United States: What Makes Brownfield Development So Difficult?
Brownfield News September/October 2001

In my recent conversations with firms that specialize in brownfield redevelopment, I heard a common refrain: that it is a lot more difficult to redevelop environmentally impaired real estate than anyone ever imagined. Many of the early pioneers in the business have folded, many are struggling, and only a handful have successfully settled in their niche of the market on a national scale. Why is the business so difficult? To begin with, all innovators face a challenge. To quote Machiavelli, "There is nothing more difficult to take in hand, more perilous to conduct or more uncertain in its success than to take the lead in the introduction of a new order of things." But that explanation only goes so far. Brownfield development takes the complex field of real estate development and overlays it on an even more complex field of environmental cleanup, creating a multiplicative, not an additive, effect of complexity.

The successful brownfield developers in this business—and there are several—have learned many important lessons. Many early players in this field viewed this as an environmental remediation business. With their expertise in environmental remediation, they reasoned, they could buy a property at a relatively low cost due to environmental impairment or stigma, and clean it up faster and cheaper than could the current owner. Environmental expertise, they thought, would let them profit on the delta between the actual and the perceived cost of cleanup. That business plan has proven to be somewhat flawed. Successful brownfield developers have recognized that environmental expertise alone is not enough. Those that have survived understand that of equal if not greater importance is expertise in real estate—understanding and executing a development plan. Moreover, the value of the risk arbitrage available to early developers has shrunk as property owners have become more sophisticated in their understanding of the business and their alternatives, including new tools such as risk transfer insurance products.

Another tough lesson learned by brownfield developers is the need for "patient capital." Developing environmentally impaired real estate generally takes much more time than developing traditional real estate. Some early investors and developers had to learn the hard way as their development projects were delayed by community and political scrutiny heightened by environmental issues. Although virtually all real estate projects face some local land use hurdles, brownfield developers are often surprised when the obvious "good" they bring to a community and to its tax rolls by eliminating environmental hazards and bringing in new business activity and jobs, is challenged by local interests who see things differently. Brownfield developers also face additional delays due to the time needed for state environmental agency approvals for cleanup plans, cleanup delays due to the discovery of unexpected site conditions, and the more elaborate process of site engineering and planning due to environmental problems, to name but a few common problems. With the help of competent legal counsel and consultants, developers can protect themselves against cost overruns or environmental surprises, and tailor insurance products to circumscribe their liability exposure. Delay, however, is a risk against which a developer can never be comfortably insured.

Another common problem voiced by brownfield developers is that while they may be welcomed, and sometimes actively pursued, by local government representatives as a solution to a blighted site, political leadership often changes before the entitlement process is complete. And with that change comes additional development hurdles, changed zoning, and more delays. Given the Rubik's cube that is a brownfield development project, a change in one land use assumption, such as the permissible density, can alter the entire project, including the remediation plan. Local governments need to understand that one of the most important incentives they may provide to brownfield developers is predictability and speed in land use decision making. That requires a commitment at the highest level.

In light of these risks, the more successful brownfield developers have learned to demand a sufficient return on investment to compensate for the high risk of these deals. Sellers of contaminated property are becoming more aware that the best price for their site is not necessarily the best deal. If a buyer cannot execute on the development, the property may come back to the seller, causing considerable pain and embarrassment.

At the end of the day, the more successful brownfield developers will continue to reinvent themselves to meet changing market conditions, and will compete head-on with the traditional developers who are becoming increasingly tolerant of environmental risks. But the assumptions that this business started with are a lot different from what the realities are today. And in many ways that has made it a lot more difficult than any of us thought it would be five years ago.