#130 Jul/Aug 2003

City Soil

Think of the typical small derelict vacant urban site. Chances are it is located in a middle- to low-income community where housing needs are great, and the site’s history includes […]

Think of the typical small derelict vacant urban site. Chances are it is located in a middle- to low-income community where housing needs are great, and the site’s history includes factory or manufacturing use. It is also a good bet that the site is located in a neighborhood where residential and industrial uses are both permitted and that the site’s condition is a haven for trash and poses potential health risks to nearby residents. These are all the qualities of a classic urban “brownfield”— shorthand for a property that is underused because of actual or perceived environmental problems.

These same qualities, however, also suggest that the site might be the right location to build affordable residences. Such residences could remove the blight of the derelict property while providing much-needed housing. Its compact lot size would also encourage buildings that architecturally complement the existing neighborhood and streetscape rather than overwhelm it. The potential synergies between brownfield reuse and affordable housing are therefore already in place. To date, the main obstacle has been the fear of cleanup costs and liability. Under certain state and federal environmental laws, an owner of contaminated property can be responsible for cleanup costs even if the owner did not cause the contamination. This fear has often driven affordable housing builders to bypass brownfields in their site selection process.

Although the laws that impose environmental liability have not gone away, the situation has changed in recent years. There are now regulatory tools, financing sources, insurance products and other strategies that can greatly reduce the uncertainties and costs involved in redeveloping brownfields for residential use. Affordable housing builders need no longer consider brownfield sites off-limits, as two recent success stories in California and Minnesota demonstrate.

Oakland’s Stanley Avenue

East Oakland, CA, a largely African-American and Latino community, is struggling with rising housing costs and the decline of local retail stores and factories that formerly provided jobs for many residents. The community is working to overcome these challenges, but it has not been easy.

The property at 6006 International Boulevard presented a particular challenge. Chevron and its predecessor, Standard Oil Company, had used the parcel as a gas station until the early 1960s, after which it became an occasional parking lot for buses. By 2001, the site was a patchwork of cracked pavement, dirt and weeds, lined with a chain-link and barbed wire fence. The original gas station building sat boarded up and unused in a corner of the yard.

Resources for Community Development (RCD), a nonprofit housing developer based in Berkeley, had built several affordable housing residences around the corner from 6006 International Boulevard in the late 1990s. At the time RCD secured an option to purchase the nearby former gas station site and began working with the East Oakland Community Development Corporation (EOCDC) on what became known as the Stanley Avenue Apartments.

Given the great housing needs in East Oakland and the effect of the blighted site on the surrounding neighborhood, RCD and EOCDC were able to secure broad support for the Stanley Avenue Apartments. The Supportive Housing Program of the Department of Housing and Urban Development (HUD), the Multifamily Housing Program of the State of California’s Housing and Community Development Department, Oakland’s HOME program, and Wells Fargo Bank all stepped forward with financing assistance.

RCD and EOCDC were aware that the property’s previous use as a gas station might have resulted in contamination, which, if confirmed, could put their financing at risk if there were significant cleanup costs or construction delays. Nonetheless, RCD and EOCDC continued to move forward with their plans. Several months prior to the date when RCD needed to exercise its purchase option, it hired a consultant to conduct an environmental site assessment. Unfortunately, the assessment confirmed petroleum contamination in the soil.

At that point, RCD and EOCDC could have chosen to walk away from 6006 International Boulevard. Instead, RCD retained an environmental attorney to approach Chevron about cleaning up the site. RCD’s legal counsel provided Chevron with the environmental reports confirming the soil contamination, advised Chevron that this contamination constituted a trespass under state law and outlined how this contamination would interfere with RCD’s plans for the site.

There was little dispute as to whether Chevron’s operations had caused the contamination; the subsurface petroleum was discovered directly beneath where the gas station’s storage tanks, lines and dispensing pumps had been located. Rather, the dispute that arose concerned three issues:
Was some of the soil sufficiently contaminated to require excavation and removal from the site? Were some of the excavation costs for which RCD sought reimbursement related to project construction or subsurface environmental conditions? Was RCD entitled to reimbursement for the initial investigations of the soil? Chevron recognized that the longer it took to resolve the dispute and get the site in a condition so that construction could begin, the greater the likelihood that RCD would begin to incur delay-related damages for which Chevron might ultimately be held liable. These dynamics created a good climate for compromise.

