Tainted Land Is Developers’ Latest Project

It’s not the kind of property that developers usually daydream about: an old 265-acre oil refinery in Santa Fe Springs, badly polluted with petrochemical waste and littered with dozens of rusting oil tanks.

Yet a creative deal between owner Golden West Refining Co. and city officials is helping transform a contaminated site into an economic engine. The owner is removing the refinery equipment and cleaning the tainted soil. On another corner of the same site, the refinery-company-turned-developer is completing its second new industrial building in the Golden West Business Park. As an incentive for the developer, the city provided an $8-million grant to help pay the cleanup costs.

Formerly scorned by both investors and public officials, “brownfields” are experiencing new popularity. Defined as sites that are both contaminated and underused (or not used at all), they are targets for a new breed of developers who have found ways to make money on properties that, until recently, nobody wanted.

These tainted properties have spawned a mini-industry among developers who specialize in converting the sites into industrial parks, retail power centers and even recreational areas.

Driving the trend is a confluence of several forces, including a booming real estate market, a growing shortage of land zoned for industry and improved availability of insurance to cover the costs of dealing with unforeseen complications on a cleanup site, according to Gary Lenz, worldwide managing principal of Arthur Andersen’s Real Estate and Hospitality Services Group.

Changes in federal regulations have helped too. In 1994 the Environmental Protection Agency relaxed its policies slightly, allowing those performing cleanups to bring their properties up to industrial standards, which are not as stringent as standards for residential use.

That initiative had a profound impact on the viability of brownfields, said David Kimball, executive vice president of Greenfield Development, a Bellevue, Wash.-based company that invests in contaminated sites.

Further help came from the federal government’s Brownfields Showcase Communities, a grant program for pilot projects. A total of $3.3 million was committed to two projects in Los Angeles: the cleanup and reuse of a 20-acre former state prison in East Los Angeles and a 200-acre former Goodyear tire plant in South-Central.

On the Goodyear site, the owner, Pacific Realty Trust, plans to create a partnership with a local nonprofit group, Concerned Citizens of South-Central Los Angeles, to build a shopping center.

Tax breaks provided a further incentive, according to Lenz: Under the 1997 Taxpayer Relief Act, parties that spent money cleaning up tainted sites were allowed to fully deduct those costs from federal income taxes, in the year the costs were incurred, until 2000.

Cleaning up and reusing polluted land is crucial for both the environment and the economy. Brownfields make up between 5% and 10% of the urban land in the United States, according to an estimate by Robert A. Simons, a professor of real estate and urban planning at Cleveland State University in Ohio. If California has a similar percentage of such sites, that would mean that as much as 600,000 acres of urbanized land in the state is going largely unused.

Business that cannot expand in existing urban areas, either due to a lack of clean sites or for fear of financial liability from occupying a site next to a known polluter, will go to the suburbs, and that contributes to a downward spiral or urban ills, said George Brewster, executive director of the California Center for Land Recycling, a San Francisco-based not-for-profit group that assists cities with brownfields issues.

When a business owner leaves the city, Brewster added, he takes jobs with him, contributing to overall sprawl and leaving behind hollowed-out urban cores, pockets of poverty and dramatically reduced tax revenues.

Environmentalists have also embraced brownfields’ development as a key strategy in sustainable development that stresses recycling and minimizes environmental damage.

“Our perspective is that brownfield projects, as land recycling, are vital for maintaining the integrity of urbanized areas and revitalizing downtowns,” Brewster said.

Many states helped landlords stop fearing polluted properties by issuing “covenants not to sue,” which protect both property owners and their lenders against environmental suits in the future, according to Lenz. Such covenants build confidence in the cleanup process by giving owners the assurance that if they clean up their contaminated property and sell it, they will not be sued by some future owner for unforeseen problems.

Greenfield Development is one of several companies that buy brownfields, clean them up and resell them to developers. “Our basic process is to review a property that is impaired, work with the owner to arrive at what the appraised value would be in a clean condition, and then the owner has its own consultant estimate the costs of remediation,” Kimball said. Those figures, he added, serve as the basis for negotiation for acquiring the property.

Greenfield then hires outside consultants and environmental contractors to do the work and later sells the clean site to a builder. So far, the company has completed projects in Indiana, Washington, Pennsylvania and New York and is contemplating two projects in California.

Local government often acts as a catalyst for brownfield projects. Typically, a city or county will buy the land from its former user, hire specialists to clean up the toxics and then lease or sell the land to developers. In Emeryville, an industrial city next to Berkeley, city officials provided big financial incentives to Chiron Corp. for building its 750,000-square-foot headquarters on brownfield sites formerly occupied by a Sherwin-Williams paint factory, a former Pacific Gas & Electric storage yard and a Shell Oil petrochemical plant. Eventually, up to 4,200 people are expected to work at the recovered site.

In Chiron’s case, the city agreed to pay all the “extraordinary” (that is, above-market) costs for the project. Those costs included toxic remediation, which alone could eventually total as much as $30 million. In addition, the city will pay Chiron’s annual municipal service fee for the property and provide up to $4.7 million for a future parking structure.

The rationale for these reimbursements is that Emeryville is a comparatively costly place in which to build, and reimbursements from the city’s redevelopment agency help keep Emeryville competitive.

In Santa Fe Springs, the owners of the former Golden West refinery would have been better off financially doing nothing, rather than attempting to clean up the site, said Robert G. Orpin, director of the Santa Fe Springs Department of Planning and Development. That was the justification for using public dollars, he added.

The standard brownfield approach is to perform the cleanup first and develop the site after it has been freed of contaminants, because most investors and developers seek to avoid the morass of being surprised by environmental problems after construction has begun.

One such surprise occurred in December with the Los Angeles Unified School District, which discovered contaminants on the site of the Belmont Learning Complex downtown. Experts have estimated that such damage could cost the district up to $50 million to fix.