Doing the Deal, Before the Deal Does You!
About the National Brownfield Association
Non-profit member-based educational organization for Brownfield professionals Network for exchanging ideas, experiences, and information Property Owners, Developers/Investors, Transaction Support Professionals Government Information, Education, and Events STAMP (Site Technical Assistance for Municipal Project) Building Sustainable Communities Workshop series The Big Deal October 3-4 Chicago IL Leadership BOD Advisory Board Chapters Sponsorship Association Events Newsletter Membership Group Individual
Program Agenda
10:15- 12:15pm Workshop Goals/Overview of Tri-State Brownfield Programs John Means, WA Department of Ecology About the Brownfield Market Property Valuation Robert Colangelo, NBA Brownfield Risks and Solutions Robert Colangelo, National Brownfield Association Frank Chmelik, Chmelik, Sitkin & Davies 12:15 – 1:00 Lunch
Public financing and Incentives to Stimulate Site Reuse Mike Stringer, Maul Foster & Alongi, Inc. Case Study: Boise Cascade Mill, Yakima Brad Hill, Principal Cascade Mill Properties, LLC Structuring the Transaction Robert Colangelo, NBA 3:00-4:30pm Role Playing Exercise Jim Darling, Maul Foster & Alongi, Inc. Robert Colangelo, NBA
Presenters
Robert Colangelo, National Brownfield Association Frank Chmelik, Chmelik, Sitkin & Davies Brad Hill, Principal Cascade Mill Properties, LLC Jim Darling, Maul Foster & Alongi, Inc. Mike Stringer, Maul Foster & Alongi, Inc.
Workshop Goals Overview of Tri-State Brownfield Programs
John Means, WA Department of Ecology About the Brownfield Market
Robert Colangelo, NBA
Publications Brownfield News. Founder and Publisher, Robert V. Colangelo, Environomics Communications, Inc. Chicago: Feb. 1997- Dec. 2008: Vol. 1-12. Szymeco, Lisa A., and Thomas C. Voice. Brownfield Redevelopment Guidebook for Michigan. Ed. Robert V. Colangelo, et al. Chicago: Robert V. Colangelo, Environomics Communications, Inc., 2001. Colangelo, Robert V., et al. Brownfields: The National Perspective. Chicago: Robert V. Colangelo, Environomics Communications, Inc., 2000. Colangelo, Robert V., and Ronald D. Miller. Environmental Site Assessments and Their Impact on Property Value: The Appraiser’s Role. Chicago: Appraisal Institute, 1993. Colangelo, Robert V. Buyer Be (A )ware: The Fundamentals of Environmental Property Assessments. Dublin, OH: National Water Well Association, 1991.
Terminology Environmental Laws Highest and Best Use Polluter Pays Place Making Brownfields Code Building Greyfields Reposition Environmental Justice Debt Blight Equity Public Private Partnerships Adaptive reuse Environmental Risk Functionally obsolete Environmental Liability Land constrained Real Estate Real estate appraisal Mixed Use VCP Land Bank MCL NFA Sustainable development Real Property a legal term encompassing real estate and ownership interests in real immovable property. Blight a "condition of property in parts of a city, town, or neighborhood that are detrimental to the physical, social, and/or economic well-being of a community”. Greyfield land is typically commercial real estate or land which is underutilized, typically producing far less revenue than it would if properly managed Brownfield land is vacant or underutilized properties where the perceived presence or existence of contamination impedes its productive use – “Real estate transaction with environmental personality”
Evolution of the Brownfield Market 1990-2000 - The Beginning
Mayors raise awareness about the Brownfield issue- EPA responded with assessment grants
State voluntary cleanup programs (VCPs) offer flexile cleanup based on end use and a way to bring finality to cleanup and clarity to liability
Specialty companies emerge to buy/develop Brownfields, provide capital and environmental insurance products
2000- 2007- The End of the Beginning
Brownfield Revitalization and Environmental Restoration Act promulgated in 2001-2002
EPA Regions negotiated MOUs with states
States develop robust incentive programs and promote brownfield redevelopment as economic development
Larger development companies enter the market
Sellers become more comfortable divesting properties
2008- 2011 - The Decline
• Great recession - housing markets collapse, vacancies increase in commercial office and retail, investors shun real estate as an asset class
• Brownfield redevelopment activity declines 2012- Present- The Rebirth
Brownfields becoming normalized
Building sustainable communities- Build green on brown!
Brownfield
Development R i s k
Greenfield Development Sustainable Community
Code building R e w a r d About the Brownfield market?
