Brownfields can turn companies green
Scores of articles, conferences, environmentalists, politicians, and pundits have proclaimed that redevelopment of environmentally impaired property validates the notion that environmental enhancement and economic progress are compatible.
Proponents of brownfields programs believe new regulatory initiatives (including some limits on liability and risk-based cleanup standards), combined with a strong real estate market, can stimulate the redevelopment of contaminated sites and revitalize surrounding communities. These new regulatory initiatives have already encouraged remediation and redevelopment at some sites, with a large majority ready for improvement.
And improvement is occurring. In Fraser, Pennsylvania, a chemical plant on 79 acres had been declared a federal Superfund site and abandoned in 1991. A local real estate developer and an environmental engineering firm, after obtaining insurance policy protections from environmental liability in excess of an established dollar amount, recently partnered to acquire and remediate the site.
Deals like this are occurring more frequently, particularly with regard to sites in older urban areas where redevelopment opportunity is rife. Abandoned plants are often located in major transportation corridors, and the sites are often attractive to commercial and retail tenants.
The future of brownfields redevelopment
Today, many such properties are being reclaimed because of the strong real estate market, protective but more realistic environmental requirements, and the availability of financing and insurance policies to enable such transactions. And insurance policies written in an increasingly competitive market now cover site owners against remediation costs and liabilities greater than ever before.
Significant progress in redeveloping brownfields sites will require more dramatic legislative and regulatory change, and more creativity from the private sector.
Among the key regulatory changes needed to encourage continued brownfields redevelopment are policies that will allow state environment agencies to define environmental risk consistent with planned use. Such cleanup standards improve the economics and risks of a project, making possible returns that are acceptable to investors.
Investors are not the only ones with an incentive to redevelop brownfields. Putting fallow, contaminated sites back into use makes sense for everyone: property owners with contaminated sites stranded on their balance sheet; taxpayers who must pay more when industrial properties are lost from the tax rolls; and, ultimately, developers who hope to profit from redevelopment. Redevelopment of brownfields makes the development of virgin land (“greenfields”) less necessary, decreasing the need to extend of utility and transportation networks.
Environmental insurance companies
Over the last few years, competition among the key environmental insurers--Kemper Insurance Group, Zurich American Insurance Group, Reliance Insurance Group, and member companies of American International Group (AIG)--has caused premiums to drop considerably, while coverage has broadened. Developers seeking such policies are relying on finance and risk management firms to help negotiate the best terms with the insurance companies. So, too, are the capital lenders themselves.
One such lender needed protection in the event of default or discovery of an actionable level of contamination. It turned to Enventures Capital, LLC (ECAP), an investment banking firm specializing in transactions involving environmentally impaired properties and businesses. ECAP managed the implementation of an alternative to traditional due diligence requirements, thus streamlining the loan underwriting process. ECAP negotiated a partnership with the lender and AIG, whose Secured Creditor Policy is designed to pay down the outstanding loan balance in case of default. The lender uses the policy as an alternative risk management technique.
"Historically, banks have been reluctant to fund the development of contaminated property or have offered terms that were not acceptable to the developers," says William Gildea, an ECAP principal. "And many property owners would sooner put a fence around the property then address remediation and assume environmental liability. Our job to is facilitate deals among owners and purchasers, the handful of insurers specializing in environmental insurance, lenders, and investors."
Recently, ECAP helped secure insurance policies for Brownfields Recovery Corp. (BRC) of Boston, a firm that specializes in redevelopment of contaminated properties. BRC paid $24 million to Nicholas Deane, owner of the former General Services Foam Factory in Andover, Massachusetts, for a 134,000-square-foot building vacant since 1986. The building had served as a factory to manufacture foam for car seats and other applications. Solvents used to clean empty chemical containers at the rear of the property had been dumped for years.
"BRC bought the property because this is good real estate," says Eli Levine, the company's vice president of acquisitions and the project manager. "There are not too many ways to create value in real estate," he says, but buying contaminated sites with redevelopment potential "is one way to get better value for your money if you understand real estate and environmental indemnity.
“Until recently, it was hard to get meaningful financing for a contaminated property. A bank would have given you a small percentage of the value. Developers want to get financed for at least 70 percent of their purchase, and now more lenders are willing to do so because of environmental insurance."
ECAP helped BRC secure a loan of nearly $4 million based on the appraised value of the property after cleanup and improvement. Zurich issued a policy that would protect the property owner and the bank from responsibility for further cleanup or liabilities associated with the site. "We went to a conduit, and we were able to get financing even though the property is contaminated. The loan is at the same rate as if the property had no contamination," Gildea says.
How environmental insurance works
Insurance underwriters operating in the brownfields redevelopment marketplace base their coverage on site-specific environmental conditions. The buyer, seller, tenants, and lender all have coverage options. Lenders can choose from among several policies to protect their security interest in the property. Buyers and sellers also can choose from among several policies, which allocate liability for historic or future claims and make it possible to "cap" remediation costs. Each of these policies can be used to replace or support environmental indemnifications.
The allocation of risk among highly rated insurers allows for a more traditional response from investors and commercial lenders. By isolating and transferring specific environmental risks on a redevelopment project, a larger pool of potential investors for both equity and debt is created. The insurance and credit underwriting models can be applied to all property types, from gas stations to Superfund sites.
The underlying real estate must still stand on its merits, but the environmental stigma need not negatively affect the site’s valuation. Today’s favorable interest rate environment, and competition between commercial banks and their capital market counterparts, should result in growing interest in brownfields properties.
The protection afforded by environmental insurance products, and the resulting investment activity in brownfield sites, will accelerate the redevelopment of these properties. A major challenge for the private sector is to obtain competitive and adequate financing needed to produce an acceptable return.
A service provider who integrates financing, insurance, and environmental management to provide true “one-stop shopping” for the developer could seize this opportunity. Such private initiatives, combined with more results-oriented government regulation, could help enhance both the economy and the environment. All these things working together make revitalizing brownfields a very viable and attractive solution.
Robert Foxen is founder and principal at of Enventures Capital, LLC (ECAP), an investment banking firm specializing in transactions involving environmentally impaired properties and businesses. For more information, contact ECAP at 399 Boylston Street, 6th Floor, Boston, MA 02116; phone 617/266-1892; fax 617/267-6447. Or visit the company’s Web site at www.ecap.net.