Builder beware

Richard Pawlyn looks at the potential environmental and financial pitfalls of Brownfield development, as well as an increasing interest in land-use history data


The picture of the UK's property landscape has changed, and will continue to do so at an alarming pace as economic and regulatory pressures increase. It is estimated that in the UK around 100,000 sites are situated on 200,000 hectares of contaminated land.

Furthermore, with the Government's announcement that the proportion of new homes built on Brownfield sites has reached an all-time record level of 70%1, the need to trace a site's land use history and to identify any potential contaminative issues has never been more important.

New survey data reveals that one in four commercial properties in the UK's largest cities faces exposure to potential environmental risks and possible loss in land and property values2. The survey confirmed that most UK cities are at risk from a range of environmental liabilities. For example, nearly 30% of commercial property in Bradford could be at risk from landfill and waste contamination. Nearly 40% of commercial property in Bristol could be at risk from pollution, with the city also recording one of the highest risks from flooding (28%). Sheffield demonstrated the greatest potential risk from radon (38%) and subsidence (95%)3.

However, it is not just potential risks that we need to be aware of - a fact made painfully clear by the case of commercial housing developer, Circular Facilities.
The price of ignorance

The developer was apparently unaware of such environmental risks when it acquired a piece of land for development in the 1980s. Soon after the project was completed, emissions of carbon dioxide and methane were found on the properties.

On 5 November 2002 Sevenoaks District Council served a remediation notice to Circular Facilities. A judge upheld the notice, stating that the developer should have been aware of the risk posed by the condition of the site and was therefore responsible. The legal costs of the remediation were awarded against the developer. The firm is currently in the process of appealing the case.

In the light of the experiences of companies like Circular Facilities, it is hardly surprising that environmental risk should be the subject of increased attention.
Developers and investors are quite rightly cautious about committing themselves to sites without fully understanding all the issues; if environmental searches aren't completed and actioned at the outset, then the landowner could end up facing full remediation costs at a later date if contamination is subsequently identified.

Erin Brockovich fired her warning shot across the bows of environmental risk in 1987, having discovered contaminated land and groundwater at Hinkley in California. It was a class action, which resulted in $333 million in compensation and made US banks look closely at their exposure.

Given such alarming statistics, not to mention the regular supply of headline-grabbing cases involving property damage caused by environmental factors, developers and investors are quite rightly cautious about committing to sites without fully understanding all the issues.

There are still many lenders and investors who have yet to appreciate the situation, and who continue to invest funds without full assessment of a development's opportunities and threats. Others, meanwhile, have appreciated the potential financial devastation wrought by this underground enemy, and buy environmental reports or enlist the services of specialised consultants to minimise their exposure.

A poison chalice
Whether you're a lender or a developer, this is no trivial matter - not when millions of pounds are at stake. If an owner defaults on a loan the lender can usually rely on the capital asset to balance the books. But if it turns out to be contaminated land, not only will it present an enormous headache of an asset to deal with, but the lender may also have to foot the bill to clean it up. That bill could all too easily amount to more than the land was worth in the first place - it's also a good deal more rewarding taking an action against a bank than an insolvent developer. So you have three problems: a bad loan, no asset and a liability.
Existing regulations which continue to make an impact include Part IIa of the Environmental Protection Act, which gives local authorities the duty to issue clean-up orders to the 'appropriate person' where a site is deemed contaminated. The recent landfill and waste regulations, together with developments in the planning regime, present uncertainty as well as opportunity.

A rising number of investors have their eyes wide open and are keeping themselves a step ahead of the competition. These few have seen the landscape changing, adhered to the warnings inherent in the Erin Brockovich case (and of course the Hollywood movie, starring Julia Roberts), and adopted the full science behind the management of financial and environmental risk.
By changing their practices to incorporate a simple screening tool into the workflow process for each loan application, these astute lenders succeed instantly in minimising their exposure.

The end result? Increased funds. And in a market where the narrowest of margins can make the widest in profits, this is a crucial advantage to have. As ever, environmental risk increases complexity to the process, but in turn it allows the astute players and early adopters - those who systematically employ environmental risk management - an important competitive advantage, as well as the opportunity to land their competitors with expensive problems to solve from a non-optimal loan book.

Help to hand
Landmark, of course, is among those organisations in a position to help with the issues raised above. We provide digital mapping and land data intelligence, furnishing consultants with information to assist them in environmental site assessments. With a large database of land, property and environmental information, we provide a range of reports to professionals in environment, banking, property, conveyancing and government, identifying contamination and environmental issues in a straightforward way.

With presentations from key figures in the environment industry, our forthcoming Risky Business seminar can provide a quick and useful update on key issues affecting that industry and numerous others.

Back for its sixth year, the seminar brings you up to date with the key market drivers in the industry, explaining the impact and potential solutions to tackle Brownfield re-development challenges.

The seminar takes place in London on 12 October. For more information on Landmark's reports, map database archive or to book your place at the Risky Business seminar call 01491 413 030 or visit www.landmarkinfo.co.uk
Richard Pawlyn is Managing Director of Landmark Information Group.

References
1 'Brownfield Development Reaches Record Levels' - press release from
Office of the Deputy Prime Minister, 28 July 2005
2 Results compiled from 342,354 commercial organisations across Birmingham, Bradford, Bristol, Edinburgh, Glasgow, Leeds, Liverpool, London (East, East Central, North, North West, South East, South West, West Central), Manchester and Sheffield. Environmental risk categories; flood, landfill and waste, pollution, historical land use, coal-mining, radon and subsidence. Location of the commercial properties is a count of the organisations rather than a count of the properties. For example, if there were two commercial organisations within a building, the location would be counted twice.
3. Ibid.

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