Liz Ewbank had the opportunity to present on behalf of Real Estate Recovery Capital on the topic of “Private Investment Perspectives on Brownfield Redevelopment” at the recent Washington Brownfield Conference. She explained what drives private investment interest on Brownfield properties, the benefits of selling to a real estate investment firm and how to position your contaminated property to attract investors and developers. Please check out the video on our new YouTube channel; the transcript and slide images are below.
Transcript for “Private Investment Perspectives on Brownfield Redevelopment”
Thank you for the opportunity to share private investment perspectives on Brownfield redevelopment to help you attract and evaluate real estate investors who can transform your contaminated property with the ripple effect of improving your community.
In my presentation, I’ll cover the driving motivation for private Brownfield redevelopers and explain why to consider engaging them. From there, I’ll explain the fundamental prerequisites for private investment interest and share how to position your Brownfields to attract investment interest. I’ll close with how to evaluate private redevelopers and their offers if that is the route you select.
What Motivates Brownfield Redevelopers
I wanted to start my presentation by weeding through some common misconceptions about Brownfield redevelopers. After all, if you want to attract sources of private investment, you need to understand their motivations.My company (Real Estate Recovery Capital) is a Brownfield real estate investment firm, meaning we purchase, remediate, and redevelop Brownfields. Throughout this presentation, I’ll be using the term Brownfield redeveloper to be more inclusive of other sources of private investment.
Hopefully a few of you have seen this sort of meme, showing how the same thing can conjure up different perceptions based on your experiences.
– What we think of ourselves: Just like in the first image, some days we feel like heroes! Personally, I love knowing that my efforts funnel into a bigger picture of preserving the environment for generations to come and revitalizing communities.
– What others might think we are like: However, others less familiar with investment or redevelopment companies might think of popular movies like “The Big Short” with ruthless, profiteering investors just rolling in money.
– What our friends think we are like: Our friends have a different mental image- one of us crawling around abandoned factories and lots, since they hear stories about our onsite involvement. I know I’ll never forget the story of our VP of Acquisition realizing that the soles of his boots had melted from coming in contact with chemicals in the soil at a property of interest.
– What it’s really like: While there are moments of glory or horror, the day-to-day looks much more like the fourth picture- making business connections, project management, and reviewing details from environmental studies and financial analysis.
The details are critical, since our main motivator is being a faithful steward of our investors’ financial resources and ensuring we can provide an adequate return on investment to them. Our need to manage risk and make wise choices on which properties we focus on will play heavily into what you can do to attract private redevelopers to fix your Brownfields.
Why Engage a Brownfield Redeveloper?
Now that you know what motivates private redevelopers, the next question to be answered is why engage them? As a Seller, the why boils down to three things: peace of mind, time and speed.
– You can remediate Brownfields by contracting directly with environmental remediation companies and soliciting support from community organizations and local government, and there are some great resources online to guide you if you take that route. We have upcoming presentations in our session that will include some great case studies and results from successful public/private partnerships. However, there are benefits from utilizing an experienced firm who can oversee the entirety of the project from remediation to a successful redevelopment. By selling the property to a redeveloper specializing in Brownfields, they can increase your peace of mind with a risk management strategy that can include liability transfer, environmental insurance, and indemnification with guarantees of performance for the remediation.
– The value of your time is another factor. With experience and established partnerships in place to address the unique needs of each Brownfield, a real estate redeveloper can move quickly. Brownfields are often complex properties and require specialized knowledge not just of current environmental, regulatory and market conditions but also of trends and upcoming changes. It’s simply not possible to teach yourself the experience that a specialized firm can offer, besides the fact that it frees you to focus on your own areas of expertise.
– The speed with which the property is remediated and ready for reuse is another factor. It takes a lot of money to successfully remediate and redevelop a Brownfield; securing adequate funding can be challenging and time-consuming. There also may be less federal funding to go around in the near future. The 2020 EPA budget for Brownfield grant programs could be 33% less than 2019 levels, which equates to approximately $16 million fewer dollars available to the public.
There’s also the time it takes to coordinate everyone’s efforts on the project. Redevelopers have a vested interest in getting the property ready for reuse quickly, since they have made a large investment that is locked up in that property until it sells. As an example, if we give our investor back $1.25 for every $1 invested, it matters a lot to them whether that increase takes 5 months or 5 years because of the opportunity cost of not having access to that money during that time and because of the impact of inflation.
Precursors for Investment Interest
Redevelopers look at several key factors as they evaluate the property’s potential.
