Subject: UFTO Note – Brownfields–Assets or Liabilities?
Date: Tue, 25 Mar 1997
From: Ed Beardsworth

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| ** UFTO ** Edward Beardsworth ** Consultant
| 951 Lincoln Ave. tel 415-328-5670
| Palo Alto CA 94301-3041 fax 415-328-5675
| http://www.ufto.com edbeards@ufto.com
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Brownfields — Environmentally Impaired Properties –Liabilities or Assets?

With recent changes in the legal and regulatory treatment, properties that may be contaminated with industrial waste can hold significant bottom-line opportunities for forward thinking corporations.

Many companies must create reserves for environmental liabilities, and must disclose them to shareholders. These liabilities depress shareholder value, distract management from its profit-making mission, and represent uncertainty in the company’s value which can impact merger or acquisition negotiations.

However, if well managed, these liabilities can be the source of significant gains. Long-held reserves can be liquidated, if liabilities are properly transferred to others. Thus, long-forgotten assets can be turned into profitable ventures.

Many utilities have properties such as former manufactured gas sites, transformer yards, and fuel storage facilities. In the old scheme of things (regulated monopoly, rate of return), it may have been OK to hold them in limbo, at worst paying for required remediation efforts (ultimately recovered in rates). Now, however, with industry restructuring and competition, utilities have strong incentives to manage these holdings more aggressively, and prepare themselves and their balance sheets for what lies ahead.

“The Brownfield Movement”

The US EPA and many state and local regulators have realized that many contaminated properties have potential for industrial, commercial, multi-family and single-family development. Unfortunately, these properties lie fallow and undeveloped because corporations are concerned about cleanup liability and the never-ending costs associated with the identification of waste from their industrial processes. Some are eyesore vacant industrial plants. Others are fenced and abandoned. Still others, although they may raise suspicions, have yet to be identified as potential problems but are put on back burners by their owners who fear the sites may be branded “hazardous waste dumps.”

But there is good news. Recognizing the enormous impact these vacant industrial sites have on local communities and the fact that many old industrial sites are in what are now high potential value locations, regulatory agencies have taken affirmative steps to give owners and developers incentives to derive economic value from these sites. For example, the US EPA has a Brownfields grant program which provides communities $200,000 for development programs. Also, the Administration is now examining tax incentives, and federal, state, and local regulators have begun to provide significant regulatory protection and relief.

Further, agencies are more likely to find health-risk-based decision-making acceptable, liberating many properties to constructive future uses. Where once a regulator might have required a “dig and haul” solution, instead a cap and immobilize approach (with much lower cost) may now be not only acceptable but recommended.

Along with the changes in governmental philosophy and policy, sophisticated transactional players have emerged to help owners of (possibly) impaired properties shift and reduce large portions of their environmental risk (see list below). They do this by coupling the new regulatory initiatives with combinations of liability-shifting indemnities, customized insurance programs, and use-appropriate environmental solutions. Most traditional environmental consulting firms don’t yet have the sophisticated real estate focus and transactional experience that’s required to maximize returns and limit future liability.

In this new approach, the keys are to look first at the highest and best potential uses of a property consistent with local zoning and land use plans (What would the land be good for, if it wasn’t contaminated?). Then, lower cost analyses based on future-use and health-risk enable owners to make thoughtful decisions whether to retain properties, implement remedies, or sell, which shifts the risks, benefits and liabilities to other parties.

With an extensive portfolio of such properties, an overall plan of attack should be undertaken, rather than a piece-meal one-at-a-time approach. In particular, high and lower value properties can be bundled for disposition, increasing returns to the seller..

With the advancing deregulation of their industry, utility companies should carefully examine their environmental liabilities to identify good business opportunities and ways to reduce corporate exposures. (Utilities also have a stake in the new energy customers that will appear on all former Brownfield sites.) With the changes in the legal/regulatory framework, and starting with a sophisticated analysis of the real estate portfolio, a forward thinking company is likely to enjoy a significant return.

Some of the key new Brownfield developers:
– Landbank, Lakewood CO and Walnut Creek CA
– Recovery Capital Company , Reston VA
– Remediation Financial, Inc., Phoenix AZ
– Cherokee Investment Security

Other information sources:
– EPA’s Brownfield Home Page — http://www.epa.gov/swerosps/bf
– McCutchen Environmental Group — http://www.mdbe.com/env
– “Eliminating Environmental Liabilities by Transferring Ownership of Contaminated Properties”, J. Simon, Remediation, Winter 1996, J. Wiley & Sons, pp. 123-128

For more information, feel free to contact:

Edward A. Firestone, Environmental Consultant & Attorney
Palo Alto CA, 415-327-6686

(Mr. Firestone provided much of the information in this article, and is a personal friend and colleague of mine. Ed B)