Have you considered adding brownfield development to your real estate portfolio ?
Image by Dr StClaire from Pixabay
By Patricia Gage , Principal , RE Solutions
It ’ s understood that having a real estate component within your investment strategy is a triedandtrue way to diversify your risk and increase your investment returns . And while most people and companies find real estate opportunities with more common approaches , there is a less conventional way to turn a profit in real estate : brownfield development .
According to the Environmental Protection Agency , “ a brownfield is a property , the expansion , redevelopment , or reuse of which may be complicated by the presence or potential presence of a hazardous substance , pollutant , or contaminant .” It is estimated that there are more than 450,000 brownfields in the U . S . Some l brownfields are obvious , like a former oil refinery . Others may be a surprise , for example , an urban infill site that housed a dry cleaner in the 1950 ’ s may now be the ice cream shop you ’ ve loved since you were a kid – who would ever think it could be contaminated ?
Assuming the developer of a brownfield property has acquired a Phase One environmental assessment ( and a Phase Two environmental assessment if recommended by the Phase One ) and is ready to move forward with the project , potential project investors should consider the following financial questions :
1 . What is the cost of the land ? In general , there should be a discount for a brownfield parcel . When compared to an equivalent clean site , the price of a brownfield should be discounted by the cost to remediate the site plus some amount to compensate for the risk inherent in the cleanup and the additional profit that should come with cleaning up a contaminated site .
2 . Does the development budget include sufficient contingency for normal construction risk as well as the risk of remediation cost overruns or delays ? While a 45 % contingency is typical for a greenfield site , the development budget on a brownfield should include that standard contingency PLUS 2025 % of the expected remediation cost if the remediation contractor is working under a costplus contract , which is typical . The contingency should also be sufficient to cover any delays if remediation takes longer than expected .
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