– First, they want to understand if the seller is serious about divesting the property to avoid chasing a deal if the seller isn’t motivated to sell. Some of the things that motivate an owner to sell a property would be limited access to capital, entitlement or zoning issues, bankruptcy, or a change in priorities where that property isn’t core to their future goals anymore.
– The purchase price needs to be reasonable and discounted to reflect the work and the money that will be invested in bringing it up to useable standards again. Essentially, real estate investment firms are looking for opportunities to resell for more than the combined purchase price, the remediation costs, the holding costs (property upkeep/taxes/insurance), and the implied cost of the risks assumed.
– Another consideration is the nature of the impairment. It needs to be consistent with the buyer’s area of expertise or something they can contract to someone else to resolve. The impairment may limit the number of potential qualified or interested redevelopers; for example, we don’t remediate sites with nuclear contamination. It’s incumbent on the seller to create opportunity for interest by making the purchase price match the nature of the impairment to allow for there to be an upside for the redeveloper after the work is complete.
– In real estate, location is everything, right? Redevelopers look for fundamental real estate value in an active market. Many times, that value is easiest to realize in primary U.S. markets, but research (and our experience) has shown that value can be found in mid-markets (or even smaller cities) with the right trends in demographics, surrounding development, and job growth. Of these factors, you really can’t change the location of the Brownfield property, so what happens if you aren’t in a “happening” area?
Top 5 Ways to Attract Private Investment
Regardless of your property’s location, there are 5 critical ways the public sector and owner can work together to attract private investment.
– I won’t go into detail on tax incentives, since we have some very talented presenters coming up who will be talking about Opportunity Zones and tax incentives, credits and abatements. These are a critical component of attracting private investment because they can make an otherwise unviable project financially attractive.
– The next attribute of a strong transaction process is when all parties maintain a problem-solving mindset. Both the buyer and seller may need to get creative to maintain situations where both parties benefit. If the return is there and honest communication/disclosure happened upfront, most transactions can close successfully regardless of obstacles that arise with a proactive, “can-do” mindset.
– I can’t emphasize this enough, but the more information you can provide the better, whether that’s in an organized packet or data room or a single environmental report. We strongly suggest sponsoring a Phase 1 environmental study. There are so many Brownfields that we typically don’t consider ones without environmental data upfront, as that aspect drives so much of whether the transaction will fit our criteria.
– Proactive marketing improves the likelihood that redevelopers will even know about the opportunity. Partnering with a good industrial or commercial broker is also recommended, since they can give you nationwide exposure through MLS and other similar real estate listing platforms. Beyond that, you can even submit the property directly to different Brownfield redevelopers for consideration. Make sure you leverage the power of social media; ask your connections to help share the property and get community organizations, like your local Chamber of Commerce, involved in promotion. You can consider setting up a formal bid to officially solicit and require responses within a certain time frame.
– A clear community vision is also extremely helpful. Knowing what end use is supported by the community and the local government streamlines the rezoning process and allows for an accurate evaluation of the property based on an acceptable end use.
How to Select a Brownfield Redeveloper
Hopefully by following some of the steps we discussed, you will be in a position to choose between multiple interested parties and offers when you are ready to sell your Brownfield.
– The first thing to look for in evaluating potential buyers is dedicated funding. One of the main reasons for a company to walk away from their contract and commitment is because their funding runs out. Make sure they are backed by reputable investors and that they have the capital to do what they said they would do, even if things don’t go perfectly.
– The selected bidder should have a track record of performance. Do their employees have relevant backgrounds and experience? Ask for client references and case studies.
– Environmental expertise is critical, as this is the greatest responsibility and liability that a seller is handing over to the buyer. The firm you work with should have environmental experts on their team and be able to speak intelligently to remediation as well as be committed to a brand of doing the right thing for the environment and the community as they take care of these properties.
– Finally, they should have a plan for the intended end use during their bid. If they haven’t considered the long-term goals for the property, they probably haven’t done their homework or may intend to sit on the property. As a starting point, I noted some questions that should be asked during the process.
In conclusion, redevelopers want to minimize their risk and maximize their return to get the property ready for reuse within a given timeframe. You can minimize the hurdle of risk by providing information (like environmental studies) upfront. You can minimize the hurdle of return on investment by working on a financial arrangement that includes a reasonable selling price and potentially local incentives that will ultimately result in a benefit to the community and an increased tax base. You can lower the hurdle of timing by minimizing red tape and having a clear picture of rezoning.
It IS possible to attract more interest from redevelopers by minimizing known obstacles, and I hope this information will be used to better attract and leverage the power of private investment to transform Brownfields in your community into their highest and best use. Thank you!