Contaminated property: Worth redeveloping?

REGION – About 130 potential retail or office sites in the region have about every factor imaginable going for them but one: They have seepage from gas, oil or other contaminants from a leaky underground storage tank buried decades before.

Across the state, enterprising developers have been able to venture into these no-man's lands and use a decade-old state law to help turn these properties to better uses. But there is still a lively debate on how well the law works and whether these arduous redevelopments are worth the effort.

On the plus side, these sites, usually former gas stations, can be found all along some of the area's most highly-traveled arteries-thoroughfares like U.S. 131 and 31, Front Street, and South Airport and Garfield roads. Were it not for contaminants saturating the soil or pooling beneath the surface, some would have been snapped up years ago for development.

Still, many have fallen into disuse or are limping along with their old operations. Some have been cleaned up, perhaps by original owners or with the help of special state funds for clean-up or other remediation when the old owners have gone out of business.

Besides those sites in Antrim, Benzie, Grand Traverse, Kalkaska and Leelanau counties, there are about 9,000 across the rest of the state. Under its Environmental Response Act of 1994, Michigan has had a process designed to encourage the parcels' development by making the original owner responsible for clean-up of a contaminated parcel whenever possible.

It involves up to two inspection phases and, if some level of contamination is discovered, an additional step called a Baseline Environmental Assessment, or BEA. As its name implies, the BEA is designed to establish a baseline indicating what pollution was there at the time of the sale-and, as time goes on, what pollution might be deposited there later.

Theoretically, at least, buyers can protect themselves against being stuck with the clean-up bill for a mess they didn't create.

"I would say the project has worked pretty well, especially in converting old gas station sites to new uses," MDEQ brownfield redevelopment coordinator Ron Smedley said.

He also said he's seeing more gas station sites lately cleaned up and upgraded to new facilities combining gas stations and convenience stores. "Most of them are on major corners, and obviously 'location' is the first thing in real estate development.

"One problem with some old gas stations, even now, is that sometimes the parcels are too small to do any active redevelopment," he said. "So a lot of times, if a drugstore is going in, you not only have to buy the gas station, but the site adjacent to it."

The MDEQ organization is apparently proud of one Traverse City site in particular: It showscases the former Krouse Tire property at 310 W. Front Street near the Boardman River on its website as a successful example of a redevelopment. Traverse City businessman Michael Anton put up a four-story office building there, but not before the site went through a state-funded cleanup and some 30 cubic feet of contaminated material were removed during construction, according to the MDEQ.

According to Smedley, BEAs have been used effectively to promote the clean-up and redevelopment of about a third of the parcels statewide that the MDEQ has designated as contaminated from storage tanks leaks.

In principle, environmental consultants determine the "baseline": what contamination was done in the past and who was responsible for it. Similarly, it basically makes any new owner responsible for future pollution or worsening the situation that existed when he or she bought the parcel. The law was passed in 1994 to help take the responsibility for old contamination off of a new owner.

"The whole idea was to facilitate the transfer and reuse of these properties," said Michael Orden, a real estate broker with Real Estate One who has experience with gas station redevelopment.

"Why would I buy something for $100,000 and have a $1 million exposure? In a way, it's great, but, the way it has been done, it's also extremely difficult because unsophisticated buyers are afraid of getting a BEA done, because they have to go through the process of dealing with the state."

Much of the debate over the BEA focuses on the fact that the buyer of a contaminated property could still end up with major responsibilities.

In some cases, MDEQ officials may come back to have a buyer examine other aspects of the property and revise the baseline assessment. That could be an expensive, time-consuming process jeopardizing the time frame for a purchase agreement.

The buyer will also have to come up with a due-care plan to prevent any contamination from becoming a threat to the public or an adjacent property owner.

During construction, the excavation for the building's new basement, for example, could extend into soil saturated with old gasoline or fuel oil and start it off on a migration over the nearest property line, Orden said. "I may not be responsible for mitigating the problem, but if I develop this property, I may have an exposure under my due-care provisions. Think about it-wouldn't that scare you as a buyer?"

Still, buyers of gas stations with storage tank problems can take a number of basic steps to protect themselves, said Joseph Quandt with Zimmerman, Kuhn, Darling, Boyd, Quandt and Phelps, PLC.

"They want to make sure that their transaction documents allow them to do a thorough environmental review of the property. A lot of people start right out of the chute with expensive inspections without a clear understanding of how it integrates with the purchase agreement itself."

The purchase agreement should allow time for a thorough inspection of the property and a provision for the buyer to get out of the agreement without a penalty if it is clear the site's redevelopment is unworkable, he said.

Once a BEA is deemed valid, it does afford the buyer some protection, Quandt said. As long as he or she isn't using hazardous substances on the property or creating an exposure to pre-existing hazardous substances, the buyer has no other obligations.

But that still may not be the end of the story. "You might find significant contamination that could cause indoor air exposure risks where substances could evaporate into a gaseous state and come inside of the building."

It might be a good idea for the purchase agreement to commit the seller to help with the cost of inspections, clean-up or barriers to block the flow pollution, he said. BN