April 1, 2008

Midwest Real Estate News: "The New Green is Brown"

Mark Thomton, Staff Writer
Midwest Real Estate News

Today it is almost passé to not push a green agenda, but what frequently gets left out of the conversation is that many companies may do more good by switching the color spectrum entirely – and pursuing “brown” instead.

Let us explain. Reducing one’s carbon footprint has become a hot-bottom issue, and the commercial real estate industry has been labeled the biggest offender in terms of emissions. In response, developers and architects have rallied to the cause and are pursuing greener buildings. But the question that is often never asked is, instead of just reducing their carbon footprint couldn’t real estate pros be striving to make any new footprints, period?

Even the greenest of new buildings, if they’re built as part of a pattern of suburban sprawl, still become part of a pattern of the environmental problem. Preservation of open space is a prime agenda for conservationists and environmental gurus.

So, perhaps the best way to find open space is not only through sprawl, but also trough brownfield development. Or, in one particular case, land recycling.

A 1966 case study from the city of Cleveland and Cleveland State University found that existing brownfield sites in Detroit, Chicago, Milwaukee and Cleveland could absorb one-to-five years’ worth of residential development; 10 to 20 years of industrial development; and 200 to 400 years of office space.

The Midwest in general has an ample supply of brownfield sites, and so it is perhaps fitting that the 2008 Brownfield Transaction Forum will be held in Detroit on May 5 after a seven-year absence from the Midwest. In Detroit, it’s estimated that 1,000 developers with a $50 billion in net worth will convene to discuss the redevelopment of brownfields. The caliber of the attendees signals that for developers with experience and knowledge, there is money to be made in brown as well as green.

First-timers enter market
Even first-time brownfield developers are beginning to embark on venture that cater to unique business opportunities which may be unavailable on green space.

Howard Wedren, president of Chicago based Dayton Street Partners, for instance, recently purchased his first brownfield site from the city of Chicago at the corner of Halstead Avenue and Pershing Street – the gates to Chicago’s historic former stockyards. It’s a joint venture with Legacy Capital Partners of Lyndhurst, Ohio.

The project will cost around $9 million, but Wedren believes that the opportunity is worth the risk.

“I’ve never done infill before, but this is a great opportunity,” he says. “There are a lot of nuances to the process. This is not like building out in the suburbs. You have to have patience, but it is something I want to do more of.”

Wedren purchased the site for $1 from the city because of the environmental cleanup involved. His gamble is that the close-in location will produce enough interest for the 104,000 square foot spec industrial facility he plans to build there. Hi firm is working with the Environmental Protection Agency to clean up the soil on the property.

“There is demand in this market for industrial facilities with 30-foot clear ceiling heights,” says Wedren. “This site is in between the Dan Ryan Expressway (Interstate 94) and I-55. It is ten minutes outside of the loop. It’s a great location.”

Many municipalities have also used brownfield sites to spur needed economic activity. New developments are often pushed further out from major metropolitan areas or central business districts, and once-thriving sites become abandoned.

As an example, the city of Milwaukee took on an ambitious project in 2006 to redevelop 130 acres that was once a thriving rail yard. The Menomonee Valley Industrial Center and Community Park is now considered a major economic engine for the city and was listed by the Sierra Club as one of the top 10 “green” developments in the country for 2006.

“Millions went into this project, but a lot of jobs were created,” says Dave Misky, executive director of the Milwaukee Redevelopment Authority. “This is a model sustainable development. Half of the 60 acres dedicated to industrial used have been sold to private businesses. There are several tax incentives for private businesses to develop initiatives property.

The remaining 70 acres were reserved for open space that doubles as community parkland and storm water management, says Misky, who estimates that $28 million went into the environmental cleanup of the area – much of it grant money from the EPA and some from private businesses.

A large population of the cleanup involved the installation of 800,000 yards f clean dirt, capping damaged areas. Legal fears keep many awake

While cities see the potential benefits of brownfield work, private interests are often gun-shy. Without the proper experience, it can seem a daunting and risky task. Some brownfields never see redevelopments because owners are unwilling to sell or redevelop the property for fear of legal repercussions and litigation from future users.

Even if environmental cleanup has taken place, owners are sometimes wary of selling property because there is no guarantee what future users will do with it. If controls are put in place by one user, buyer user may disturb those controls and unearth contamination, often resulting in litigation of the original user.

An example of this would be a parking lot put in place to cap damaged soil. If successive owners were to develop on that parking lot, they may seek financial reparations from the previous owner.

However, some laws have been put into affect numerous states and are being introduced into others. The Uniform Environmental Covenants Act has been adopted by 21 states and is currently being introduced into nine more.

“The act doesn’t say how clean the property has to be,” says Michael Kerr, legislative director for the Uniform Law Commission in Chicago. “What it does is at the end of each clean up, if there needs to be controls put on future use of the property, this act makes sure those controls stay in place.”

Kerr says this gives more confidence to both buyers and sellers in the process. The seller knows that the buyer is aware of the controls on the property, and the buyers is aware that there are controls must stay in place.

Opportunities available
Despite existing hurdles, developers continue to test the waters and enter in to brownfield redevelopment. The Urban Land Institute (ULI) in Detroit, the organizer of the Brownfield Transaction Forum, is anticipating a big turnout. Deals will be done at the conference, and the host city happens to be one of the most desirable markets for national investors to enter.

Detroit has an abundant supply of brownfields at very affordable prices.

“Michigan has become the national leader in brownfield cleanups,” says Jim Bieri, president and CEO of the Bieri Co. and co-chair of the ULI of Detroit. “Detroit is a very big area with a lot of land that has been taken out of service. There are many opportunities for investment here.”

Doug Brown, director of development for ASTI Environmental in Brighton, Mich,. and a sponsor of the event, says that national investors have been more bullish on the Detroit market than locals.

“The biggest challenge is to take the stigma out of the word ‘brownfield,’” says Doug Brown, director of development for ASTI Environmental in Brighton, Mich. “Until we do, we will continue to see sprawl into greenfields.”