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Brownfield Development — Bridge Financing

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In our view, the redevelopment of unused or underutilized sites located in urban settings will continue to provide opportunities for developers. The intensification of these sites makes better use of the existing infrastructure. However, these developers must have the requisite resources whether it be financial or in-house knowledge to deal with the site conditions encountered in the remediation of these contaminated sites. From our perspective, it is paramount that the skills and resources of the developer match the scale of the project.

We, at Firm Capital Corporation, are a non bank lender that specializes in providing bridge financing for land acquisitions. As a result, we encounter many properties that have existing site conditions. Accessing capital through more conventional sources has proven to be more difficult and has therefore presented financing opportunities for us in this market segment. Our role is to assist the developer to acquire or to refinance the site and/or provide the necessary capital to facilitate the remediation of the site while the developer is navigating the planning process to achieve site plan approvals. In reviewing financing for development proposals we want to be comfortable that the proposed development plan meets the current market demand and at the same time provides a development profit commensurate to the overall risk being undertaken.

Our underwriting process follows the Guidelines established in order for developers to achieve development approvals. It begins with the initial Phase 1 site assessment that determines potential or actual contamination. Followed by a review of the sampling and analysis derived from the Phase 2 assessment to locate, delineate and quantify the contamination. Thirdly, a review of the remediation report. Once we review these reports we are able to assess the environmental remediation costs in relation to the as is land value and the proposed development pro forma . Our experience shows that as long as we understand the issues and can quantify the same, then we are able to make informed decisions.

Example #1:

Issues:

  • The developer acquires a brownfield site in the inner city based on a long form purchase and sale agreement;
  • The developer begins the planning process;
  • The developer arranges land and servicing financing from a bank;
  • The magnitude of the on-site environmental issues result in the bank not proceeding with their financing commitment.

Solutions:

  • The developer approaches Firm Capital for financing;
  • The developer comes up with a solution to satisfy the environmental issues by securing a fixed price bonded contract from a major servicing contractor to remediate the site;
  • The site remediation is completed and the developer secures market pre sales;
  • The developer now arranges construction financing with the bank ; this creates our exit strategy.

Example #2:

Issues:

  • Inner city site with the current site being used as a parking lot;
  • Developer wants to refinance the existing site;
  • The dated initial site assessment indicated concerns about fill material and waste disposal on site;
  • An updated Phase 2 requested by our office revealed that should the site be developed, the fill material would likely need to be removed and managed as waste material.

Solutions:

  • Initial loan advance was made under our loan facility in the context of the existing as is land value;
  • Prior to further advances we requested a supplemenatary letter to quantify the removal and disposal of the contaminated soil at a regulated landfill site.

In summary, the complexities of developing urban sites with site conditions cannot be underestimated. However, they can offer the reward of an attractive land input number.

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