It is impossible to present a universal brownfield redevelopment formula because every brownfield site is unique. As in all real estate transactions, location matters. Many brownfields will never be redeveloped because their location is economically distressed or rural. The redevelopment upside in these markets is simply too thin to justify the cleanup costs.

Real estate investment generally is most profitable in growing markets and brownfields are no exception. But this does not mean attractive brownfields must be in suburbs to redevelop. Infill development is ongoing in many cities, including Atlanta, Chicago, and Miami. The key question is whether the brownfield site is ready for or already undergoing revival.

Accurately anticipating all brownfield costs is the second greatest challenge and risk. Brownfield costs include acquisition, environmental cleanup and demolition, legal and engineering costs, annual costs for taxes, utilities and interest, marketing costs, and sale or leasing commissions.

But the most frequently overlooked brownfield cost is the time value of money, because brownfield redevelopment takes so much longer than Greenfield development. It is quite risky to frontload too many brownfield costs because a three-year cleanup and $500,000 budget can easily become a five-year cleanup with a $750,000 cost.

Other brownfield redevelopment issues to consider include the following.

Project size. Regardless of size, all brownfield redevelopments require considerable time, money, and energy. Brokers should therefore reflect on how much grief they wish to experience for a small project. At times, brownfield projects can make brokers feel like charity workers.

Reuse potential. Many brownfield buildings are functionally obsolete. Redevelopment of the building may not make sense. If local officials feel an old building must be saved, it may be wise to let them save it.

Redevelopment potential. When considering brownfield projects involving demolition and land redevelopment, be sure to compare the brownfield to nearby Greenfield sites. In the final analysis, banks and developers often will find a Greenfield site less risky and thus more attractive.

Market dynamics. Consider whether the market is expanding. Are new jobs being created? Is real estate changing hands?

Economic feasibility. Banks generally avoid financing brownfield projects because of the risks described above. Brownfield developers therefore must use cash or borrow at higher rates from hard-money lenders. As a result, a brownfield project must offer an above-average profit to give investors the cash-on-cash return they require and deserve for taking the risk on a brownfield redevelopment.

Public funds. Brownfield grants and loans, while sometimes helpful, will complicate and slow the redevelopment. Carefully evaluate whether the funds received justify the additional time and costs they will require.

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Steve Collins, CCIM, is executive vice president of Environmental Liability (Transfer in St. Louis, a division of Commercial Development Co. that has purchased more than 30 million square feet of brownfield properties in 30 states. Contact him at (314) 835-1515 Ext. 107 or scollins@eltransfer.com.

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