Hitting Pay Dirt : Spurred by More Lenient Policies, Developers Are Buying Blighted Sites and Turning Them Into Profitable Real Estate

Wanted: a few good contaminated industrial sites.

That message is seeping through the country’s large real estate offices as developers scramble to snap up tainted land once occupied by such polluters as gas stations, dry cleaners, factories and industrial parks.

Some sites have been vacant for decades but they’re now being viewed as lucrative development opportunities because of new state and federal regulations making it easier to clean up and develop properties saturated with chemicals and other pollutants.

Several Southern California companies figure to become major players in transforming these “brownfields” into working real estate. Newport Beach-based Koll Investment Management, for example, has teamed up with a Massachusetts environmental engineering firm to buy up toxic properties stretching from Southern California to New Jersey. The companies hope eventually to hold a portfolio worth $1 billion, and just recently closed a deal to buy a Seattle-area industrial park that was contaminated by underground petrochemical tanks. Directors of the venture said they are currently negotiating for property in Northern California and the Los Angeles area, but would not disclose the specific sites.

“We have our sights set very high,” said Nicholas Patin, managing director of Koll Investment and an executive of the joint venture with ENSR Consulting and Engineering of Acton, Mass. “We are positioning to be the dominant player in this industry.”

Dames & Moore Inc., an environmental consulting firm based in Los Angeles, has a similar venture going with the Brookhill Group, a New York-based developer.

The opportunities appear to be ample. Developers and government officials estimate there are as many as 500,000 “environmentally challenged” sites throughout the United States, many near freeways and in other prime urban locations.

Collectively, they are worth $500 billion to $750 billion even in their abandoned state--a fraction of what they could be worth after being cleaned up and transformed into retail or commercial centers, according to government reports. In California, at least 5,000 of these sites have been identified so far.

The Clinton administration opened the gates for this new land rush in January 1995 when it unveiled a new policy, called the Brownfields Initiative, in response to state and municipal complaints about the blight caused by these vacant properties. The asbestos-ridden, chemically saturated sites once occupied by gas stations and factories had sat fallow for years, caught up in legal wrangling over who was responsible for the contamination and who has to clean it up.

Developers say this initiative, as well as more lenient state standards, provide the private sector with two key incentives:

* They limit the legal exposure of investors who develop sites filled with hazardous wastes. Developers as well as lenders generally won’t be held responsible for pollutants left by a previous owner.

* They ease rules that have required developers to clean up contaminated sites to much higher residential standards, even when they were not intended for residential use.

When homes go up, regulators assume that children and adults will be digging in the dirt and could come into contact with contaminants and toxins in the soil and water 24 hours a day, 365 days a year. So they have insisted that contaminants be completely removed, no matter how deeply they may be buried.

The new standards don’t require such a thorough cleanup, recognizing that workers and shoppers at a commercial center are less likely to be exposed to contaminants left deep in the soil.

“The problem with cleaning these dirty sites was, up until a couple of years ago, you had to deal with the EPA [Environmental Protection Agency] and state agencies in a rigid, authoritarian manner,” said Alan Krusi, a geologist and president of Dames & Moore Ventures.

The agencies would balk over “ridiculously low” levels of contamination, even at sites targeted for industrial development, he said.

“They would expect us to clean up [soil and water] to drinking level, which was a killer because it would cost so much money to attain those levels,” Krusi said. “Companies said, ‘This is ridiculous. . . . Why are you making me clean up the sites to these levels?’ ”

Supporters see numerous benefits to the more flexible policies. If developers clean up these sites and fill them with shopping centers, office buildings or industrial complexes, property values and tax revenue will go up, and more jobs will be created. The effort also draws praise from those who believe it is better to reclaim existing industrial land rather than pave over farmland or other undeveloped land.

A few years ago, the site of the 75-acre Carson Towne Center next to the San Diego Freeway was just an eyesore, a vacant parcel abandoned by an oil refinery that was going out of business.

In stepped the state’s EPA, which hammered out an agreement calling for the owners of the old Golden Eagle Refinery to remove lead, petroleum hydrocarbons and solvents left on the site. Cal-EPA also said it would not take any legal action against the developer, Torrance-based Mar Ventures Inc. The agreement includes a standard clause saying the land can’t be converted to residential use in the future without a full cleanup.

Soil remediation started two years ago at the site, and engineers will be removing tainted ground water for another five to seven years, said Thomas M. Cota, a hazardous substances scientist with Cal-EPA, which is supervising the cleanup. But the development is on its way.

A Kmart store already has opened on the 40-acre shopping area of the new Carson Towne Center, which will eventually be a 500,000-square-foot, open-air mall. An additional 35 acres of the old refinery will house office buildings and industrial parks. The project is expected to generate about 2,000 jobs and contribute $12 million annually to the city’s tax base.

Of course, developers also hope to profit from revitalizing acres of abandoned blighted land.

Spurred by the more lenient policies, the Dames & Moore/Brookhill venture has transformed a shopping center in Huntsville, Ala., from a site filled with asbestos and leaky oil tanks into a profitable operation generating an income of $1.34 million a year for the developers.

And the Koll venture is hoping to achieve returns of 20% to 40% on its brownfield investments, said William Trefethen, a senior vice president of the Newport Beach concern, one of the nation’s largest real estate investment advisors.

The new movement does have its critics and skeptics. Whereas environmental groups are anxious to see contaminated sites cleaned up, many question the government decision to encourage the private sector to get involved.

“It was the free market that got us here,” said Carlos Porras, Southern California director of Communities for a Better Environment. “I think we have enough examples of flawed thinking among the agencies created to protect our public health.”

These brownfield projects still pose financial risks, however, developers say. For one thing, there’s no guarantee that property values will increase enough or generate enough revenue to offset cleanup costs.

These costs also are difficult to nail down. Engineers can estimate cleanup costs at $1 million, for example, only to discover some hidden plume of contamination that will cost millions of dollars more to remove while delaying development for years.