How many Brownfields are in the US? How many have been cleaned up? How many have been redeveloped? How many have been repositioned to a highest and best use? USEPA estimates that up to 1 million properties are considered a “brownfield site” as defined in HR 2869. The United States General Accounting Office estimates as many as 425,000 Brownfield sites. Other estimates suggest that there are 5 million acres of abandoned industrial property in urban areas. Portland urban growth boundaries 30 percent of all available land considered to be Brownfield NBA estimates that between 5,000-10,000 individuals make their livelihood in the US Brownfield market 80:20 Rule Brownfields
Good Bad Ugly
•5% of environmentally impaired sites have strong real estate market attributes that will allow them to be redeveloped without incentives, using private capital.
•15% of sites have favorable real estate market attributes, but need public subsidies, government incentives or a change in use to make them viable to generate the economic returns necessary to attract sufficient private capital.
•80% of sites have bad real estate market attributes or have a combination of liabilities that greatly exceed the unimpaired value of the property.
$ 100,000 property value/$1,000,000 liability $100,000,000 property value/$1,000,000 liability
Property Valuation
Robert Colangelo, NBA www.brownfieldassociation.org
2009
Brownfield = Uncertainty
Property value Site characterization Cost to clean up known contamination Risk of undiscovered contamination Cost of ongoing treatment/operation and maintenance Cost to maintain institutional controls & engineered barriers Third party cost recovery Government re-opener Third party liability exposure
Highest and Best Use
Industrial
Commercial Residential Major Place-making Parks Development Vacant Mixed Use 1900’s Recreation Parks Residential Commercial Blighted Industrial industrial & Abandoned 2010
Slide content courtesy of Soji Adelaja, Ph.D., Michigan State University, Land Policy Institute Real Estate Property Value Market Value - is the price buyer and seller agree to after analyzing available information for their own best interest. Appraisals are an estimate of value and can be used to Establish a baseline value Secure financing Dispute property taxes Support internal decision making Traditional appraisal methods often are difficult to apply to Brownfield sites because of environmental exclusion/caveat to appraisal Cost Approach Sales Comparison Approach Income Approach
Factors that affect real estate property value
Location • Transportation and access Demographics • Population density and diversity Highest and Best Use • Functionality Market Conditions • Supply and demand Liabilities • Tax, legal, financial, • physical & environmental Brownfield Value
Easy Positive
Value can be increased through financial Difficult incentives and by repositioning a site to a Neutral highest and best use.
Value can be diminished through liabilities, risk & stigma. Very Hard Upside Down US Conference of Mayors, Recycling Americas Land estimates 30% of all Brownfield sites are perceived to be contaminated
“As Is Where Is” Valuation
IMV = CMV – (CC + EL + OL)
IMV = “As Is” Valuation is the Impaired Market Value (Decrease in value due to liabilities)
CMV = Clean Market Value (Value estimate, using BOV assuming no liabilities and no change in use)
CC = Carrying Costs (Expenses for taxes, insurance, financing, maintenance and security)
EL = Environmental Liabilities (the cost to cure, or clean up the property and the reduction in value due to stigma)
OL = Other liabilities (Cost to cure title and other encumbrances such as assessed unpaid taxes, liens, judgments, building code violations, demolition, etc…)
Highest and Best Use Valuation
IMV = (TC+EL+OL+ R + K) – I
IMV Impaired Market Value TC Transaction costs EL Environmental liabilities OL Other liabilities (Tax, legal, financial, physical…) R Repositioning costs and cost to secure incentives K Cost of capital (interest, rate of return plus risk premium) I % of total value of government Incentives that apply
Brownfield Risks and Solutions
Robert Colangelo, National Brownfield Association Frank Chmelik, Chmelik, Sitkin & Davies Market Sectors Stakeholder Perspective
Property Owners Mange/bound liabilities Maximize real estate asset value Developers & Investors (public & private) Generate a ROI Can highest and best use be achieved? Certainty and time? Government Protection of human health and the environment Economic development Transaction Support Assist buyers and sellers with transactions by charging a fee for services. Minimize liability
Brownfield Transaction Risks & Liabilities Environmental Site characterization Cost to clean up known contamination Risk of undiscovered contamination Cost of ongoing treatment/operation and maintenance Cost to maintain institutional controls & engineered barriers Third party cost recovery Government re-opener Third party liability exposure Financial Unknown costs Securing financing Time Unexpected delays Business and service interruption Use restrictions • Can highest and best use or intended use be achieved
Risk Management Strategies
Do Nothing; Fence & lock technology. Retain Risk;Self-remediate, self-develop, retain tort/statutory risk and market risk. Share Risk; Sell property in “as is, where is” condition, hope third party will responsibly extinguish tort and statutory environmental liabilities. Transfer Risk; Enter site in state VCP or formal program, hire third party to remediate property, use environmental insurance policy to cover residual statutory and tort liability, sell property after remediation with appropriate, representations, warranties and indemnity to fiscally solvent party. Liability Transfer; Pay third party to stand in polluters position in perpetuity and be legally recognized for all environmental liabilities (does not exist)
Tools for Risk Management
Due diligence Organizational structure Insurance Contracts Government programs
