Dig deeper to reveal contamination risk

Copyright: David Lawson

First published: Property Week April 2008

You make widgets. You want to make more widgets. Despite a feeling that manufacturing is dying, the rampant Euro means there are good markets across the Channel. But sniffy banks diverted widget-maker loans into property long ago. Silly bankers. Now they won’t lend to anyone.

  Perhaps you can raise cash from those old sheds left to crumble when computerised production cut space needs by 50%.  Piles of dodgy scrap and hidden pits of festering sludge would have put off developers in the old days but they are now desperate for sites as planners clamp down on anything showing a few blades of grass.  One of those new-fangled environmental reports should satisfy Mr Himmler in the planning department. It has to be cheap, of course. No use spending loads when money is tight.

  Thus are the hopes of Britain’s manufacturers dashed. Brownfield land rarely hits the market nowadays without a ground study but sellers often do not dig deeply enough. Buyers make the effort, as they end up handling problems, and that is when negotiations get messy.

   Land owners should do all they can to expose every detail of contamination, says Jim Gott.  You might expect that from the commercial director of environmental consultant CRA Europe, but he has a point.  Increasingly tough pollution standards mean any hint of a problem will emerge once groundworks start and the buyer will make sure they can claw back compensation. In fact, it is unlikely to take that long, as developers want to know these things up front rather than face delays and legal wrangles later.

  If all the grimy details are on the table at the stage when tenders are being made, sellers can work out a deal, and that is far easier when several bidders are scrapping for the site, says Gott. It is more difficult once tied into a preferred buyer who can threaten to walk away and leave the land owner facing the costs of another marketing campaign.  The usual ground study is not enough. CRA is pushing more intense development feasibility assessments [DFA] which provide a range of likely, best and worse case estimates of costs based on input from specialist suppliers and contractors. The key factor is inclusion of potential abnormal costs that may emerge.

  Initial findings from these studies can be dispiriting. Environmental liability can cut book value of land by between 10% and 50%, which owners may not wish to reveal to shareholders. The DFA can also cost two or three times a conventional environmental study, so the temptation is to do as little as possible.  But buyers have already cottoned on. Gott recently knocked £2m off the price of one site after digging deeper than the seller’s consultant. Up front costs can also pall to insignificance compared with potential returns. One firm struggling to break even raised more than £30m of life-saving cash by selling surplus land.

   Gott is working with GVA Grimley on a clutch of projects as manufacturers discover hidden resources. Big sites once considered too difficult are being revived by new technology and soaring demand for space to house big sheds.

 CRA is remediating 75 acres at Europe’s largest waste water treatment centre in Minworth, near Birmingham, for Prologis. The site remained undeveloped for 20 years due to the technical difficulty of doing anything with it. A vast number of more modest schemes involving 5-10 acres are also beginning to emerge as developers go knocking on doors. They often know before manufacturers themselves about the potential for land released by less space hungry production techniques.   

Development Feasibility Assessment

CRA says these  include:

Liability Transfer

A ground-breaking method of handling environmental risk could point the way to releasing thousands of acres of land across the UK.  Acorn Developments faced a legacy of contamination problems when bidding for a 500,000 sq ft former Kodak chemical works in the North West. But it called in WSP Environmental  [WSPE] to take on obligation for cleaning up the site, including any cost overruns to fulfil environmental responsibilities.

   This is believed to be the first time the technique of liability transfer has been used outside the US, where it is a common way to unlock contaminated land. The WSP Active Transfer program, underpinned by insurance from ACE Environmental and brokered by Willis, allows buyers and sellers to negotiate the transfer of assets free from the cost uncertainty of historical environmental liabilities.

  Stuart McLachlan, MD of WSP Environmental, said he expects Active Transfer to become increasingly accepted outside the US for companies looking to be released from the historical legacy of contaminated land liabilities.  The key advantage of liability transfer is creating a ‘clean deal’, says Jim Gott, commercial director of CRA Europe, which analysed the site for Kodak. Something unexpected can turn up after even the most intense investigation but this technique means neither side has to worry.