Brownfield Development - Featured Articles

The Low Hanging Fruit is Gone

CCI Development

In our view, the redevelopment of Brownfield properties is, as is the case with all distress real estate, about the identification and management of risk. In addition to the usual risks taken to redevelop property, Brownfield redevelopment layers on the additional risks associated with the environmental contamination. These include the assumption of the environmental liabilities, land use redevelopment restrictions, and a myriad of additional regulatory approval requirements.

Since environmental issues tend to be inconsistently scattered across a site, it is a little like walking through a mine field without a metal detector. Having said that, the rewards can be large; many multiples of the costs, if you are successful. We believe we make our money when we buy, which is why our due diligence process is lengthy (6 months minimum) and expensive. In order to identify, quantify and set out a plan to manage the risks we invest significant time and money reviewing (in addition to the usual land use/development issues) existing environmental reports, conducting additional confirmatory testing, preparing a remedial action plan and holding preliminary discussions with the regulator(s), sourcing environmental insurance, and of course raising the capital.

Lastly, we try to gauge the "perception" factor related to the environmental issues. In our experience public perception of the environmental risks is often greater than the reality, and it can be a huge factor in the regulatory response to our land use proposals. All of the foregoing will determine the price point we are prepared to proceed at. We have purchased land from $1 to $52M. We have also passed on transactions where in our view the land had a negative value, as the costs to overcome the environmental obstacles exceeded the redevelopment revenue projections.

All of this was challenging enough in a strong market, which in our view lasted for quite a few years, but ended in the summer of 2008. The onset of the current recession and resulting impact on the capital markets has caused investment capital (and its appetite for risk) and credit for real estate development to shrink at a time when regulators are continuing to impose more restrictive and in some cases crazy additional requirements on brownfield developers.

Others in this series of articles will opine further on this, but suffice to say waking up one day to the fact that a property which was "clean" yesterday is now "dirty" or "exceeding standards" today because of the stroke of a regulatory pen is scary. Even more so if you have conventional debt in place!

Given the foregoing, we believe the opportunities going forward will be more difficult to price and finance and in general brownfield development will become more economically challenging. This is the disconnect between current political and public sector rhetoric which suggests otherwise.

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