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Private Land
Recycling - A New BY JIM JACOBS Contaminated properties can be a terrific opportunity for developers and the consultants who team with them. These properties can be either a community resource worthy of recycling or “brownfields” attracting vandals and the homeless. Mention the words “soil and groundwater contamination” or “asbestos and lead abatement” and many bankers and SBA lenders are likely to hang up the telephone or show a developer to the front door. Even with the nationwide policy changes that have occurred over the past several years, many bankers and lenders are unwilling to consider the financing of contaminated properties, worried by the fear of foreclosing on a contaminated property. Many banks and private lenders still remember losing millions of dollars in bad debt as the owners of contaminated property walked away from their loans. Additional legal fees and environmental fines associated with the contaminated properties may have added to the environmental liabilities for financial institutions in the past. Even with the recent easing of regulatory requirements reinforced by the Lawrence Livermore National Laboratory report in 1995 and the associated perception of lowering environmental risks on many sites, many bankers and lenders are still not convinced. The “stigma” or devaluation of environmentally impacted sites is real, even today. Two 1996 cases from California were reviewed, one in Marin County and one in San Luis Obispo County. Both cases illustrated devaluations of up to 50 % on impacted properties compared to the appraisals of similar non-stigma property values. The loss in real value in both cases exceeded $400,000 per parcel. The Marin County example sold recently for $14.95/square foot. The quarter-acre site, owned by a major oil company, was a contaminated gasoline service station. The owner, a major oil company, indemnified the future owners for ten years. Within five miles, also in Marin County, a similar quarter-acre gasoline station that had been cleaned up and closed sold for $30.00/square foot. In the beach town of Avila, the San Luis Obispo County Appraiser estimated loss in value of up to 50% for properties impacted by the upgradient refinery. Over a long time period, the refinery released significant quantities of hydrocarbons, impacting the soils and groundwater of the business district of this Pacific Coast town. Buying contaminated properties can create unique problems for the new owners. Adjacent properties may be affected by significant loss of value associated with the environmental stigma or offsite movement of contaminants. Even with recent regulatory changes , the recovery of lost real estate value for innocent adjacent property owners still encourage lawsuits against the new owners of the impacted properties. Recycling “brownfields” in the private sector requires that a prospective property must have some inherent value. Since the prospective contaminated site may have other problems including condemned buildings, delinquent taxes or significant surface debris, location becomes an even more important element to insure that environmentally depressed value can be restored to the property. It is sad but true, but in some economically depressed areas of California, some properties are not financially viable investments, pristine or contaminated. Therefore, a careful economic evaluation from a property assessorÕs perspective is highly recommended. The evaluation will include sales prices in the area, rental rates of nearby properties, occupancy rates for the area, and other information related to the specific property. The author will describe his efforts in the evaluation, purchasing and redevelopment of a contaminated property in an up and coming area of Richmond, California, known locally as Point Richmond. Over fifty commercial properties in California were examined during the two year search. Of those, offers to purchase were made on five properties over eighteen months by the partners. The property in which all the factors, including warehouse to office ratio, freeway access, price, financing, and timing had worked out, was in Point Richmond. The property in Point Richmond had been a corporate yard for a large contracting firm. The property had soil and groundwater contamination from a former 6,000 gallon diesel underground storage tank and a former 2,000 gallon gasoline underground storage tank. The Point Richmond property had been difficult to sell, having been on the market for over two years. Previous prospective buyers had walked away, due in part, to the concerns about the propertyÕs need for an environmental cleanup. What made this property attractive to the partners was that the environmental cleanup could be performed without interfering with the efforts to lease the space. Reimbursement for the costs of environmental restoration and closure, was not appropriate in this case, but may include recovery from previous owners, former insurance policies and government funding agencies. During the due diligence period, an evaluation determined which party ends up with the long-term environmental liability. Other factors which were evaluated included the price of the property, the price of nearby properties, the rental income potential, the tax basis, the financing terms, the cost and timing of any cleanup or site closure activities, and the cost of any building renovations. As a long-term investment, the long-term cash flow was examined. Other issues that were examined included the freeway access, the office to warehouse ratio, the general location, and the investment growth potential of the Point Richmond area. The partners brought in an environmental consulting firm as part of the team to evaluate the environmental liabilities and determine the steps to site closure. The appropriate due diligence was performed, which included a Phase I Environmental Assessment . Based on the results of the Phase I Environmental Assessment, a Phase II Subsurface Investigation was performed, testing the soils and groundwater for contaminants believed to be present in the underground storage tanks or chemicals stored on-site and related to surface activities. After the property was thoroughly characterized, the partners bought the property. Major building renovations are presently being performed by the partners and tenants occupy more than half of the existing rental space. This private approach toward “brownfields” was effective in successfully resolving environmental issues with this property. Other properties and opportunities exist that might be available through a variety of circumstances, including foreclosure, estate sales, or lawsuits. The author is a partner in a redevelopment group that specializes in recycling environmentally contaminated properties. If you have any questions or comments, please contact Jim Jacobs at (510) 232-2728; ext. 222 Jim Jacobs is past president of the San Francisco Chapter of the GRA and president of FAST-TEK Engineering Support Services. Summary Of Some Of The Factors Price of Property |