Hi all, my firm is considering acquiring an industrial zoned site (currently occupied by an office). The plan is to rezone the site for townhomes. The site infill and surrounded by homes and other industrial buildings.
The site was a former small plane airport decades ago and so the soil may be contaminated by de-greasers and other contaminants. The levels tested showed they were below the limits for drinking water but some filtration pipes were installed to decontaminate the nearby well water before it enters the deeper ground water which serves the neighboring community.
The site could be worth a great deal more than the sale price if the rezoning is achieved. My main concern is that the presence of contaminants may be the reason why the seller does not pursue this themselves.
The seller has provided a basic environmental report which recommended further soil tests. We will be conducting further soil testing in DD but I'm suspicious the seller already knows what they will reveal and thus wants to sell instead of rezone themselves. Any other things to watch out for/questions to ask seller?
Appreciate your help. Thanks!
Why not negotiate the terms of the PSA so that closing is contingent upon good soil test results or that you can reduce the final sale price if testing indicates that expensive remediation is required. And make the PSA deposits refundable if you don't get the results you want.
Is this basic environmental report something generic or is it a Phase I ESA? If it has further recommendations for soil tests, it sounds like it could be the latter and that the guidance from that report is to initiate a Phase 2 ESA. If you aren't aware, a component of a legitimate Phase I ESA is an interview with the property owner that runs through previous uses of the property, history of contamination, presence of underground storage tanks, etc. -- presumably an honest property owner would disclose this.
A Phase 2 ESA will be particularly helpful. Additionally, when initiating a title search I'd ask to specifically include an Activity/Use Limitations and Environmental Liens search. "No Further Remediation" letters and the like on-title may come up from local and/or state agencies. I'd also check your state and the EPA brownfield databases to see if this property shows up. If the property does turn out to be contaminated in and around the area that you would like to develop, best of luck to you. I've found brownfield development to be immensely challenging, particularly when going from a use like industrial to residential.
Some unsolicited but relevant advice on the rezoning component: I like inquiring with the local zoning/planning staff as to if the property in question was ever considered for any sort of rezoning, development plan, annexation, conditional use, etc. Maybe the property owner tried and failed to rezone/develop the property for legitimate local political/economic reasons, and not due to any environmental issues.
Lots of great advice here. Another thing to look into is any state/local tax breaks/incentives for cleaning up old sites, it can help alleviate some of the costs. Brownfield development can be tough, but if it wasn't everyone would be doing it. Get some quotes for remediation and see if you can work it into your budget.
Well said.
And I should further clarify my earlier remarks to state that I agree with jarstar1; just because brownfield development is challenging, doesn’t mean every developer should walk away from it.
If you’re in a large enough area, like LA, chances are there is a Brownfield Redevelopment Authority (or the like) which may have grant dollars, loan guarantees, engineering and legal support, and so forth, that could make remediation economical and further de-risk the site. Many states have similar offices and resources.
Your ESA consultant should have good contacts with brownfield experts (if you don’t have them already). Getting a feel for how compromised the site is- or could be- from the experts seems like a wise measure.
Would love to understand a few things:
- why are you buying industrial land to have a zone change to townhomes in the first place? What market are you in btw? Typically, zone changes are just simply not worth the headache and especially if you build an apartment next to loading dock industrial: loud, no walking/green space, in CA/LA this triggers union labor with increased discretionary approvals, adding at least 20% to a projects costs and many more months of approvals.
- second, how is it possible that multi density for townhomes with a zone change is more lucrative than NNN industrial? Typically, townhome rents would be worth less than NNN industrial because it’s gross and industrial areas don’t necessarily command high multi rents, especially for townhomes psf…
- next, why would you buy contaminated land for multi uses in the first place? You’re already covering a lot of bases, but not tying this thing up with an option contract is already risky, and like the other poster said above, why wouldn’t closing of land be tied to mitigation?
with all of this being said: why wouldn’t your team just co-GP/land JV with an active multifamily developer and let them take the reigns on all of this hard core dev stuff? Doesn’t necessarily sound like your team is currently equipped to do this project, not to be to blunt about it ..
"no walking/green space, in CA/LA this triggers union labor with increased discretionary approvals"
How does the union labour aspect work? If a site goes to rezoning, the developer has to use union labour? But if its already zoned for the use, they can use non-union?
I've never heard of a city enforcing who you choose as the builder, but I'm not from USA.
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