Doing the Deal, Before the Deal Does You!

Transcription

1 Doing the Deal, Before the Deal Does You!

2 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

3 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 3:00-4:30pm 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 Role Playing Exercise Jim Darling, Maul Foster & Alongi, Inc. Robert Colangelo, NBA

4 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.

5 Workshop Goals Overview of Tri-State Brownfield Programs John Means, WA Department of Ecology

6 About the Brownfield Market Robert Colangelo, NBA Publications Brownfield News. Founder and Publisher, Robert V. Colangelo, Environomics Communications, Inc. Chicago: Feb Dec. 2008: Vol 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., Colangelo, Robert V., et al. Brownfields: The National Perspective. Chicago: Robert V. Colangelo, Environomics Communications, Inc., Colangelo, Robert V., and Ronald D. Miller. Environmental Site Assessments and Their Impact on Property Value: The Appraiser s Role. Chicago: Appraisal Institute, Colangelo, Robert V. Buyer Be (A )ware: The Fundamentals of Environmental Property Assessments. Dublin, OH: National Water Well Association, 1991.

7 Terminology Environmental Laws Polluter Pays Brownfields Greyfields Environmental Justice Blight Public Private Partnerships Environmental Risk Environmental Liability Real Estate Mixed Use Land Bank NFA Highest and Best Use Place Making Code Building Reposition Debt Equity Adaptive reuse Functionally obsolete Land constrained Real estate appraisal VCP MCL Sustainable development

8 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

9 Evolution of the Brownfield Market 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 The End of the Beginning Brownfield Revitalization and Environmental Restoration Act promulgated in 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 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 Present- The Rebirth Brownfields becoming normalized Building sustainable communities- Build green on brown!

10 R i s k Brownfield Development Greenfield Development Sustainable Community Code building R e w a r d

11 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 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

12 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

13 Property Valuation Robert Colangelo, NBA

14 2009

15 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

16 Highest and Best Use 1900 s Vacant Blighted industrial & Abandoned 2010 Parks Industrial Residential Residential Commercial Commercial Parks Recreation Industrial Major Place-making Development Mixed Use Slide content courtesy of Soji Adelaja, Ph.D., Michigan State University, Land Policy Institute

17 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

18 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

19 Brownfield Value Easy Positive Difficult Neutral Very Hard Upside Down Value can be increased through financial incentives and by repositioning a site to a highest and best use. Value can be diminished through liabilities, risk & stigma. US Conference of Mayors, Recycling Americas Land estimates 30% of all Brownfield sites are perceived to be contaminated

20 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 due to stigma) OL = Other liabilities (Cost to cure title and other encumbrances such as assessed unpaid liens, judgments, building code violations, demolition, etc ) value taxes,

21 Highest and Best Use Valuation IMV = (TC+EL+OL+ R + K) I IMV TC EL OL R K I Impaired Market Value Transaction costs Environmental liabilities Other liabilities (Tax, legal, financial, physical ) Repositioning costs and cost to secure incentives Cost of capital (interest, rate of return plus risk premium) % of total value of government Incentives that apply

22 Brownfield Risks and Solutions Robert Colangelo, National Brownfield Association Frank Chmelik, Chmelik, Sitkin & Davies

23 Market Sectors

24 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

25 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

26 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)

27 Tools for Risk Management Due diligence Organizational structure Insurance Contracts Government programs

28 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

29 Buyer-Due Diligence Checklist Accessibility Traffic Studies Taxes Utilities Permits Zoning Political Environment Community Support Market Conditions Feasibility of Development Adaptive Reuse Redevelopment/Reposition Environmental Condition Regulatory Process Incentives Improvements Condition Code Violations Functionality Financing Pro Forma Appraisal Risk Management Plan Insurance Exit Strategy

30 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

31 Organizational structure Remote single asset entity Preference - Limited Liability Corporation Maximum liability protection for members/shareholders Flexible investment structure Offer little comfort to seller

32 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

33 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: % Estimated Cost to Remediate

