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Brownfields Attracting Varied Land Uses
January 5, 2012
Recession One Factor Among Many Challenges
By Joel Kranc
In a volatile economy, plans that are not directly tied to stimulus, economic development or even political gamesmanship often fall by the wayside and lose momentum. Case in point is the development and redevelopment of brownfield parcels of land. These contaminated and often derelict former industrial/commercial tracts of land have risen and fallen out of favour with the economic tides over the last three to four years.
As was the case within the general economic landscape, real estate development suffered a major setback during the credit crisis that began in 2008-09. As commercial and residential development demand slowed, the trickle effect was felt beyond conventional greenfield sites and brownfield development suffered as well.
Coupled with that, new and more stringent legislation from the Ministry of the Environment defining brownfield sites and their remediation came into effect in July 2011, making it more challenging for developers and municipalities to ensure newer demands are met as the economy improves.
The Federation of Canadian Municipalities (FCM) estimates 25% of the Canadian urban landscape is contaminated by previous industrial activities and that about 30,000 brownfield sites exist across the country. Municipalities own between 2 and 10% of contaminated sites in Canada and are the key drivers at initiating remediation and redevelopment of privately owned brownfield sites.
As demand starts to increase again and the new legislation redefines what constitutes a brownfield site, the FCM numbers shed an important light as greenfield sites drop off and the availability of brownfield sites become more important to developers.
PROCESS AND THE ECONOMY
Increased and more stringent regulation, especially in uncertain times, could mean softer development. However, the trends are pointing slightly in the other direction according to developers with direct experience in brownfield development.
The process has changed to one where developers are now asked to take a risk-based assessment on top of the work necessary to actually analyze and remediate the property. Developers like Kilmer Brownfield Ltd. have already factored that into their equations.
“We are going to a more risk-based process,” says Pamela Kraft, Development Manager with Kilmer. “Builders would complete risk assessments prior to obtaining a record of site condition rather than just meeting the generic standards. We’ve had regard for the new standards since they were published, but before they came into effect.”
That process has not hurt the turnaround in the brownfield development market. “We do see more in the development world, more acceptance of the term ‘record of site condition’ and a bit more understanding of risk assessment,” she adds.
During the credit crisis other issues crept into the landscape that hindered development. Luciano Piccioni, President of the planning consulting firm, RCI Consulting, notes two distinct problems that curbed development.
“There were fewer and fewer good deals,” he says. “The best brownfield sites have already been redeveloped and some of the larger companies were mothballing their brownfield sites for fear of regulator liability or other reasons. So there was just not a lot of supply of developable sites on the market.”
Graham Banks, Vice President with Morrison Financial, a boutique lending company to the construction industry, says the supply issue was not necessarily caused by the recession. “Municipal planners have put restrictions on greenfield development but there is still a demand, still a growing population and growing demand for housing,” he notes.
Banks suggests the issue facing developers amounts to project economics – i.e. can a developer make a profit by cleaning up and redeveloping a piece of property?
“If there is not a market for the end product then nothing is going to happen,” he says. “It’s a very simple supply and demand equation.”
SUPPORT FOR RESIDENTIAL
Many knowledgeable observers have noted an increase in the demand for residential and multi-residential development.
“I’m also seeing some of the older larger industrial companies getting rid of their properties,” Piccioni reports. “And those properties might not be converted to residential but are being used for other industrial or commercial uses.”
He additionally points to land values and a surge in demand of residential developments in secondary regional markets. “We’re starting to see an uptick in places like Waterloo, Guelph, Kitchener – and developers are saying they think they can make a profit in those areas,” he says.
Kraft likewise maintains that demand in a variety of areas is having an impact. “I think we are looking at broader land uses. We weren’t really looking at retail or the industrial side of things, and [now] we are looking at them in select areas. I think there is some life back into the businesses,” she says.
Significant sums of stimulus money directed to transit and other infrastructure projects across the country are a byproduct of the credit crises and recession. This, too, is having its effect on the brownfield development market.
“If transit gets built and expanded, people will be more attracted to higher forms of housing in secondary marketplaces,” Kraft predicts. “Transit has had a huge impact.”
Even at the governmental level, the demand for brownfield development coupled with larger infrastructure projects has crept into the project roster. For example, the Pan Am project being redeveloped at the West Don Lands site in Toronto. The former industrial wasteland is now being converted to an athlete’s village and future housing complex for the games.
“Infrastructure Ontario fully applied the amendments to the regulation on the West Don Lands – Pan/Para Pan Am Athletes’ Village redevelopment project,” notes Julia Sakas, a Communications Advisor with Infrastructure Ontario. “Using the new risk-based approach, property specific standards were developed for the remediation program for the site and the property is ready for the next phase of this redevelopment.”
FINANCING IMPLICATIONS
Traditional lenders and banks are often not interested in the perceived riskiness of brownfield redevelopment ventures. However, a growing number of municipalities offer incentives programs that make it more attractive for lenders like Morrison Financial to assist developers.
As of February 2011, 44 Ontario municipalities had approved Community Improvement Plans that include brownfield incentives. Many of those incentives include tax increment funding for the developers.
Under such schemes, cash would be available at the very earliest once a record of site condition has been filed and a brownfield agreement has been struck with the municipality. Even though payment streams may be quantified only after the property has been built and it has been reassessed for tax purposes, financiers like Morrison Financial deem municipalities credit worthy and generally not affected by economic climate. Prior to project completion, however, there would be standard construction risks such as cost overruns and absorption risks.
Obtaining financing outside of traditional areas does often force developers to pay more interest on loans, self-finance or phase projects and/or reduce the size of their ambitions. Meanwhile, many municipalities offer other incentives for builders such as partial or total development charge reductions, grants to promote environmental studies, annual grants equal to part or all of the municipal property tax increase generated by the project for a period of time after project completion, planning rebates and parkland dedication requirements reductions. Many municipalities will also allow packaging or bundling of the incentives to entice builders and provide financial backing.
For the time being, brownfield development is generally occurring at a consistent pace. This is due, in part, to the demand in residential and commercial developments, but also to the raft of projects that received approvals before the July regulations came into effect.
Industry insiders like Kraft, Piccioni and Banks agree the demand is likely to grow, but foresee a shrinking of available developable areas under the new regulations. These conflicting factors will shape the sector and likely increase the imaginative ways in which all parties are brought to the table to develop more sites in the future.
Joel Kranc is a freelance journalist based in Toronto.
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