According to some estimates, there are over a half-million brownfield properties across the United States. Due to their former uses, most of these properties are environmentally impaired to some extent or another. This characteristic separates brownfields from greenfields, and creates additional challenges for companies and communities alike.
Through decades of success and change, many corporations have amassed portfolios of excess property. These properties cause significant headaches for both the corporate financial officer and risk officer. Companies have significant apprehension about divesting these properties, primarily because of the concern that the environmental liabilities could eventually rebound back to them. The buyer might not be able to meet his or her obligations and additional due diligence may trigger more environmental response actions. As a result, many of these properties remain unaltered on corporate books for decades, continuing to drag down the corporate balance sheet. Beyond the environmental liabilities and their associated costs, the other issues with balance sheet implications include property taxes, insurance, site security/maintenance, financial reporting obligations (under SOX), government actions, and diminution in brand/property value.
Communities face similar concerns as properties remain unused in the heart of their historic industrial areas. The original companies may or may not remain solvent, but the properties remain unused as a blight upon the urban environment and as an obstacle to further growth.
Many of these brownfield properties housed state-of-the-art industrial operations when they were built - including automotive assembly plants, chemical manufacturing facilities, industrial warehousing, and plants built for specific applications across many industries. These facilities were situated at key locations that maximized their exposure to raw materials, markets, logistics networks, and key utilities. Many of these properties are also located near ports, along strategic transportation/transit corridors, and in urban infill locations.
While the properties may have problems and the infrastructure dates from an earlier age, these locations can still provide these same key inputs that make businesses successful. The solution, then, is to develop a risk management and redevelopment strategy that matches the best possible and most reasonable re-use of the property.
In order to divest/re-use a brownfield property, the company or community needs to be able to match liability to opportunity. The first step is to understand the environmental liabilities and how those liabilities will be quantified and allocated between seller and buyer. This is accomplished by developing a remediation strategy that aligns with the redevelopment plan, a multi-tiered risk management strategy through insurance, third-party risk transfer, escrows/environmental trusts, and public-sector financial incentives and liability protections.
The primary advantages of divesting surplus properties and transferring the environmental liabilities are:
• eliminate/substantially reduce operating costs (identified earlier in this article);
• reduce tax obligations;
• refocus company resources on core business;
• favorably position the company for a merger and/or acquisition;
• improve brand image.
There are many examples of where the environmental risk transfer coupled with the divestment of a property has been successfully accomplished. There are also a few examples where the desired outcome was not achieved and the previous owner had to step back in. However, with the availability of sophisticated risk management expertise and insurance/financial assurance products, corporate owners should seriously look at divesting their environmental impaired properties to reduce their operating expenses, transfer their environmental liabilities, and generate positive cash flow.
Reverse Site Selection
A good strategy for re-use begins in understanding the strengths of the site as it might have appeared in its original, unimpaired state. Understanding and reversing the site selection process provides important insight into how these properties might be re-used and can, in the best of cases, even point to new users for this excess property.
The site selection process normally begins with an examination of the problem to be solved; i.e., the goals that the new facility will be expected to fulfill. These goals will include such straightforward items as the functions to be accommodated within the facility and how they fit in with the user's value chain(s) or production strategy, etc. The process will then move to examine the staffing, skills, logistics access, market proximity, regulatory, quality of life and features needed to make the operation successful.
The same process is being used in reverse to help companies, communities, and public agencies re-use abandoned, vacant, and underutilized properties. Labor, market access, infrastructure, climate, cost, utilities, regulatory, and other data provide the clues to determine who might be a prospective new user for the site or facility and give insight into the packaging and marketing that can be used to make that site more attractive and competitive.
Industry and use-specific profiles coupled with weighting schemes can add substance to marketing plans to demonstrate the location's and community's strengths relative to competitive alternatives - as well as into incentive plans later. Essential items such as market access or infrastructure requirements - one-day drive to "n" markets, proximity to international shipping, etc. - facilitate filtering and removal of candidate communities that are unable to deliver them. From this point forward, the site selection process becomes a weighting game.
No candidate location will completely match the prospective user's ideal location profile, and some preferred criteria, such as access to key markets and the availability of highly trained labor, may negatively correlate with others, such as low cost of operations. The user must find the balance that will ensure the success of the enterprise by providing a location that will respond to the user's needs now and during a reasonable range of downstream scenarios.
Finally, the company or community must be able to look into the future to determine which of the industries or uses best suited to the site are likely to have a need in the near future. What are the dynamics of the industry? Who are the major players? What pressures is the industry facing, and what will this likely force the companies to do? Is it possible to influence these decision factors to make the site at hand more attractive? State and local government agencies can also be enlisted - through incentive, credit, or other programs - and become active partners in bringing economic vitality to what would otherwise be drain on the community.
Rayomond Bhumgara has over 20 years of experience in the real estate acquisition/development and environmental consulting business. He can be reached at email@example.com. Christopher Steele is president of CWS Consulting Group, a business consulting firm specializing in location strategy, site selection, industrial development, and business attraction. Contact him at firstname.lastname@example.org.