While legal reforms such as the 2002 Brownfields Liability Act have significantly improved defenses to liability, the risk associated with acquiring sites containing quantities of hazardous materials can still be significant.
For example, the development of abandoned or underutilized properties known as brownfields has become a widely accepted means of cleaning up the environment while generating a high rate of return for investors. However, even sophisticated real estate players are finding that project budgets can be blown by unexpected contamination discovered during construction, not to mention the potential risk of not properly quantifying long-term liabilities such as groundwater remediation.
As local and federal government officials have stepped up their efforts to promote smart growth and reuse projects, a new breed of developers has evolved that specializes in redeveloping brownfields properties. And while returns are high, so are the risks.
In addition to more traditional brownfields sites, corporate America is increasingly responsible for fully disclosing environmental liabilities on its balance sheet thanks to the Sarbanes-Oxley and interpretations published by the Financial Accounting Standards Board such as "FIN 47." The sale of these properties with financial and performance guarantees backstopped by insurance can get the liabilities off the books.
Real property transactions can easily be caught up in a repeating cycle of endless investigations, litigation and regulatory re-openers. This process could take years if not managed properly, stranding assets and missing opportunities to sell at appropriate times in the market cycle.
One approach to addressing these risks is to shift them contractually, and a number of firms have developed risk transfer models to address this need in the marketplace. One such firm is SCS Secure, a division of SCS Engineers -- one of the top 100 environmental engineering firms in the United States, according to ENR/Engineering News-Record.
While each risk transfer deal is unique, there are some common elements to most transactions, such as:
* Guaranteed remediation, both in terms of price as well as in terms of obtaining formal closure from an agency;
* Insurance to backstop remediation cost estimates;
* Shifting of liability for all costs related to a cleanup to the risk transfer firm; and,
* Insurance to protect against 1) third party claims, 2) toxic torts, 3) a regulatory agency reopening a closed site. Examples of good candidate sites for a risk transfer program include gas stations, dry cleaners, industrial facilities and redevelopment sites -- particularly some kinds of landfills and brownfields.
A typical transaction could involve cost and liability underwriting, including review of available investigation reports, cleanup plans and any regulatory orders. Once underwriting is complete, an initial letter of intent is developed, which is then converted to a site-specific contract.
SCS Secure has been involved with a number of sites where risk transfer tools have been the principal reason a real estate transaction was able to go forward, despite, in some cases, a long history of stigma and being on the market with failed escrow after failed escrow.
While some developers might otherwise have walked away from a risky but potentially lucrative development project or investment, they now have the option of collaborating with firms that will assume full responsibility for potentially costly budget overruns and liability. Corporate America also has a viable option to push those "mothballed" properties off the balance sheet with a high degree of confidence that they will not get a "bounce back" years later.
By offering liability protection and transferable indemnification for future cleanup costs and third party claims, risk transfer allows contaminated real estate to more readily be conveyed, financed, cleaned up and put back into productive use.
Partnerships between real estate owners and risk transfer firms can eliminate the barriers that often prevent the sale and development of nonproductive, environmentally tainted properties. With the shortage of developable land and continuing urban sprawl, risk transfer firms are a crucial link for neglected properties to be brought back to uses that benefit the community, the economy, and the environment.