34 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

35 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 Contracts

36 Gaining Control of Real Property Purchase/ Sale Agreement Public Sector Participation Purchase Condemnation Eminent domain Foreclosure Tax Liens

37 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

38 Public Financing and Incentives to Stimulate Site Reuse Mike Stringer, Maul Foster

39 Overview of Government Brownfield Programs & Incentives Liability Relief Technical Assistance Incentives

40 Site Assessment Funding Program Description Fed. OR ID WA Targeted Brownfield Assessments EPA Brownfield Assessment & Multipurpose Grants Assessment Grants Brownfield Redevelopment Fund Remedial Action Grants Integrated Planning Grants Conducted by EPA contractor. Eligibility: Local governments, tribes & nonprofits. Max Amount: $200K Petroleum, $200K Haz. Mat. Eligibility: Local governments & tribes State environmental agency grants funded by EPA Eligibility: Local governments Typically loans, but grants available. Eligibility: Public and private parties. Max Amount: VCP = $200K (with 50% match) Formal = no limit (50% match typical) Eligibility: Local governments Site assessment & redevelopment planning. Max Amount: $200K (no match) Eligibility: Local governments

41 Cleanup Funding Program Description Fed. OR ID WA EPA Brownfield Cleanup & Multipurpose Grants Brownfield Revolving Loan Fund Brownfield Redevelopment Fund Community Reinvestment Pilot Remedial Action Grants Max Amount: $200K / site (20% cost share) Eligibility: Local governments & tribes State managed loan program capitalized by EPA. Max Amount: $1 M (20% cost share) varies by state Eligibility: Public & private parties Typically loans, but grants available. Eligibility: Public and private parties. Max amount: 70% of cleanup costs (up to $150K) Eligibility: Parties conducting VCP cleanups Max Amount: VCP = $200K (with 50% match) Formal = no limit (50% match typical) Eligibility: Local governments

42 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

43 Funding Contacts USEPA Susan Morales, , Oregon Karen Homolac, Business Oregon, , Gil Wistar, Oregon DEQ, , Idaho Aaron Scheff, Idaho DEQ, , Washington John Means, Ecology, , Bill Mandevill, Dept of Commerce, ,

44 Case Study: Boise Cascade Mill, Yakima Brad Hill, Principal Cascade Mill Properties, LLC

45 Structuring the Transaction Robert Colangelo, NBA

46 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

47 Parties to a Transaction Buyer Property Owner/Seller Third Parties Investors Financiers Consultants, contractors and counsel Local Government Community Groups State Agencies Federal Agencies

48 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%

49 Major landowners with industrial operations Major Sources of Brownfields Utilities Railroad Mining Oil & Gas Forestry/ Pulp & Paper Heavy Manufacturing Chemical Gas stations & dry cleaners

50 Types of Property Owners Interested Owners PSA Option Disinterested Owners Understand Needs Recalcitrant owners Litigation and enforcement action Insolvent owners Foreclosure, tax liens

51 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

52 Who Buys Brownfields? Types of buyers have access to different sources of financing Specialty development companies Industrial REITS Traditional Development Companies Owner/Operators Government

53 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!

54 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.

55 Rate of Return Financing Equity Debt Redevelopment Milestones

56 Marketing your Brownfield Real Estate Broker Publications Events State Programs Websites Creative Methods

57 R i s k Brownfield Development Greenfield Development Sustainable Community Code building R e w a r d

58 Role Playing Exercise Jim Darling, Maul Foster & Alongi, Inc. Robert Colangelo, NBA

59 Wenatchee Case Study Location

60 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

61 Community Assets

62 Economic Conditions Largest business sectors Agriculture Tourism Fastest growing sectors Health care Professional services Manufacturing

63 Environmental Conditions Former Landfill Soil Groundwater Public Works Yard Soil Groundwater

64 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 RESOURCES CONSERVATORSHIP ACT ANDREW M. MENCHYK, JR., ATTORNEY, STEPANIAN & MUSCATELLO, LLP