What is site redevelopment? Basically, it’s a type of construction project that converts an unused or underperforming property into something profitable. Typical projects range from recreational use properties such as a former golf course to properties with a history of heavy industrial use. Future use may be of a similar nature, such as apartments being redeveloped into high-rise residential. They could be something totally different, like redeveloping a vacant industrial property into mixed-use retail and residential.
Before breaking ground on such a project, stakeholders must recognize that there are a number of critical environmental risk factors that can impact success and profitability. Let’s take a look at some of them.
Location, Location, Location
At first blush, it might seem that a manufacturing site and a fallow orchard might have nothing in common with one another. The fact is both could have historical contaminants that could complicate their redevelopment. The challenge is this: many redevelopment projects involve distressed or vacant properties that may have been home to commercial, industrial or agricultural activities and/or structures, all of which could have left behind unwelcome souvenirs of their previous existence. Worse still, possible contaminants could be lurking below an adjacent property causing environmental concerns at your redevelopment site without someone stepping up to assume responsibility.
What you don’t know can hurt you
If you fail to identify and understand environmental risks during site redevelopment, you could wind up facing unexpected costs, construction delays, legal fees, remediation expenses, or even injury to site workers. And because of the complicated nature of contamination, cleanup, liability and other factors, expenses can quickly escalate for buyers, sellers, and developers.
You could end up being forced to abandon a project altogether.
Getting to know what’s below
Knowing the historic use of the property in question goes a long way to understanding the potential risks. Dry cleaning, electroplating and vapor degreasing sites, for example, have a long and well-established history of leaving behind some nasty substances – even beneath a concrete foundation. Completing a Phase I Environmental Site Assessment (ESA) and subsequent subsurface investigation(s) is a key step in identifying and defining environmental conditions.
Depending on the outcome of the Phase I ESA, additional study may be required, including subsurface sampling. It’s important to have a well-qualified firm perform the needed sampling and analysis. For example, imagine your redevelopment site is an old gas station. Not only should samples be tested to confirm the presence of gasoline, but depending on the years it operated, professionals should know when to recommend whether additives such as lead and methyl tert-butyl ether (MTBE) should also be tested. Consultants can also help interpret results and recommend next steps.
Urban fill presents a unique set of challenges as it may contain bits of metal, hydrocarbons, construction debris, coal or wood ash. Even specific contaminants like asbestos or polychlorinated biphenyls (PCBs) can be present.
Can you dig it? Maybe you shouldn’t.
Most redevelopment projects will require some excavation or grading. What happens to the resulting disturbed soil? If it is destined to be used at the site, that’s one thing. But what if the soil must be transported elsewhere? Depending on where the soil is headed, it may require additional analysis before it can be disposed of or put to new use. Complicating matters in metropolitan areas is something known as urban fill, a mixture of soils and man-made materials often used to bring a site to grade. Urban fill presents a unique set of challenges as it may contain bits of metal, hydrocarbons, construction debris, coal or wood ash. Even specific contaminants like asbestos or polychlorinated biphenyls (PCBs) can be present.
Going with the flow
Contaminated groundwater is even more challenging to deal with than soil. Redevelopment excavation may require dewatering to facilitate construction. Similar to contaminated soil, groundwater that will be disposed off-site will likely require additional testing. Depending on the nature of the contamination and the geology of the area, pollutants in groundwater could also spread well beyond the redevelopment site. And groundwater removal or treatment is tricky. And costly. Because it presents such high potential risk to both humans and the environment, proper permits and specific treatment processes must be followed. Depending on the severity, groundwater contamination could result in restrictions on the intended use.
Something in the air
Volatile organic compounds (VOCs), which include benzene, formaldehyde and toluene, give off harmful vapors. These substances can be particularly harmful to humans, some of which are suspected of causing cancer. Soil, soil vapor, and groundwater contaminated with VOCs will often need additional assessment and controls to ensure indoor air quality is not impacted. Post-construction sampling and testing may even be needed to obtain occupancy permits or even needed post-occupancy to ensure mitigation systems are working correctly.
The human factor
Redevelopment sites will be heavily populated with site workers, contractors, consultants, regulatory representatives and others. Not only must people entering the site understand the risks, precautions must be taken to protect them from exposure to onsite contaminants. There is also the additional risk of exposure for people on adjacent or nearby properties.
Avoiding deep trouble
While the above-mentioned risks should be carefully examined, they don’t have to put an end to a redevelopment project. However, effective risk management practices are essential to deal with the complexities of pollution liability in all redevelopment projects.
Risk control
It’s important to define responsibilities for environmental conditions early in the redevelopment process. Purchase and sale agreements (PSAs) are a way for historic owners, current owners, purchasers and neighboring property owners to proactively negotiate responsibility for environmental conditions before a property is even sold. Pollution liability insurance is also a commonly used risk transfer tool in real estate transactions.
Site owners should always ensure contracts for consultants, contractors, and construction firms contain appropriate indemnification language. They must also include insurance requirements and owners should obtain proof of adequate professional, general liability, and pollution liability coverage.
Bottom line
Site redevelopment can be lucrative, while transforming underused and underperforming real estate into a productive and attractive revenue-generating asset. As you can see, however, there are many risks that must be evaluated and managed. That’s where an experienced broker, insurer, consultant, and or legal counsel comes in. The risks for environmental and professional damage are so high and so complex, you need advice from people who understand those risks and how to deal with them.
For more detailed information about this topic, check out AXA XL’s Environmental team’s white paper: Site redevelopment: understanding and managing environmental risks.
