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 and 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 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 per cent 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 two and 10 per cent 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.
This 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,” says Pamela Kraft, development manager with Kilmer Brownfield Ltd.
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 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 says.
Banks suggest the issue facing developers amounts to project economics.
For example, 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,” says Banks. “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,” says RCI Consulting’s Piccioni. “And those properties might not be converted to residential but are being used for other industrial or commercial uses.”
Piccioni also points to land values and a surge in demand for 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.”
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.
Even at the governmental level, the demand for brownfield development coupled with larger infrastructure projects has crept into the project roster. Take, 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,” says 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 incentive programs that make it more attractive for lenders 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 conditions 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 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 incentives to entice builders and provide financial backing.
For the time being, though, 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.
Joel Kranc is a freelance journalist based in Toronto.
