Redevelopment
Evaluating Brownfield Properties
Here’s what to look for when tackling this redevelopment niche.
By Steve Collins, CCIM |
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.