Due Diligence “Buyer Be(A)ware”
Systematic approach to uncovering unknowns and identifying environmental risk and liability Phased approach to data collection Looking for a quick “no” Look for what they don’t tell you Get control of the property before spending significant “hard” money on meaningful due diligence Little correlation to environmental cleanup and property size
Buyer-Due Diligence Checklist
Environmental Condition Accessibility Regulatory Process Traffic Studies Incentives Taxes Improvements Utilities Condition Permits Code Violations Zoning Functionality Political Environment Financing Community Support Pro Forma Market Conditions Appraisal Feasibility of Development Risk Management Plan Adaptive Reuse Insurance Redevelopment/Reposition Exit Strategy Seller-Due Diligence Issues
Understand your site - environmental and land use Can the perspective purchaser close? Credit worthy/Financeable Reputable Development experience Brownfield development experience Purchase Sale Agreement Price Terms Due diligence period Closing
Organizational structure Remote single asset entity Preference - Limited Liability Corporation Maximum liability protection for members/shareholders Flexible investment structure Offer little comfort to seller Environmental Insurance
Two widely used insurance products are used in more than 80% of the transactions: Cleanup Cost Cap (CCC) Pollution Legal Liability (PLL) Guaranteed Fixed Price Remediation Third party provides fixed price remediation and obtains CCC and/or PLL insurance Liability Transfer
Cleanup Cost Cap Policy
Covers Remediation Cost Overruns for Actual contamination greater than estimated Offsite cleanup costs adjacent to the covered site Other unknown contamination found during remediation Increased cost of remediation due to change in regulations during project
Insurance
Buffer Layer: - 0-30%
Estimated Cost to Remediate
Pollution Legal Liability Policy
Policy Inception
Covers “Unknown Pre-existing” Contamination Covers “New” Pollution Events Cleanup Protection On-site /Off-site cleanup coverage for contaminants on,within or under the site Unknown, pre-existing and new conditions. Tort Actions Bodily Injury on and off site Property Damage on and off site, including NRD Other liabilities Business Interruption Extra Expense Project Delay Transportation Contracts
Legally binding, court enforceable document Memorialize the terms and conditions of an agreement Avoid misunderstandings Contractual mechanism for apportioning liability protection environmental insurance premiums, engineering and institutional controls Gaining Control of Real Property
Purchase/ Sale Agreement Public Sector Participation Purchase Condemnation Eminent domain Foreclosure Tax Liens
PURCAHSE SALES AGREEMENT
Letter of Intent (LOI)/Term sheet Purchase Sale Agreement (PSA) Terms Price Inspection period Down payment Due diligence period Indemnification, reps and warranties Timing of business deal and cleanup Closing
Public Financing and Incentives to Stimulate Site Reuse
Mike Stringer, Maul Foster Overview of Government Brownfield Programs & Incentives
Liability Relief Technical Assistance Incentives
Site Assessment Funding
Program Description Fed. OR ID WA Targeted Brownfield Conducted by EPA contractor. Assessments Eligibility: Local governments, tribes & non- profits. EPA Brownfield Max Amount: $200K Petroleum, $200K Haz. Mat. Assessment & Multi- Eligibility: Local governments & tribes purpose Grants Assessment Grants State environmental agency grants funded by EPA Eligibility: Local governments Brownfield Typically loans, but grants available. Redevelopment Eligibility: Public and private parties. Fund Remedial Action Max Amount: VCP = $200K (with 50% match) Grants Formal = no limit (50% match typical) Eligibility: Local governments Integrated Planning Site assessment & redevelopment planning. Grants Max Amount: $200K (no match) Eligibility: Local governments Cleanup Funding
Program Description Fed. OR ID WA EPA Brownfield Max Amount: $200K / site (20% cost share) Cleanup & Multi- Eligibility: Local governments & tribes purpose Grants Brownfield State managed loan program capitalized by EPA. Revolving Loan Max Amount: $1 M (20% cost share) – varies by Fund state Eligibility: Public & private parties Brownfield Typically loans, but grants available. Redevelopment Eligibility: Public and private parties. Fund Community Max amount: 70% of cleanup costs (up to $150K) Reinvestment Pilot Eligibility: Parties conducting VCP cleanups Remedial Action Max Amount: VCP = $200K (with 50% match) Grants Formal = no limit (50% match typical) Eligibility: Local governments Other Funding Sources
US Department of Agriculture – Rural Development Grants and Loans US Department of Housing & Urban Development Community Development Block Grant US Department of Commerce – Economic Development Administration Public Works—infrastructure construction Economic Adjustment—infrastructure construction
Funding Contacts USEPA Susan Morales, 206-553-7229, [email protected] Oregon Karen Homolac, Business Oregon, 503-986-0191, [email protected] Gil Wistar, Oregon DEQ, 503-229-5512, [email protected] Idaho Aaron Scheff, Idaho DEQ, 208-373-0420, [email protected] Washington John Means, Ecology, 360-407-7188, [email protected] Bill Mandevill, Dept of Commerce, 360-725-3051, [email protected]
Case Study: Boise Cascade Mill, Yakima
Brad Hill, Principal Cascade Mill Properties, LLC
Structuring the Transaction
Robert Colangelo, NBA
Exit Strategies Understanding the key parties to a transaction Alignment of Interests Begin with the “End” – Create an exit strategy Understand highest and best use Redevelopment options Repositioning a property Adaptive Reuse Redevelopment Public Private Partnerships
Parties to a Transaction Buyer Property Owner/Seller Third Parties Investors Financiers Consultants, contractors and counsel Local Government Community Groups State Agencies Federal Agencies Who owns commercial real estate in the U.S.?
