Acompany that redevelops what is known as a “brownfield” can see long-term financial savings on its real estate purchase and, at the same time, enhance a community’s local environment.
“In most cases, you can turn that property into an asset, in part because the government provides funds for redeveloping it,” says Jeff Lemanski, a senior vice president in Grubb & Ellis’s Detroit office.
Smart Business talked to Lemanski about the difficult but eminently profitable venture of redeveloping a brownfield.
What is a brownfield?
‘Brownfield’ is a term that describes an environmentally impaired property. A property might qualify as a brownfield if it’s contaminated, blighted or functionally obsolete. Not as common are functionally obsolete properties because of factors like antiquated mechanical systems and lead water service lines. Brownfields are very common in Michigan due to the industrial nature of the state’s economy. Many brownfield properties are the result of leaking underground storage tanks, old landfills, chemical spills, illegal dumping, dry cleaning tanks and rail yards. Some of the successful brownfield redevelopment projects in the area include Ford Field, Comerica Park, Arvin Meritor and Renaissance Global Logistics on Fort Street, Fairlane Green (the former Ford Motor Company Allen Park Clay Mine), the Home Depot in Southfield (former landfill) and the Detroit International Riverfront Project.
What is Michigan Act 381?
Michigan Act 381 is the Brownfield Redevelopment Financing Act, which establishes a method to finance environmental response activity to a contaminated property. The incentives available include low interest loans, grants, tax credits, expense reimbursement and tax deductions. Some expenses that may be available for reimbursement include demolition and infrastructure improvements like grading, parking and installing utilities. Many times, a brownfield TIF (tax increment financing) can be established. With a TIF, the value of the property, which is typically depressed, is capped prior to redevelopment. Then, the incremental increase in taxes due to the brownfield development can be applied as an incentive to clean up and develop the property. Thus, the municipality provides an incentive due to the increase in value of the brownfield that it would have never realized had the property not been redeveloped.
Why consider buying a brownfield for commercial or industrial development?
For several reasons: First is the potential for a profitable development. Second, incentives are available for brownfields that aren’t available for normal developments. Third is the satisfaction of converting a problem property to a productive property. Fourth, you improve the impact on the environment.
What issues are associated with redeveloping a brownfield?
Brownfield redevelopment can be challenging but very rewarding. Because you are dealing with contamination, the process of identification, cleanup, due-care planning and applying for brownfield incentives takes longer than a normal real estate development. Developers need to plan for the process to take more time than with a nonbrownfield.
When working with municipalities and other government agencies on a brownfield redevelopment, it is best to fully understand the process required by the municipality prior to the commencement of the project. It is critical to contemplate issues early in the process and assemble an experienced team to meet all the challenges of working with brownfields.
Where does the real estate broker enter into the process?
The broker can advise the seller, create a disposition strategy, sell the property and assemble a diverse team to create a successful brownfield development after the sale. Some companies specialize in developing brownfield properties. Knowing these companies can speed up the process and improve the chances of successful development.
How much time does a total decontamination and redevelopment take?
It depends on the scope of the development and the nature of the contamination. I have a client who took six months from the time he started the process to the time a tenant moved in. Most projects will take longer.
Does brownfield redevelopment pay off financially for a company?
Brownfield redevelopment can be a winwin situation. Sellers win when they sell the property and eliminate or reduce any inherent risk. Buyers win because they acquire the property usually at a significantly reduced price and hopefully create a profitable development. The community wins with a ‘cleaned-up’ property that is paying taxes and creating new jobs. Neighbors win due to their property value increasing and the elimination of a problem property, and the environment wins. Because of the lower acquisition prices and incentives available, brownfield redevelopments can be very profitable when done right.
JEFF LEMANSKI is senior vice president in Grubb & Ellis’s Detroit office. He serves on the executive committee of the National Brownfield Association, Michigan Chapter. Reach him at (248) 447-2707 or firstname.lastname@example.org.