Understanding the need for a match between the brownfields market and large-scale investment capital, Brownfields Capital has discovered an innovative way to link ecological flourishing with profitability. Brownfields Capital is a finance/investment management firm that plays the role of intermediary to bring these two themes together. This is done through their innovative financial instrument called ‘Brownfields Value Contract (BVC)’ which provides owners or prospective owners of environmentally challenged land with a fully financed capital structure and business plan, while simultaneously creating opportunity for investors to put their money in an innovative debt instrument.
Innovation
Brownfields Capital is based on unlocking the huge potential of brownfields by the use of an innovative financial instrument called the ‘Brownfields Value Contract (BVC)’. Brownfields are environmentally impaired and underutilized properties. Many are located on waterfront real estate, left behind by manufacturers from an earlier industrial period when vertical space and shipping transportation were most desirable. BVC helps finance all stages of re-development of brownfields. Based on sound principles of accounting, finance, and law, the instrument’s innovative structure aggregates investment capital and provides it to the market more efficiently. The risk in this way is transferred to the parties that can shoulder them. The instrument allows the investors to capitalize on the disequilibrium in prices created by environmental law, rather than fluctuations in supply in the real estate market.
Brownfields Capital clients include corporations and financial institutions who wish to reduce the environmental liabilities associated with owned or acquired properties, developers and builders who wish to unlock the value of remediated land, and investors who see attractive low risk returns from the development of urban in-fill properties in prime locations throughout the world.
How the instrument works is surprisingly simple. The investors perform the sole role of capital provider. Developers with good track records, remediation firms with high expertise, and real estate and insurance firms are pooled in to provide their expert services. A separate company or partnership is formed by these parties with an aim to own and re-develop the site. The money invested in BVC by the investors is used to finance this entity. The BVC is similar to a corporate bond and specifies how the cash generated from the re-development of a brownfields property will be allocated to investors and to the ownership entity. As a result, a minimum investment of $25 million in total project costs is achieved by providing efficient and low cost financing to the owners of brownfields, developers, remediators, and insurers.
Typically an owner transfers brownfield real estate to the transaction and the associated environmental remediation liability to this new ownership entity. The owner may also invest a small amount of cash in the ownership entity, in addition to the real estate. The developer earns market management fees and an incentive fee based on performance (on time, on budget). The developer may also choose to invest in the ownership entity. Financing is repaid from sales proceeds, net cash flows from rents, refinancing proceeds or any combination of these and additional sources like the total cash flows. After investor return requirements are met the remaining profit or equity is disbursed between the parties who had formed the ownership entity.
Impact
The success of this debt instrument [BVC] has helped all stakeholders to realize value. It has broadened the market for investors, owners, and developers of brownfields. For the corporations, governments, and private owners who have been holding such contaminated properties as idle on their balance sheets, this is a way to turn non-performance into positive value.
As for the investors this means availability of an unexplored niche of real estate in prime locations at an advantageous price. By the initiation of new large-scale projects more economic opportunities are created in terms of job creation, tax revenues, improved infrastructure, and better urban planning. Most importantly, it benefits the environment by the use of previously unavailable properties that minimizes the construction on virgin lands.
Inspiration
The Environmental Protection Agency has estimated the total number of brownfield sites as 400,000 with total clean-up costs around $520 billion and $2 trillion. To date only $2.3 billion has been raised for this indicating a vast potential. This huge capacity has provided the impetus to the innovative and entrepreneurial spirit of the company. The clean-up and reuse of these sites has helped realized the objectives of the inception of Brownfields Capital - restoring the environment, enhancing urban planning efforts, improving existing, aging infrastructure, increasing tax revenues, and revitalizing aging neighborhoods in turn reducing sprawl and the resulting traffic and air pollution problems.
The World Inquiry editorial team edited this profile from the original submission of the interviewer or other source. The views expressed do not necessarily represent Case Western Reserve University, the Weatherhead School of Management or the Center for Business as an Agent of World Benefit. More >>