Corporations 43%
Partnerhsips 25.6%
Not for Profits 10.5%
Institutions 7.6%
Government 6%
REIT's 4.1%
Individuals 2.4%
Others 0.7% Major landowners with industrial operations
Major Sources of Brownfields Utilities Railroad Mining Oil & Gas Forestry/ Pulp & Paper Heavy Manufacturing Chemical Gas stations & dry cleaners
Types of Property Owners
Interested Owners PSA Option Disinterested Owners Understand Needs Recalcitrant owners Litigation and enforcement action Insolvent owners Foreclosure, tax liens
Creating Seller Comfort
Come with clear development plan Cleanup plan is commensurate with reuse and will limit Regulatory “re-openers” Third-party liability (“toxic tort”) Cleanup cost uncertainties Alignment of interest Property owner, regulator, community Bring the “A” development Team Consider a long-term lease if transfer is not an option
Who Buys Brownfields?
Types of buyers have access to different sources of financing Specialty development companies Industrial REITS Traditional Development Companies Owner/Operators Government
The Financier’s Perspective Preservation of Principal Effective lending structure Advance rate, repayment velocity and cash flow Recourse/Non-recourse Collateral, guarantees Generate Return Fees, interest, preferred return, participation interest Minimize Transaction Liabilities Environmental Legal
The Golden Rule: He who has the gold makes the rules! Capital
Debt- Borrowed money that will be repaid to the lender under specific terms and conditions. Equity-Invested money that, represents the risk capital staked by an investor for ownership in stock or an asset (land, project). Mezzanine - Non-conventional funding that shares characteristics of both debt and equity. Subordinated to debt Gap- It is an interim loan given to finance the difference between the debt and equity financing as committed.
http://www.scotsmanguide.com
Financing
Rate Return of Rate Equity
Debt
Redevelopment Milestones Marketing your Brownfield Real Estate Broker Publications Events State Programs Websites Creative Methods
Brownfield
Development R i s k
Greenfield Development Sustainable Community
Code building R e w a r d Role Playing Exercise
Jim Darling, Maul Foster & Alongi, Inc. Robert Colangelo, NBA
Wenatchee Case Study Location Wenatchee Case Study Location Ownership City Size 3.3 acres Zoning Waterfront Mixed Use Utilities Municipal water and sewer Former Use Public Works Yard & Municipal Landfill
Community Assets Economic Conditions Largest business sectors Agriculture Tourism Fastest growing sectors Health care Professional services Manufacturing
Environmental Conditions Former Landfill Soil Groundwater Public Works Yard Soil Groundwater
THANK YOU JOHN MEANS, DEPARTMENT OF ECOLOGY, STATE OF WASHINGTON BLIGHT AND REVITALIZATION STRATEGIES Frank Chmelik, Chmelik, Sitkin & Davies Brad Hill, Principal Cascade Mill Properties, LLC Jim Darling, Maul Foster & Alongi, Inc. Mike Stringer, Maul Foster & Alongi, Inc.
NEIGHBORHOOD BLIGHT, RECLAMATION AND REVITALIZATION ACT
MARK PATRICK, MANAGER, ECONOMIC DEVELOPMENT SERVICES, KU ESOURCES R
CONSERVATORSHIP ACT
ANDREW M. MENCHYK, JR., ATTORNEY, STEPANIAN & MUSCATELLO, LLP