Brownfield Funding: For all or just some redevelopment projects?

The Grand Traverse region is a rare natural beauty – scenic splendor relatively isolated from “the Big City.” When gazing out over Grand Traverse Bay, it can be easy to forget the area’s industrial roots. However, manufacturing, agriculture, and logging have left their mark. In many cases, their legacy is invisible – hidden in the soil and water.

Policy makers have created regulations to identify and remediate contaminated sites, often referred to as “brownfields.” Underlying the regulatory scheme is the intent to hold responsible parties liable for cleanup costs. Consequently, every purchaser of commercial property should be well apprised of how those laws work.

As added incentive to “know the regulations” (or know someone who does!), grants and loans are available to developers willing to take on brownfield projects. Projects such as the River’s Edge development in downtown Traverse City and the Village at Grand Traverse Commons benefited from brownfield funding. The result: a decontaminated environment, increased property values and the beautification of abandoned properties.

However, there is controversy regarding how funding should be used. As with any public subsidy, there is potential for abuse. Some want to limit the scope of brownfield funding to large projects that create a sweeping economic impact, and prohibit money from flowing into smaller projects meant to only increase property values and beautify the land. Awareness of this emerging concern is important to the developer.

To protect oneself from environmental liability, “all appropriate inquiry” must be completed before purchasing property. This process begins with a Phase I Environment Site Assessment (ESA). A Phase I ESA does not involve in-depth soil and water sampling. Most of the work consists of reviewing historical data to see if hazardous substances have been used on or near the site. If the Phase I ESA reveals such potential, the process continues with a Phase II ESA, where physical samples are collected and analyzed to determine whether hazardous substances are actually present.

If a potential purchaser successfully completes “all appropriate inquiry” without discovering a significant pollution problem, the buyer is off the hook for any subsequently discovered contamination. If, on the other hand, unacceptable levels of hazardous substances are found, the developer must evaluate the costs and benefits of undertaking a cleanup.

The Grand Traverse County Brownfield Redevelopment Authority (BRA) provides funding and incentives to developers who are willing to take on the task, the primary method being “tax increment financing” (TIF). Developed land free from pollution is more valuable, and therefore taxed at a higher rate, than the existing brownfield. The BRA captures the increased tax revenue and returns the costs of cleanup to the developer over time.

For instance, the former Traverse City Iron Works site, now the River’s Edge development, was once rife with pollution. In 1999, the taxable land value of the property was about $300,000. After extensive cleanup and development, the taxable value topped $19 million, an increase in the tax base of more than 6,178 percent. As the higher taxes were paid, the county used the new revenue to reimburse the developer for cleanup costs.

The Copper Ridge development on the west side of Traverse City is a similar success story, resulting in reclamation of contaminated land and increasing property value by $22 million. TIF has been so successful that excess tax revenue has been used to create the Local Site Remediation Revolving Fund, a source for upfront financing. The Revolving Fund provided $46,000 to pay for environmental studies to determine the extent of contamination on the former Boot Lake Dump in Garfield Township.

In all, brownfield redevelopment has brought almost $250 million dollars in private investment to the area, with more anticipated. Tax revenue in excess of $75 million has been generated. By any measure, the process of brownfield reclamation in Traverse City has been a great success. However, the BRA does not greenlight every proposal, recently rejecting a proposal that involved the demolition of three old houses contaminated with lead paint and coal dust. Underlying the denial was the question: should funding be available for smaller projects that only cleanse and beautify the community, or should it be reserved for large-scale commercial and industrial projects that will make an immediate and large economic impact? An important question, and one that demands ethical management of the BRA.

Preserving the environment is a critical task, both to those of us who are living now and for the generations to come. Regulations designed to help our communities be responsible stewards of the environment can be effective, but they can also be costly to those who ignore them. If you or your company is planning on entering into a transaction involving real property, a modest investment in addressing the environmental implications can ultimately reap significant rewards for both you and the community at large. Whether the BRA will approve funding for smaller projects remains to be seen.

Daniel J. Dingeman is an attorney at Dingeman & Dancer in Traverse City who has been working with real estate developers, large and small, in northern Michigan for 30 years.