Q&A with the Deal Makers

Moderator:
Denice Trimble, GordonDerr
Speakers:
Denice Trimble, Partner, GordonDerr
Seth Hudson, Weston Solutions Inc
Don Moody, First Vice President, CB Richard Ellis
Ed Morales, Environmental Risk Officer, Sterling Savings Bank

10:15 AM: Denice Trimble introduced this session as an opportunity to talk about what financial resources are available for brownfield projects, and the legal and risk concerns on these projects.

How do the current economic conditions affect the negotiations these days?
Don Moody: brownfields are very similar in process to other properties, but with the inclusion of costs associated with the remediation. But, there are simply fewer buyers. Since 2007, there was a 70% decline in large lot sales. Same for brownfields. But, activity if picking up. Brownfields are becoming more positive because they tend to be in urban settings. Tearing down a building have costs, too.
Seth Hudson: They do 6-8 deals across the country for brownfield purchase and development. There has to be a trust relationship and a exit strategy. They do not hold property for more than 5 years. They clean them up and move on. This is easier with access to capital.

How has the economy affected the financing of brownfields?
Ed Morales: There haven't been many deals lately, as developers have been licking their wounds on construction loans. But, there is money available. It's important to try to understand the risk. U.S. Bank wants to do these kinds of loans because they have internal expertise. Private investment brownfield "flippers" are saying that there are places where brownfields are ready to be taken up, and the Northwest is one of the hot areas, particularly Seattle and Bellevue.
Hudson: Agreement on that last point.

How do you identify the right properties?Moody: There is movement away from greenfield development. From a financing perspective, owner may have to finance half the cost. But, sometimes, there's no point to insuring a building, except for liability, because it doesn't matter if it burns down. But sometimes they can be used for purposes which provide low incomes. In the end, though, it's important to have good exit strategies.
Hudson: It used to be that if you build it, they will come, so it's little more than buying it, cleaning it up, then selling it to someone. The market is changing because you can identify a customer first and find a property that best fits their needs. Now they can set criteria for site selection because they know a specific need. That's what has changed the most. But, sometimes, current owners call to dispose of it.
Moody: It's almost impossible to find financing for a new building right now, even if the need can't be met elsewhere. That's new. So, it may be that they must use a brownfield site because it doesn't exist any other way.
Hudson: There are finance structures which recognize that the land might be upside down prior to the environmental concern. In that case, property owners might provide the land for free (even with cash) to get it off their books. Alternatively, the payment for the sale might happen on the back end after the final owner receives it.
Morales: Indemnity flow is important: who is ultimately responsible for the cost. This will also be a variable in the financial and insurance arrangements.
Moody: You must be highly curious to make these work. Every deal is different.
Hudson: people involved must be open about the situation. Testing in areas where there wouldn't be an issue isn't appropriate.

What kinds of clients are you looking for? How many are there?
Moody: there are very few buyers. there are no 30-60 day sales. These can take 3-5 years, and you don't get paid until the back end. Sales are always a team effort, including sellers, buyers, and government agencies.

From a lending perspective, what are you expecting to see during the due dilligence phase?
Morales: Do as much as possible. You're risking capital. The amount of due diligence is very important. Characterization of the site is key, and how much has been done to mitigate, and what plans are in place to complete it, including the costs. Regulators require a course of action. Insurance may cover those costs of the presumptive solution. How often does this happen? On occassion.
Hudson: this is a costly, time-consuming process. Sometimes gaining that time requires hard or soft money to hold it off the market. Sometimes a government can assist on those costs, if they're important sites. Remediation can take a year or two.

Does the size of the site matter? Are small ones worth it?
Moody: There are hundreds of small sites in Tacoma. Almost every gas station is simply too small. Aggregating them makes more sense. In old cities like that it's even difficult to determine what the source is because the contamination plumes can overlap.
Hudson: the best use for fomer gas stations are...gas stations. But there are also similarly sized uses, such as fast food drive through restaurants, so there's some possibility of that if the city will allow it. A gas station in Fresno is different from one in Beverly Hills because it has to do with land value. You can do more with it if the land value is higher.
Morales: one of the ways to make the credit people in the banks happy is to provide an insurance policy against the cost of remediation of these small sites.

Can the insurance policy actually solve the problem if there's a new owner afterwards?The term of the insurance policy is usually pretty short because there's usually enough time for big oil to finish cleaning it up within a couple years. So, it may not be necessary for later owners. But, they could also add a new beneficiary to the existing insurance policy.
Moody: It's important for brownfield experts to be a source of information for the clients so they can learn about what is actually going on here. Others may not be willing or able to provide useful information.
Hudson: For his company, the land is owned by an LLC created for that purpose, and the insurance is transferred to the corporate parent. This allows them to bankrupt the LLC while protecting the corporate bottom line.
Morales: This also helps with funding because the banks are more willing to provide dollars to the guarantor: in this case, not the LLC, but the mother corporation, which balances the risk load.
Hudson: And they provide a guarantee that if any further contamination is found, they will go back to finish it up.

How do attorneys affect this process?Trimble: This is a partnership amongst all the members of the transaction. But, yes, as attorneys are very risk averse. There is a spectrum: "as is" to "full indemnities" (though that never happens). there has to be sufficient time for due diligence. What are the representations and warranties? What is the source of the information? Some information is more reliable. There may be a limit to the indemnification. Are there sunset provisions which provides a number of years before the seller is off the hook?
Morales: the strength of the legal team is very important. Good representation makes a difference. The context is also important because there may be superfund exposure and interaction with environmental assets off site.
Hudson: But, it's important that the business terms are clear before you bring in the attorney otherwise it will never get off the dime
Trimble: Non-binding terms!

Mr. Hudson, do you work with the public sector?
Hudson: Yes.
How long are you willing to hold the properties?
Hudson: 5 years was what was said in the past. Now it's more like 5-7 years. We don't want to clean for one year then hold it for several more years. We are looking for jobs that would take longer now because there's the time. In hot markets, you have to move faster, and that's difficult with brownfields because they simply take time.

What about brownfields without a building?
Morales: There isn't alot of that going on right now because you need to know that the building was substantially leased. It was 50%, but now more like 70%.
Hudson: this requires pre-leases, even. They moved into a building they were building in order to have the building leased.
Moody: There is little market for this. It's simply not happening right now. It will take a year to get the funding and you will have to prove you don't need it to get it.
Morales: Confirmed. That's the current conditions.

What about land banking?
Morales: Yes, you can get liability insurance for a longer term after remediation. There's only three markets, though, for environmental remediation coverage, down from five last year. It's easier to do this if you're bigger. One-offs are far more difficult.
Hudson: insurance is flexible, you may put in large deductables or insurance for a part, then no insurer liability for a range of values, say between $5 million and $10 million where the company is self-insured, then the insurance kicks in again above that.

Denise Trimble thanked the participants.