The trouble with brownfields and red ink

AACI | Vice President, The Regional Group of Companies Inc.
  • Mar. 21, 2013

I’ve been working on a file where an old building must be demolished, but the cost of demolition and dealing with the environmental issues at the site are so high that redevelopment may prove to be uneconomic.

It’s a growing issue across Canada as our building stock ages and the bar on environmental standards continues to rise. Many buildings are themselves contaminated with materials that are now banned due to health issues, such as asbestos. Others were built on contaminated land, at a time when the long-term health risks of the contaminants were not fully understood the requirements for site remediation were less stringent.

A common early 20th century cause of site contamination is coal tar, a carcinogen in a liquid state that can migrate through the soil. This black goo was a byproduct of coal gasification, a process to produce the coal gas used by municipalities for lighting and heat prior to natural gas. Coal tar was often disposed of by burying it without any form of containment. Another common cause of site contamination is found at old incinerator sites, where there is a toxic buildup in the soil of heavy metals, but any kind of old warehousing facility, storage site, railyard, factory or service station could also suffer from soil contamination.

These contaminated sites are collectively called brownfields. In a 2003 report, Cleaning Up the Past, Building the Future: A National Brownfield Redevelopment Strategy for Canada, the National Round Table on the Environment and the Economy (NREE) estimated there could be as many as 30,000 brownfield sites across Canada. These sites “represent a significant loss of economic opportunity,” the report stated. “They adversely impact a neighbourhood’s image and quality of life, and in some cases pose risks to human health and the environment.”

In larger cities, where property and land values are high, the cost of site remediation is often eclipsed by the new revenue that will be generated as a result of redevelopment. And municipalities can chip in and sweeten the pot for private developers by offering property tax rebates.

Remediation in smaller communities is a challenge

But the problem I see is found in smaller communities across Canada, where property and land values are not high enough to make remediation and redevelopment economical, even with a tax rebate thrown in.

Consider the scenario of the aging building that is situated on contaminated land and can no longer generate positive cash flow or attract desirable tenants. Current environmental standards require that land to be remediated before any redevelopment can occur. But the owner can’t afford the cost of remediation and no buyer will touch the property because they know the local market and the numbers don’t add up.

The owner can milk the property for every last penny of revenue while they still can, but in the end, they are still stuck with a liability. They may simply opt to walk away.

This scenario could repeat itself thousands of times across Canada in the years to come as environmental standards continue to rise and our building stock continues to age. And it is municipalities that will ultimately be left with a collection of these blights on the townscape.

Legal action could of course be pursued against the owners, but what if the owners are deceased, absent, or simply do not have the financial resources to deal with the problem? According to NREE, so-called “orphan sites,” for which viable responsible parties cannot be found, are a major problem across Canada.

It will ultimately become a cleanup job for the municipality, a cost that can easily run into the millions, if not tens of millions, plucked from the pockets of local taxpayers. And if left unaddressed, such derelicts become safety hazards and eyesores that erode the values of adjacent properties, which results in reduced tax revenue for the municipality.

Municipalities must be proactive

It’s for this reason that municipalities must be proactive in dealing with their brownfield sites as part of their broader infrastructure strategies. They must consider some form of legislation or modification to existing property standards bylaws so that some corrective action is taken before the building deteriorates to the point where the owner simply gives up on it.

If it’s possible to proactively retrofit the building while it is still in fair condition, this can extend its useful life and defer the need for the full-scale redevelopment that will require site remediation. It’s not the perfect solution, but it does provide the opportunity to generate more income from the property, which could be banked against its eventual redevelopment cost, and provide more runway for future advances in technology that could potentially provide a cheaper way to remediate.

The only other option is for the municipality to assume responsibility for the site and deal with it in the most economical way possible – demolish the building, cap the contamination in some way and turn the site into a park. However, this still results in an ongoing cost that will have to be absorbed by the local tax base.

There is no easy solution for dealing with these dirty leftovers from yesteryear, but the problem will only worsen if it is ignored.

To discuss this or any other valuation topic in the context of your property, please contact me at [email protected]. I am also interested in your feedback and suggestions for future articles.

About John Clark: With over 30 years of experience in the national real estate appraisal and valuation industry, John Clark (BA, AACI, P.App., FRICS, Chartered Valuation Surveyor) is a leading expert on real estate matters that impact the value of commercial, institutional, residential and other special use properties. He joined The Regional Group of Companies Inc. in 1988 and has served as Vice-President of Valuation and Consulting since 1990. He is a Fellow of the Appraisal Institute of Canada and served as its National President, 2001-2002.

John Clark is Vice President with The Regional Group of Companies Inc. He has more than 33 years of experience in the real estate appraisal field, is a fully accredited…

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John Clark is Vice President with The Regional Group of Companies Inc. He has more than 33 years of experience in the real estate appraisal field, is a fully accredited…

Read more

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