Brownfields Capital, a specialty lending and investment management firm, has announced the closing and funding of its first project, Gold Hill Mesa, a prime urban property in Colorado Springs, CO. For the first time, this process opens the brownfield market to large scale investment capital and enables owners of contaminated property to finance their environmental liabilities without negative impact to their core business, while unlocking and participating in the redeveloped value of the property.
For more on this topic, see “Building On Brownfields” from the Business Facilities archive.
The patented process and financial instrument introduced by Brownfields Capital is similar to past innovations in real estate financing, such as Commercial Mortgage Backed Securities (CMBS). The Brownfields Capital platform is a transaction process coupled with a financial instrument called a Brownfields Value Contract (BVC), designed to enable institutional and private capital to be deployed to restore environmentally contaminated properties to productive use. In addition, the BVC actively shields investors, owners, future owners and communities from current and future risks associated with environmental impairment.
“The brownfields real estate market is enormous and has been estimated by industry observers at approximately $2 trillion. But to date, less than $3 billion of capital has been raised to target investments in environmentally impaired properties because of the real or perceived risks,” says Cheryl Hoffman, the founder and CEO of Brownfields Capital. “Brownfields Capital insulates institutional investors from the reach of environmental law and simultaneously provides owners a fully financed capital structure and business plan.”
The Brownfields Capital Platform
The Brownfields Capital process aligns all parties needed to characterize, remediate, insure, entitle, land-plan, and redevelop polluted sites in a single set of interdependent agreements before significant capital is invested. Aligning the interests of all involved parties and providing all capital through a single financial instrument mitigates the negative impact of time delays, transaction costs, and other unknown risks.
The Brownfields Capital process recognizes that brownfields redevelopment differs from traditional real estate development, thus the capital structure must be different, too. The process creates a special purpose vehicle (SPV), which is an entity formed with the expertise to own and redevelop the property and finances that entity through a Brownfields Value Contract (BVC). The SPV is created when the owner of the contaminated site contributes or sells the property and all of its rights to the SPV and takes back marketable equity ownership in the SPV. The fully capitalized SPV owns and controls the site and assumes responsibility for remediation and redevelopment, allowing the site owner to remove any contingent or actual liabilities associated with the site from its financial statement. The establishment of the SPV, and its supporting business plan, creates a way to finance cleanup and development away from the owner’s balance sheet and protects its shareholders from losses and risks.
By financing the full redevelopment as a fully committed corporate debt facility, the cost of capital is reduced to the lowest possible level and thus creates the highest and only predictable equity residual. At the same time, risks to all parties are substantially mitigated, including many risks of traditional development, as well as environmental risks.
“Through the process, distressed, immobilized owners of contaminated real estate can now be converted into willing sellers, unlocking access to some of the most desirable inventory of urban development in the country,” says Eugene Mercy Jr., chairman of Brownfields Capital and a senior director (retired) of Goldman Sachs and Company. “In turn, large-scale investors can invest in an unexplored but vast real estate market with premium, non-correlated returns.”
Gold Hill Mesa Development
For more than 50 years, Gold Hill Mesa, a 210-acre former gold mill site located in the heart of Colorado Springs, remained idle as a result of environmental concerns. Colorado Springs, one of America’s top 10 places to do business according to Forbes magazine, has fully developed its urban greenfield land, leaving Gold Hill Mesa, nestled between the Front Range and downtown, as one of the last prime inner city parcels of land for development.
The land is the former site of the Golden Cycle Mill, a gold and silver mill that began operations in 1906 and processed over 800 tons of ore per day. Operations ceased in 1949, leaving behind a mesa comprised of 14 million tons of gold tailing-infused soil. Over the past three decades, attempts to reprocess the tailings to recover remaining metals or redevelop the site have failed.
“Before Brownfields Capital, financing the redevelopment of a brownfield site could be even more difficult than the clean-up itself,” says Robert Hadley, a principal of Gold Hill Mesa Partners, LLC, owner of the Gold Hill Mesa property. “As an owner of a brownfield trying to develop in accordance with our approved Voluntary Clean-Up Plan, we were challenged from every angle. Traditional bank construction capital simply wasn’t available. Brownfields Capital unlocked the value of the clean land, allowing us to attract the capital we needed for best-use redevelopment.”
In March 2006, Brownfields Capital provided Gold Hill Mesa Partners a $19 million Brownfields Value Contract with an expected term of 3.25 years. The BVC provides revolving debt financing for the complete remediation and development of the site.
Through the 100% project financing commitment from Brownfields Capital, Gold Hill Mesa Partners, LLC has started clean-up and development of the site. The plan envisions a mixed-use development, drawing on the influences of New Urbanism: a dense commercial and residential core anchored by a community center with parks and residences. A total of 877 residential units are being developed, consisting of condos, town homes, and single-family detached units of various sizes. John Laing Homes, a prominent national builder with a strong presence in Colorado Springs, has committed to purchase more than 40% of the available lots once finished. The development is currently underway with revenues expected to begin in the summer of 2006, and the community center expected to open in the fall of 2006.