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By Jared Shelly

After 63 years, the smokestacks, brick buildings and vast warehouses of the Ecusta paper mill fell quiet. What used to be a thriving business that not only employed thousands in Bravard, N.C., but also fed workers in its cafeteria, provided healthcare at its on-site hospital, supplied energy with its power plant and even offered employees free music lessons, closed its doors in 2002.

Standing in the way of old Bravard and new Bravard was the 550-acre paper mill property. When Renova Partners bought the site in 2008, it may have been enticing for the Wellesley, Mass.-based developer to simply bulldoze the factory, lay down some concrete or asphalt and build on top of it.

But the Ecusta site was considered a brownfield. It had environmental risks that had to be remediated properly to ensure contaminants didn't escape into the atmosphere or leak into groundwater. Experts had to make sure there were no lingering risks for the residents or tourists Bravard hoped to draw. Only after successful remediation would the site be ready for construction.

Brownfields can have any number of environmental issues. Their severity or complexity depends on how the site was used in the past. A factory may have gas or fuel lines that need to be removed and the soil they were nestled in cleaned up. A warehouse may have previously stored harmful contaminants, and the soil underneath the former warehouse could be toxic.

Cleaning these sites poses specific risks, but developing a brownfield can also be very profitable. Land classified as a brownfield is often bought cheaply with the help of government subsidies through the Environmental Protection Agency's Brownfields Program.

The EPA estimates that there has been $14 billion invested in Brownfield cleanup and redevelopment since the Brownfields Program began 16 years ago, creating almost 61,000 jobs. The low prices of the current real estate market and the availability of tax credits means that nationally, brownfield redevelopment is still a very attractive proposition, according to experts.

At the former Ecusta plant, there were plenty of environmental risks. Sludge from the paper-making process, as well as coal from the power plant, was buried in landfills on the site.

Mercury tainted the soil, said Pete Pederson, managing principle and founder of Renova Partners LLC, a Wellesley, Mass.-based brownfield redevelopment company.

To make matters worse, the mercury was migrating toward the Davidson River, forcing Renova to remove soil by the truckload, he said. After that, Renova placed horizontal barriers beneath the ground to keep the soil from shifting, and capped the affected areas to ensure there was no mercury exposure to people on the surface.

Since the remediation, the site has been rezoned for 1 million square feet of commercial space, up to 1,000 housing units and a 250,000-square-foot resort, Pederson said. All the site needs now is a builder.

Insured by XL Insurance in Exton, Pa., the cleanup called for pollution legal liability coverage, which protects against one of the biggest problems in brownfield development -- surprises.

And there are plenty in the redevelopment of a brownfield site. Let's say cleanup on a project is completed but a contaminant had worked its way to a neighboring site and making people sick or lowering property values. The property damage, the health effects on residents, the clean-up costs, and the legal costs are covered under a typical pollution legal liability policy.

XL also provided remediation cost cap coverage on the project to protect against cost overruns from known risks. What if there was double the amount of mercury beneath the ground than the developer originally thought? Cost cap coverage would cover that risk.

As it turned out, remediation went smoothly for Renova and the company didn't make any claims on the Ecusta project, Pederson said. Or at least hasn't to date.

Another common coverage on brownfields projects is contractor pollution liability, which protects the owner of the land from any environmental damage or pollution conditions resulting from a contractor's actions.

Before any project gets started, the insurance company, contractors and developers send engineers to assess the project, figure out how the site was previously used and test for contaminants, said Kerry Simon, senior vice president of the environmental division at Chartis.

Parties to the redevelopment project want to be prepared. "Are we comfortable that when the developer starts to dig at a site, they are not going to find additional contamination?" Simon said. "That is the hardest part of underwriting these development deals from the carrier side. However, with the right information and comprehensive due diligence prior to the start of the project we usually can find a happy medium between us and the insured and move forward with a deal."

Some of the hottest areas for redevelopment are Washington, D.C., Boston and Southern California, Simon said.

"The smaller cities is where I have seen a trend in the market," Simon said. "It seems that is where people are moving, too. Also, development in bigger cities is sometimes more difficult because the bigger cities are already congested and developed."

With population growth in those smaller markets, there's more need for stores, restaurants and other amenities, and converting environmentally challenged sites can be a profitable way to develop those sorts of properties.

Potential sites were certainly more plentiful after the EPA's Brownfield Program began in 1995 and the federal Brownfield Tax Incentive, started in 1997, allowed environmental clean-up costs to be fully tax deductible.

But today's Brownfield development market is also active, said Bob Hallenbeck, senior vice president at XL Insurance in Philadelphia. "It's not a market that is in any way slacking or losing demand," he said.

That's especially true in cities that are trying to recover from the automotive industry crash, like Lansing, and Flint, in Michigan, and Detroit, the Motor City, said Bill Hazelton, executive vice president of Ace Environmental Risk.

The state of Michigan offered tax credits for redevelopment until budgetary concerns caused it to stop the program in June. But the Michigan Economic Development Corp. and its $100 million budget may pick up the pieces, according to news reports.

Today's soft real estate market is certainly enticing developers toward brownfields around the country, but the credit crunch is making it harder for developers to gain control of brownfield sites, Hazelton said.

"There are still a number of opportunities, sites, redevelopers and folks willing to put the financial resources into play," he said, "but it's a more cumbersome process than it was four or five years ago."

The current economic and real estate climate is changing the development focus for brownfields. During the real-estate boom of 2002 to 2007, many sites were focusing on residential expansion. Since the market turned, the focus has changed to warehousing, logistics, hotels and casinos, or renewable energy projects, said John Beauchamp, underwriter and the head of Beazley's environmental team.

The Philadelphia waterfront, which recently developed the SugarHouse Casino, is a perfect example, he said.

Romanticized in Billy Joel's song Allentown, Bethlehem Steel was a manufacturing juggernaut. It made steel for the New York skyline, the Golden Gate Bridge and the U.S. Supreme Court building. But the American steel industry crumbled in the latter half of the 20th century and the plant closed in 2003, although a steel-forging facility remains.

More than 100 years of steel manufacturing can leave behind a lot of debris, but you wouldn't know it while taking a ride down 4th Street in Bethlehem. Factories and warehouses have been replaced with paved roads, lights, sidewalks and new business centers housing companies like United States Cold Storage and Cigar International.

Remediation on the 1,000-acre property, done by Bethlehem Steel then continued by Lehigh Valley Industrial Park Inc. which purchased the land in 2004, meant removing underground gasoline storage tanks, demolishing buildings and paving land to cap contaminant risks, said Kerry A. Wrobel, president of Lehigh Valley Industrial Park. The organization still conducts ongoing tests of the soil and groundwater to make sure the contamination levels there remain stable and within legal limits, he said.

Insurance on the project was structured to include cost overrun coverage for the expected remediation costs. The insurance program included a premises pollution-liability policy that provided coverage for clean-up costs arising from potential unknown conditions, said Jon W. Peeples, vice president of Ace Environmental Risk.

Now things are looking up at the site. There was a ribbon cutting for an office building in October and Wrobel expects more businesses to move in and join the 2,500 employees at 11 companies that currently call the former steel making center home. Those efforts are moving Bethlehem forward.

"Our mission is create jobs, expand the tax base and diversify the local economy," Wrobel said. "Every time we sell a parcel of land, there is a transfer tax and a portion goes to the city. They're getting a water user as well as property tax and payroll taxes."

And with that, a field of brown has turned into a field of green.

JARED SHELLY is senior editor/Web editor of Risk & Insurance®. He can be reached at riskletters@lrp.com.

December 1, 2011

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