing and removal of soil, a cement cap was laid over the remaining contaminants. In the end, the school was able to build a baseball diamond on what used to be a burn dump.

THE BOTTOM LINE
Even if liability can be resolved, a brownfield never will be recycled unless it can be profitable. The majority of sites are not particularly promising. These properties are most often located in economically depressed areas (this being much of the reason they were mothballed in the first place), so financial assistance and creative financing are keys to most state programs.

New York passed a bond act devoted to clean air and water in 1996. The legislation earmarked $200 million for brownfield redevelopment. The funds are available to municipalities for up to 75 percent of the cost of assessing contamination and cleaning up a contaminated site.

Illinois also offers several financial incentives. The Brownfields Redevelopment Grant Program allocates $1.2 million annually to municipalities to coordinate the reuse of brownfields, although the money may not be used for actual cleanup expenses. A commercial bank program in Chicago offers matching loans up to $350,000 at reduced interest rates (75 percent of the prime rate for three to 15 years). An income tax credit also is available for developers who restore contaminated sites. The credit is capped at $40,000 per year and $150,000 per site.

In addition to similar low-interest loans and grant programs, Pennsylvania allows government and nonprofit entities to tap into a fund to assess pollution at sites and to perform limited cleanup functions. Pennsylvania also ties tax incentives to job creation. For firms that increase their number of employees by more than 20 percent within three years of redevelopment of a brownfield site, a tax credit of $1,000 is offered for each job created.

INTO THE NEXT CENTURY
Hundreds of urban brownfields are being cleaned and recycled, pumping new life into inner city communities. Although most officials are optimistic the move will continue, hundreds of thousands of properties will remain useless into the next century. These sites will require the ongoing attention of policymakers for many years.

The lessons so far? Experience indicates that the most successful projects have had multiple parties working together. Property owners, lenders, engineers, developers, state and federal governments, and community groups need to pool resources to recycle the contaminated sites. States and municipalities in particular need to stay on top of the financial resources available through federal agencies and promote these opportunities to community leaders and private sector developers.

Early projects have produced remarkable results and indicate that significant economic and social benefits may be achieved through widespread brownfield recycling. Cognizant of the fact that hundreds of thousands of sites remain, Senator Brightbill warns, "We’ve got to empower the private sector to do the cleanups—there just isn’t enough government money."

Federal Bucks for Brownfields

State and local officials have lobbied hard for help with cleanup of contaminated property. In recent years, the federal government has doled out more than $100 million in grants to states, cities, towns, counties and Native American tribes. The EPA’s national brownfields program coordinator, Majorie Buckholtz, says that the Clinton administration has made them a priority because of "the strong and vocal interest of city mayors and local public officials." Significant federal funding is funneled through the agency.

Since 1995, EPA has given $200,000 to each of up to 226 communities for pilot projects that are testing various ways to bring landowners, developers, lenders, community groups and others together to reduce barriers to redevelopment and to serve as a model for other projects.

EPA also has taken steps to address the liability questions that often stall restoration projects. The agency issued a policy clarifying circumstances under which lenders and government entities are protected from financial liability for contamination at Superfund sites. EPA also removed 30,000 properties from a list of "potential Superfund sites" to eliminate the stigma of potential liability that would scare off anyone interested in them. EPA organized a task force of federal agencies to coordinate strategies and has worked with community colleges to encourage work force development.

According to Buckholz, the climate for redevelopment has "become very dynamic. We’re hearing about a lot of activity."

Other federal agencies working on the issue include the Economic Development Administration, the Department of Housing and Urban Development and the Department of Transportation. Through its public works and business development programs, EDA distributed $41 million to 24 brownfield projects between 1992 and 1996. HUD made $25 million available in special FY 1998 economic development funds. DOT’s new brownfields policy allows states and cities to incorporate redevelopment into transportation projects. More than 20 federal departments and agencies signed onto EPA’s national brownfields partnership action agenda.

The Taxpayer Relief Act of 1997 allows buyers of contaminated properties in targeted areas to fully deduct the cost of cleanup in the year the costs are incurred (rather than spreading deductions over several years). The incentive is valued at $1.5 billion and is expected to leverage $6 billion in private investment and spur the redevelopment of 14,000 sites.

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