Although the prospect of litigation was present during the settlement discussions between RCD and Chevron, in the end RCD and EOCDC avoided a lawsuit by being clear about what they wanted. Under state law, RCD could have sought damages from Chevron for diminution in property value and for incremental construction-related costs resulting from the environmental conditions. But the more pressing concern was to ensure a quick cleanup to protect project financing and avoid construction delays. RCD’s strategic decision to make a more limited demand resulted in a settlement agreement that was negotiated relatively quickly and with modest legal expenses.

The settlement called for Chevron to assume direct responsibility for overseeing a cleanup that would keep construction on schedule and reimburse RCD for the cost of its initial subsurface assessments and soil removal. Chevron also paid for the additional excavation, transport and disposal costs resulting from the contamination. This turned out to be the most expeditious and cost-efficient solution for both parties because of Chevron’s extensive experience with cleaning up gas station sites.

With the settlement agreement in place, RCD exercised its option to purchase 6006 International Boulevard. On May 1, 2003, RCD and EOCDC hosted the opening of the Stanley Avenue Apartments. What was once a contaminated vacant site with a dilapidated gas station building is now an architecturally stunning complex of 24 multifamily residences, a community room, a computer lab, a shared courtyard and a children’s playground. All of the housing units will be affordable to families at 45 percent of the area median income (AMI) or less, with half of the units affordable to families at 40 percent of AMI or less. According to RCD, there were more than 1,600 applications for these 24 residential units.

Minneapolis’ Stevens Avenue

The Whittier neighborhood of South Minneapolis is not one of the city’s more affluent areas. The neighborhood has a population of approximately 15,000 and its median income is far below the average for the cities of Minneapolis and St. Paul.

Twin Cities Habitat for Humanity located several sites that seemed like good candidates for affordable family homes. There was concern, however, because these sites either had previous historical industrial uses or because of documented subsurface contamination on properties nearby. One of the promising yet potentially troublesome affordable housing sites identified by Twin Cities Habitat was located on Stevens Avenue in the Whittier neighborhood, only a few blocks from local grocery stores, the Minneapolis Institute of Art and the recently completed Midtown Greenway bike path.

Twin Cities Habitat had experience with the financing and construction of affordable homes, but it was unfamiliar with environmental cleanup and liability. For years Twin Cities Habitat simply declined to pursue properties that presented environmental challenges. But when its board urged a dramatic increase in the rate of housing production in the late 1990s, Twin Cities Habitat decided to partner with the Twin Cities Metropolitan Council and another nonprofit group, the Minnesota Environmental Initiative (MEI). The Twin Cities Metropolitan Council applied for and was awarded a grant from the Brownfield Pilot Program of the United States Environmental Protection Agency (EPA) to work with MEI to investigate and, if necessary, remediate sites identified by Twin Cities Habitat.

Since 1995, the Twin Cities Metropolitan Council Brownfield Pilot has received $300,000 from the EPA, and the Twin Cities Metropolitan Council, Twin Cities Habitat and MEI have leveraged this EPA funding to attract more than $400,000 in additional funds for their homebuilding projects, including in-kind contributions of environmental assessment work from a local consulting firm, Braun Intertec. By the end of 2002, the Twin Cities Metropolitan Council Brownfield Pilot had completed the environmental assessment of eight properties where there were contamination concerns, and had begun or completed construction of 26 new affordable homes. One of these new homes is located on the Stevens Avenue site.

As it turned out, several of the sites assessed by the Twin Cities Metropolitan Council Brownfield Pilot (including the Stevens Avenue property) had little or no subsurface environmental contamination. The results of the site investigations were good news for Twin Cities Habitat because they meant that construction of the new homes could proceed without expensive remediation. These results, however, also drive home another troubling point. Many urban brownfields are being overlooked as potential housing sites not because of actual contamination but because of the fear of potential contamination. Yet, this potential contamination is something that can usually be identified or ruled out through proper assessment.

“Knowledge is power in such situations,” says Michael Welch, MEI’s brownfield program director and contact for the Twin Cities Habitat partnership. “The investigations we’ve conducted give Twin Cities Habitat confidence that it can proceed with redevelopment without exposing staff, volunteers or, eventually, the homeowners to residual environmental hazards. Nonprofits never have extra money to solve problems, but they are very good at using collective knowledge effectively. The caveat here is that the extra knowledge does take extra time, so nonprofits have to build that into any brownfield purchase they pursue.”

