New incentives shed light on Brownfields. (An Advertising Supplement to the Los Angeles Business Journal: Corporate Expansion & Relocation).

The current economic downturn has motivated many companies to look at ways to improve the bottom line by addressing non-core business assets. For some, those assets include real estate that has been abandoned or under-utilized as a result of environmental problems. With the shortage of developable land in Southern California, especially in urban areas, this could be the ideal time for companies to re-evaluate their real estate assets, clean up contamination, and either realize a healthy return by selling the site or put the property back to good use themselves.

This article will examine many of the incentives now available for Brownfield redevelopment in California including: (1) changes in regulatory attitudes and the environmental cleanup business that make remediation more efficient, more predictable and more affordable; (2) government loans, grants, and other direct public funding; and (3) tax breaks and other indirect Brownfield incentives.

Changes in regulatory attitudes and the environmental industryHistorically, environmental cleanup standards were established using generic health-based criteria with extremely conservative safety margins. Every site was subject to the same standards regardless of future land use plans, even where a contaminated site was likely to remain in industrial use. These "off-the-shelf" cleanup standards were based on the "worst case" assumption of unrestricted residential use.

Regulators compounded the problem by choosing to ignore considerations of technological feasibility and cost-effectiveness. More recently, however, environmental regulators have begun to accept (if not embrace) the concept of "risk-based" cleanup, where standards are set based on a site-specific study of the risks posed by the contaminants present, taking into consideration the planned use of the property, and often coupled with deed restrictions or other land use controls. This process often results in a faster, less expensive site cleanup.

In addition, many environmental cleanup contractors now offer "fixed fee" contracts for large remediation projects. Similarly, insurance carriers such as AIG and Zurich offer "cost cap" policies that protect against cleanup cost overruns, and "pollution liability" policies that protect against other environmental risks (property damage claims by neighboring property owners, etc.).

The combination of risk-based cleanup standards, innovative remediation contracts, and environmental insurance policies can quantify costs and minimize risks presented by the cleanup and redevelopment of contaminated properties.

Public Brownfield funding

Today, a number of federal programs provide grants and other direct public funding to facilitate Brownfield redevelopment, including EPA's Brownfields Economic Redevelopment Initiative, which provides Brownfield "pilot grants" of up to $200,000 to cities or other local public entities. Unfortunately, these EPA grants must be used for site investigations or other studies, and not for cleanup or land development costs.

The U.S. Department of Housing and Urban Development ("HUD") offers three direct funding assistance programs that can help finance Brownfield redevelopment:

The Community Development and Block Grant ("CDBG") Program provides cities with funding for a wide variety of municipal development projects. These funds may be used for environmental cleanups, as well as building rehabilitations, and other Brownfield-related costs. Furthermore. property owners or developers may apply for low-interest, short-term borrowing of a city's allocated CDBG funds to finance qualified development projects (that create local jobs, etc.).

The Section 108 Loan Guarantee Program allows cities to raise money to finance large public development projects by issuing debentures secured by their CDBG grants. Section 108 funds may be used for site cleanup, land acquisition, building rehabilitation or demolition, and a variety of other project-related activities.

The Empowerment Zone and Enterprise Communities Program offers millions of dollars in social service grants and other financial, regulatory and technical assistance to spur private investment and economic activity in targeted, economically depressed geographic areas. The City of Los Angeles has an empowerment zone that includes parts of Pacoima, Boyle Heights, Willowbrook, Fire-stone, the eastern half of downtown LA, South Central LA, the Slauson Corridor and Watts. Empowerment zone funds may be used for a broad range of Brownfield activities, including environmental cleanups and investigations, land acquisitions and building renovations. Among other things, tax-exempt facility bonds may provide businesses in these targeted areas with millions of dollars to finance construction of new facilities or expansion of existing ones, and machinery and equipment acquisition.

The most significant recent Brownfield development in California is the new loan program, enacted last year. The California Department of Toxic Substances ("DTSC") now offers direct, low-interest Brownfield loans under two separate programs:

The Investigating Site Contamination Program ("ISCP") offers loans of up to 5100,000 for site assessments. If redevelopment is determined to be economically infeasible, up to 75 percent of the ISCP loan may be forgiven.

The Cleanup Loans and Environmental Assistance to Neighborhoods ("CLEAN") Program offers loans of up to $2.5 million for a range of Brownfield costs, including site cleanup.

At the local level, cities may use tax increment financing ("TIF") to spur inner-city development. Municipal bonds are sold based upon the availability of increased property tax revenues to repay the bond obligations, and the funds raised through bond sales are used to help finance the redevelopment project. TIF proceeds may be used for a range of redevelopment activities including site preparation, streets, utilities and other infrastructure. Cities also may issue "general obligation" bonds to help finance virtually any project that provides a benefit to the city. Typically these bonds are used to fund land acquisition, infrastructure improvements and other activities that have a direct bearing on Brownfield redevelopment.

Indirect Brownfield incentives

As a result of recent changes in the Internal Revenue Code, environmental cleanup costs generally are now deductible in the year incurred. In addition, the Empowerment Zone program allows companies in these zones to take greater depreciation deductions on equipment in the year acquired.

At the local level, cities are often will grant significant tax incentives to lure developers into the urban core. They may grant a temporary sales tax exemption or property tax abatement to a business willing to relocate to a depressed urban area (particularly if the site was formerly contaminated).

Of course, there are other, more basic reasons for a corporation seeking to expand or relocate to consider a Brownfield site. For example, a former industrial site is likely to be zoned to allow the use contemplated by the corporation. Furthermore, such a site likely will have good rail or freeway access, and/or access to public transportation. Finally, such sites often have existing permits or entitlements, including but not limited to environmental permits, that make them more attractive than undeveloped space.

Brownfields can offer very attractive opportunities for corporate expansion or relocation because their redevelopment has become easier, more affordable and less risky. When used properly, the tools discussed above can turn a site that might otherwise remain moth-balled into a productive, valuable real estate asset, to the benefit of both the owner and the surrounding community.

Gregory Trimarche is a shareholder in the Los Angeles office of the international law firm of Greenberg Traurig, LLP, where he specializes in environmental law, with an emphasis on representing clients throughout the US in Brown field redevelopment.