Role Models: How Former Military Bases are Effectively Addressing Environmental Liability to Take Advantage of Real Estate Opportunities

Role Models: How Former Military Bases are Effectively Addressing Environmental Liability to Take Advantage of Real Estate Opportunities

Acknowledgement to XL Environmental

By Bob Hallenbeck, SVP, Sales & Marketing, Environmental Group

Since the Defense Base Closure and Realignment Act of 1988, almost 200 military bases have been shuttered, mothballed, closed. Fortunately, while the military activities has long ceased, many closed military bases have not sat idle. Closed Bergstrom Air Force Base, near Austin, Texas was transformed into an international, commercial airport that brings in $1.8 billion annually into the community and created 37,500 jobs. The Former Philadelphia Navy Yard currently houses docks for ship building, a cruise terminal, a corporate park and historic district. In Lubbock, Texas, the former Reese Air Force Base is now Reese Technology Center, home to several biotechnology firms. The Village of Glenview, Illinois — once home to Glenview Naval Air Station — established The Glen, a 1,121 acre mixed-use district, with new homes, offices, two golf course and retail space.

Many closed military bases have, or continue, to reinvent themselves, not as places for defense-related activity but as revitalized properties filled with housing, industrial, training, educational and recreational facilities and hubs of commercial business activity. In many cases, more jobs were created than those lost. For instance, at the former Lowry Air Force Base, when closed in 1991, approximately 2275 civilian jobs were lost and 4000 military personnel were transferred but according the ADC’s State of Base Redevelopment Report, the redevelopment created 7100 jobs by 2007.

Currently, another two dozen military bases are somewhere in the process of their closure and redevelopment as a result of BRAC 2005. While they will certainly learn from the experience of these previous BRAC bases, others involved in real estate development or redevelopment should take notes too.

A clear lesson learned in the five rounds of base closings is that there are obstacles to overcome with one of the biggest being the existing environmental conditions on the property. Military bases — often self-contained communities themselves — have all the environmental issues that a city or municipality often handle. There are housing issues, motor vehicle maintenance facilities, fueling islands for a variety of military vehicles, laundry and dry cleaning facilities, mechanical and electrical equipment maintenance facilities and municipal type waste dumps.

Under Section 120 of the Comprehensive Environmental Response Compensation and Liability Act (CERCLA), the Department of Defense (DoD) is required to be responsible for all remedial action necessary to protect human health and the environment that its activities have caused in the past before it is transferred to the private sector. To help in the process, once the closure of a base is announced, a Local Redevelopment Authority (LRA) is formed and work begins on the environmental clean up of the site and a Master Plan for the base’s future. Eventually, once the clean up is complete, the land is officially transferred to the local authority at no charge. Developers then work with the LRA to help take the dreams laid out in the Master Plan and make them a reality.

Despite the best clean up efforts, there is often some hesitation to acquire land with a polluted past for fear of acquiring environmental liability associated with it, for instance:

  • Additional contamination may be discovered that requires a business to halt operations on a former base for an extended period of time while remediation takes place;
  • Lack of assistance in indemnifying and defending subsequent property owners if they are named as co-defendants in lawsuits brought by third parties because of an environmental incident; or
  • The discovery of new contamination.

Regardless of these risks, communities certainly want to see redevelopment happen and are seeking ways to address the environmental liability and whenever possible, speed up the process. For example, LRAs have seen the benefit of using environmental insurance to gain the early transfer of former military base property, before the DoD completes its remediation, allowing them to take more control of clean up plans and their pace. For instance, the Riverbank Local Redevelopment Authority recently purchased environmental insurance coverage from XL Insurance to allow them to become the landlord for almost a dozen tenants operating on the site.

According to Debbie Olson, Executive Director of the Riverbank Local Redevelopment Authority, “It was crucial for us to have insurance protection as we negotiated our agreement with the Army. We’ll continue to work with our insurer as we negotiate other aspects of our Early Transfer agreement.” The early transfer of the property was important to the LRA allowing it to gain control over the majority of the facility a year prior to the September 2011 Statutory deadline so that it could begin its marketing and redevelopment activities as soon as possible.

The former Riverbank Army Ammunition Plan has more than 190 structures and an estimated 920,000 square feet of roofed industrial areas scattered on its 172 acres. Riverbank’s LRA recently announced a new tenant: Green EnviroTech, a recovery, cleaning, and plastics recycling company which plans to open a 50,000-square foot recycling facility there in early 2011. The LRA has plans to attract other green technology businesses to its available space.

Developers were never overly eager to delve into projects on property they knew had been contaminated. There was always the risk that something was missed, that more contamination could be discovered, and whoever acquired the land was left holding the bag on additional clean up expenses. For communities which saw the loss of jobs and revenue generated by these base operations, like Riverbank, there are significant reasons to tackle the environmental issues and uncertainty head on, so that the land could be returned to productive use.

That’s where environmental insurance entered the picture, becoming an increasingly useful risk management tool even before a project is slated to begin. First of all, environmental insurance helps eliminate or reduce the uncertainty surrounding a property’s environmental condition, providing reassurance to potential buyers, developers, contractors and even potential tenants that they will not incur additional clean up costs or project delays. In its traditional role, environmental coverages also provides a financial cushion if an incident occurs — more contamination is discovered, a fuel oil spill occurs on the jobsite, or mold is uncovered in buildings — swith an annual premium that is certainly more attractive than an unexpected five or six figure cleanup expense. Without such financial protection for unforeseen expenses, a project could reach a stalemate and remain that way until cleanup expenses become available.

As many are involved in redevelopment projects, environmental policies are now available to insure every party and every aspect of real estate redevelopment projects, property transfers or sales transactions, including contractors, developers, subcontractors, financial institutions, and future buyers. Without some kind of protection, these groups were often understandably hesitant to undertake a project that involves known environmental contamination and, more importantly, the risk of unknown pollutants.

Effective environmental insurance policies are not “off the shelf” products but are tailored, underwritten specifically to accommodate the environmental concerns of an individual transaction. Environmental insurance is an engineered product. In other words, a substantial amount of upfront, hands-on work and evaluation goes into assessing a potential buyer’s environmental exposure before a policy is actually underwritten. Then, based on the upfront analysis, enhancements or endorsements can be attached to the standard environmental policy to address specific environmental issues of concern, for instance — indoor air quality, underground storage tanks, use of incinerators, air emissions, asbestos, or lead paint, illegal dumping or contingent liability of subcontracted waste haulers.

Advances in overall risk management strategies are clearly opening the doors of opportunity for military bases and for the agencies charged with turning their redevelopment dreams into realities. What they have already accomplished is providing valuable guidance for others. Especially as the economy and in turn, the real estate market improves, the lessons that these redevelopments have learned and the risk management tools they have implemented can be applied to other real estate transactions to address environmental liability, keeping them on schedule and profitable.

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