Brownfield Reuse Resources

The range of potential brownfield reuse resources and strategies available to affordable housing builders is even broader than the stories of Stanley and Stevens Avenues suggest.

Statewide government programs and private organizations with funds and expertise now exist to help with brownfield reuse. For instance, in early 2003, California launched a new program administered by the nonprofit California Center for Land Recycling (CCLR) based in San Francisco and the for-profit California Environmental Redevelopment Fund (CERF) based in Sacramento. This new program, known as California Recycle Underutilized Sites (Cal ReUSE) provides low-interest forgivable loans of up to $125,000 for brownfield site assessment and remediation. If a site is found to be severely contaminated, requiring expensive remediation beyond what the builder can afford, CCLR and CERF can forgive the Cal ReUSE loan. Under the Cal ReUSE program, priority will be given to projects located in distressed neighborhoods with demonstrated community support – the very same neighborhoods that are often ideally suited for small-scale affordable housing.

In addition to government programs such as Cal ReUse and the EPA’s Brownfield Pilot Program, there is an increasing array of other options available to facilitate brownfield reuse. Three warrant particular attention.

First, there are creative ways to contractually allocate the liability between buyers and sellers of brownfields. In the past, the allocation was often all-or-nothing: either the buyer or seller assumed full responsibility for the site’s environmental condition. Today, purchase agreements frequently use a more nuanced approach. For instance, a purchase agreement could hold the seller responsible for securing a closure letter (which indicates that no further remediation is presently required) from the agency with environmental oversight, but could also provide that the seller is released from all future environmental liability once the closure letter is issued. Or a purchase agreement could provide that the seller will agree to indemnify the buyer up to a specified amount for cleanup costs, but that the buyer releases the seller from any environmental liability beyond that specified amount. These types of contract provisions enable parties to share the environmental risks and avoid the type of all-or-nothing liability consequences that can often kill a proposed brownfield deal.

Second, many environmental agencies will now enter into preacquisition agreements with potential buyers of brownfields. These agreements, usually known as Prospective Purchaser Agreements (PPAs), specify upfront the cleanup that will be required to obtain a closure letter at a particular site. The advantage of a PPA is that it helps the potential buyer to better establish on the front end the costs that are likely to result from a site’s environmental condition. In general, an environmental agency will not enter into a PPA unless a comprehensive subsurface assessment and proposed remedial plan have been prepared. Because the preparation of this assessment and plan can sometimes be expensive, the PPA approach may not be economically feasible for some sites. Nonetheless, it is an option that potential brownfield purchasers can consider and explore.

Third, in recent years new environmental insurance products have come on the market. One of these new products is the Pollution Legal Liability (PLL) policy, which covers remediation costs in the event that a cleanup is ordered during the policy period. Although PLL policy premiums and deductibles can be high, sometimes the buyer and the seller of a brownfield can agree to split the costs and have both parties named as co-insureds. This arrangement makes the cost more manageable and provides a level of certainty and protection to everyone involved. Purchasing a PLL policy can also help to secure acquisition financing from sources that might otherwise be wary of brownfield sites.

There is no one-size-fits-all strategy for redeveloping brownfields as affordable housing. The strategy is dictated by environmental site conditions, the type of housing proposed and the resources of the parties involved. The point is that there are options available for affordable housing builders to control environmental costs and risks.

From a public policy perspective, residential reuse of brownfields is often the best reuse. Most environmental agencies allow less comprehensive, risk-based cleanups for sites that will be used for retail or industrial use – if the owner agrees to record a deed restriction prohibiting residential use in the future. Although this approach enables the owner to avoid certain cleanup costs, it may not be in the best interest of the environment or the community. In the long run, there is a greater potential for contamination to make its way either up to the surface or down to the groundwater.

From a community standpoint, the problem with such deed restrictions is that the most economically and socially appropriate use of a particular piece of land often changes over time. A brownfield’s highest and best use today may be a factory or warehouse; in a decade or two it may be housing. Zoning laws can evolve to accommodate these changing needs, but a recorded deed prohibiting residential use is much harder to undo. By exchanging recorded land-use restrictions for cheaper cleanups, communities are trading away their future land-use options.

For all of these reasons – and with the resources now available to manage environmental costs and risks – affordable housing builders should not shy away from urban brownfields but should focus on the synergies and opportunities these sites present.


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