Generating Cash Flow Now: Interim and Ancillary Uses for Brownfield Development Projects

The ideal real estate scenario for any property acquired for redevelopment is to begin that development as soon as possible after acquisition. The longer it takes to deliver product, the greater the market and interest rate risk, which may lead to lower returns.

Unfortunately, on a brownfield site, immediate site redevelopment may not always be possible. In addition to typical real estate considerations such as entitlements, rezoning and plan approvals, when developing a brownfield site you also must take into consideration the environmental conditions and the remediation required to allow development to proceed. In some cases, redevelopment cannot begin for months or years while the property is being cleaned up to an acceptable re-use standard. This is particularly true on large properties with multiple or complicated remediation efforts.

Finding interim uses for brownfield properties can generate cash flow and help cover the carrying costs on the property between the time of acquisition and redevelopment. In addition to interim cash flow, ancillary uses — alternative, long-term usage of a portion of the property — can bridge a financial gap in the deal, and make the remediation and redevelopment of a brownfield site economically viable.

Considerations

There are many different ways in which a brownfield property can be utilized prior to redevelopment. Some interim uses require only that access to the property be granted for a limited period of time for a specific activity, for example as a location for a movie or photography shoot. Other interim uses can involve a short term, or month-to-month, lease of the property.

Ancillary uses can be of varying duration, and can include long-term leases, easements or conservation sales. If an easement or long-term lease that would extend into the period of redevelopment is contemplated, the nature of the activity must be compatible with the planned end use of the property. For instance, a long-term lease for alternative energy generation may not be an appropriate ancillary use for a retail or residential redevelopment plan.

For a long-term lease, the location of the activity on the site also must conform to the development site plan and cannot interfere with future site operations. This is particularly critical if the ancillary use requires the siting of any structures or buildings or provides for a “no-build” easement, such as over a gas transmission line.

Before you enter into a lease, consider that when you are ready to sell the site, ongoing contracts for the use of the land may present a problem for prospective buyers.
A key factor in allowing a third party to access, lease or otherwise use a brownfield site, no matter the duration of the use, is the environmental condition of the property. Care must be taken to ensure that users of the site are not exposed to environmental contaminants in excess of acceptable risk levels.

Proper notification of the presence of any hazardous substances or conditions should be given to any site users, and releases obtained whenever possible. Furthermore, the interim use should not exacerbate any environmental condition or interfere with any on-going remedial activities.

If environmental insurance has been placed on the property, the insurer should be notified in advance of the interim use planned for the site so that coverage is not inadvertently voided. Most environmental insurance policies have an Intended Use Endorsement, and any uses other than those scheduled on the endorsement may nullify some or all of the coverage.

And finally, an owner should consult an attorney prior to entering into any access agreement, lease or other contract for a third party’s use of the site, no matter the nature or duration of that use.

Examples of Interim Uses

• Advertising signage and billboards: This can be a short- or longer-term use, and is particularly viable on properties with freeway frontage or in other attractive, visible locations.
• Parking: This can include bus or other fleet parking, overflow vehicle storage for car dealerships, or municipal or public works yards.
• Construction yards: Lay-down or equipment storage yards for municipal, public works or private users. Maintenance activities, when allowed, should be limited and carefully monitored so as not to create new environmental conditions.
• Locations for photo shoots or filming: Brownfield properties, particularly vacant or decommissioned post-industrial properties, can be interesting sites for filming or photography shoots. This can include filming of advertisements or movies for television or film, music videos, or photography shoots for print media. For instance, approximately 88 movies, including portions of “Independence Day,” “Mortal Combat” and “The Terminator,” were filmed at the former Kaiser Steel Mill site, and multiple episodes of “The Power Rangers” and “CSI” were filmed at another Southern California brownfield.
• Leasing of existing buildings: While brownfield properties are almost always underutilized, at times there is some use taking place. In these cases, a tenant may elect to continue on a month-to-month lease, or other tenants may be found for below-market-rate short-term leases.
• Public service: Vacant industrial buildings can be ideal training grounds for local firefighters, police or emergency responders. For instance, Cherokee Investment Partners has made portions of the former Gates Rubber facility in Denver available to the Denver Police Department to use in training exercises for hostage scenarios and canine search and rescue. Military and police training also take place at the Kaiser Eagle Mountain Mine in Desert Center. While generally not being a source of cash flow, such uses can provide a valuable community service and represent a beneficial public use of the property pre-development.
• Agricultural uses: In general, environmental conditions often preclude agricultural interim uses. However, in one of the more unique interim uses of a brownfield property, one site in southern California was leased to a beekeeper for several years while entitlements were obtained. In addition to a modest lease income, the owner of the property received a generous supply of honey during the term of the lease.

Examples of Ancillary Uses

• Siting of cell towers: Location of the towers must be considered carefully so as not to interfere with future site development or operations.
• Alternative energy uses: These can include Brightfields (solar panels), wind farms, methane gas generation, etc. Because of the capital expense involved in establishing alternative energy sources and connecting them to the power grid, this could be considered a redevelopment option for the site as a whole. This can be a particularly good option for rural brownfield properties in locations where weather conditions are favorable. Brightfields and wind farms can be a beneficial and profitable reuse plan for those properties that do not have the real estate value to support remediation, or in locations without a market demand for redevelopment.
• Environmental or conservation easements: Depending on the resources on the property, sale of wetlands credits or conservation easements may be an option for generating cash flow.

  ——–
  Mary Hashem is a principal at Brownfield Partners in Denver, Colo.

  This article has been reprinted courtesy of Brownfield News. It first appeared in the February 2005 issue of that publication.