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Contamination reconsidered: Developers show more acceptance toward environmental trouble spots When property is scarce, mitigation becomes viable

May 21, 2007

When property is scarce, mitigation becomes viable

The plan to close Citizens Gas & Coke Utility's coke manufacturing plant this year has already brought a few inquires about its reuse potential. But perhaps the biggest impact of the foundry fuel-maker's demise will be stoking discussions over whether other environmentally scarred properties are ripe for redevelopment.

Until recent years, many developers regarded any property with even a tinge of environmental contamination as if a parcel in Chernobyl.

The coke plant "illustrates the next critical opportunity and step the real estate investment and development market needs to take- tackling corporate legacy properties with significant-real or perceived-environmental challenges," said Kent Johnson, senior project manager at Indianapolis-based August Mack Environmental.

"Historically, it has been, 'If it's contaminated, we don't want it. We have enough green space around here'" to build on, he added.

"People shied away from environmental problems. They became paranoid. Nobody wanted the risk," said Kris Altice, general counsel for downtown-based Shiel Sexton Construction.

But, in Indianapolis, the dragon of urban sprawl has devoured the number of socalled green spaces, generating new incentive for "infill projects."

Rising fuel prices and worsening pollution also make a strong case for revisiting urban areas, especially for housing downtown that's become attractive for its proximity to work and to cultural and sporting events.

"There's only so much land down here and you do have to take some of these empty buildings and tear them down or renovate them," Altice said.

The necessity to deal with environmental headaches inherent in the downtown area has made the construction firm and its partners adept at finding market-based solutions-generally without government subsidization that has long been a prerequisite for developers.

For example, the office building Shiel Sexton renovated at 1402 N. Capitol Ave. had solvent in the soil. An insurance policy from a previous owner contributed to cleanup costs.

"The challenge is finding the policy," Johnson said. "That's actually opened up a new field-insurance archeology."

August Mack and other environmental consulting firms that routinely search for such policies discovered that in the early 1980s many insurers "got smart" and started to exclude environmental losses in policies they wrote.

Another way to cover part or all of cleanup costs is to build them into the price of a property deal. A seller might have some wiggle room to put money into an escrow account. It's just been in the past five or six years some lenders and developers and other interested parties put a value to the liability and determined who will pay for it, Johnson said.

Upside-down properties

One type of property has not been so easy to make work-former gas stations. Generally, they're in desirable locations, at key intersections. But these sites often languish on the market for years because groundwater cleanup costs can easily run into the six figures-a premium that's too high relative to the purchase price.

"The more common phrase is 'upsidedown property'," said Jim McGoff, director of environmental programs at the Indiana Finance Authority, which administers the Indiana Brownfields Program. "The cleanup is much more expensive than the end development."

One thing developers can't do is price themselves out of the market, Altice said. "At the end of the day, it's got to work financially."

"It comes down to, it's a real estate deal," said Geoffrey Glanders, president and principal hydrogeologist at August Mack.

When it doesn't, there are brownfields programs.

Indiana's version stepped in to help cover the costs of remediating an old gas station at Meridian and 38th streets, which became a Starbucks.

Ninety sites in Marion County

Over the years, about 90 sites in Marion County have received financial, technical or legal assistance from the program-including $2.9 million to Indianapolis and Lawrence. Statewide, the fund has shelled out $21.5 million in 72 counties, said Meredith Gramelspacher, assistant director and general counsel of the program.

The Daniels administration has worked to pump up the fund in recent years-to $3.2 million in grants in 2007 from $1.6 million in 2005.

Among some of the current projects is a low-interest loan to Lawrence, which is reloaning the funds to the owner of the former Precision Machine on East 59th Street, to clean up the site. It's slated for retail/commercial use, said the agency.

Another project in recent times is a $300,000 grant from the agency to the city of Indianapolis to pay for cleanup in the 1800 block of South Shelby Street-the future home of Claus' German Sausage & Meat Market.

Whether developers deal with contami- nation through state assistance or strike deals with other private parties, they must confront liability concerns.

Getting financing is often difficult without some assurance that a property will not be haunted later by environmental liability. Enter the "comfort letter" issued by the Indiana Department of Environmental Management.

It's one tool to clarify things, such as that no enforcement action is pending against a site or that the state won't hold an adjacent property owner responsible for contamination to groundwater that migrates from off-site. Sometimes the letters come with caveats, such as that groundwater under the site is not to be used for drinking water.

For example, one letter written to the proposed developer of a Dollar General Store along Dr. Martin Luther King Jr. Drive noted the historical uses of nearby land, including as a Kentucky Fried Chicken, a gas station and a car lot. It also gave a long accounting of the pollution found in the ground over the years.

Such letters aren't iron-clad protection. Though one letter said IDEM "decided to exercise its enforcement discretion to forgo pursuit" of site owner or operators, the agency said it reserves the right to revoke its decision if it finds any of the information is inaccurate or if a contaminant other than what is known and documented is found.

"Though not a legal release from liability, this letter will help to establish whether environmental conditions at the site might be a barrier to redevelopment or transfer." In the end it concludes: "IDEM encourages the commercial/industrial redevelopment of this site."

Glanders noted there are now insurance policies for unknown environmental issues-from insurers such as AIG, Chubb and Zurich. Many of these pay cleanup costs above a certain level not seen at the start of a project.

If Citizens Gas puts its Indianapolis Coke plant on the market, it will take a developer with a big stomach.

The 140-acre, 98-year-old complex at Prospect Street and Keystone Avenue will likely take one or two years just to dismantle, according to the utility. One problem is that there are numerous masonry structures, which are not only a challenge to destroy but generate dust that will have to be minimized for the sake of surrounding neighborhoods.

Remediation of the land could take three years to five years, according to the utility's latest "rough" timetable.

The site has at least one positive, according to developers: rail connections.

"We have had some preliminary inquiries about the property, but the exact land use is unclear at this point as [to] whether we will sell or retain the property," said Citizens' communications manager, Dan Considine.

"Following remediation, we will work to redevelop the plant site to a use that enhances the overall community."
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