Clean Sweep
By Rick Mandell and Michael B. Gerrard

Page 2 of 3

Redevelopment Funds
Strategic institutional investment in real estate reaches new highs year after year. Annual investment in new development and acquisitions by pension funds, REITs, foreign investors and private developers now exceeds $40 billion. Institutional investment in brownfields is on the rise, too. For example, over the last several years, TIAA-CREF has seen five to 10 loan applications a year with an environmental impairment. The transaction size ranges from $15 million, while the total dollar amount of its transactions may approach $100 million. The pension fund has several such transactions worth about $150 million in its pipeline.

Over the last four or five years, an emerging market has grown for redevelopers who concentrate primarily on brownfields. Many local developers take on contaminated sites, and there may be 20 companies with a national focus on redevelopment and risk transfer. It's a large and vigorous market.

LandBank, Brookhill Redevelopment and Cherokee Investment Security all have a national focus and have collectively redeveloped over 50 sites in the last two years with combined values above $100 million - and a value range of individual properties of from $4 million to over $30 million. Brookhill has completed more than 40 acquisitions in the last 5 years. AMB Realty Corp., a $3-billion REIT, has a $100-million joint venture with AIG to buy contaminated assets in its core real estate markets. About one-quarter of its 1998 acquisitions involved properties with defining environmental characteristics.

While industrial/commercial redevelopment is the favorite focus of most activity, LandBank also has been involved in residential projects. For example, LandBank acquired a portfolio of properties from TransWorld Oil USA, Inc., including former bulk storage terminals for fuel oil, diesel fuel, gasoline and kerosene, and gas stations in New York and Massachusetts. And AMB purchased Taylor Rail Yards in Los Angeles from Union Pacific Railroad. The yards are being developed into a 700,000-square-foot industrial complex.

Current acquisition activity also includes four deals under contract and 30 being screened by LandBank valued at $200 million to $300 million, and 15 deals valued at $60 million being reviewed by Brookhill. The annual deal value capacity of each company exceeds $200 million.

New Lease on Life
Environmental risk transfer is essential to brownfield redevelopment transactions. Most deals provide for an insurance company with a high credit rating and strong balance sheet to assume unknown regulatory and third-party risks. All known risks need to be accounted for in the economics of a particular transaction and are reserved against.

LandBank uses a proprietary line of insurance policies intended to provide sellers and buyers with full indemnification from all environmental liability. It also offers occurrence-based policies with pollution protection in perpetuity, principally for residential repositioning. AMB seeks to align the risk management concerns and interests of both the buyer and the seller. It provides the seller with indemnifications and other contractual devices supported by a comprehensive environmental insurance program backed by AIG. Brookhill will also make certain that it has a maximum guaranteed price from a cleanup contractor on a fully characterized site, with established maximum time limits and dollar amounts.

The insurance market for brownfield redevelopment is vibrant. Many lawyers were occupied throughout the 1980s and '90s litigating whether old insurance policies excluded environmental claims. In contrast, policies written today explicitly cover environmental claims. Thus, insurance is an important element of most cleanup deals.

AIG, which has written thousands of pollution liability policies, looks at hundreds of new transactions each month and writes insurance on 30 percent to 50 percent of them. The company, which has almost unlimited ability to write environmental liability policies, has a comprehensive approach in insurance against environmental liability, and offers insurance designed to facilitate mergers and acquisitions as well as real estate sales.

AIG Environmental provides environmental insurance for large complex risks such as ports and rail yards, and smaller exposures such as local dry cleaners and shopping centers. It protects the buyer, seller or both parties from the risk associated with unknown environmental liability. AIG offers a secured creditor impaired property policy designed to protect the interests of financial institutions in connection with real estate transactions. The policy offers protection against defaults on commercial loans with environmental conditions. Coverage options can be for losses due to on- or off-site pollution conditions, transportation and owned or non-owned disposal sites. Cleanup cost cap policies manage the economic risk when environmental remediation projects exceed the projected costs.

AIG's size - it's in the Fortune 50- means when a large corporation sells contaminated land with an AIG policy in place, the seller isn't the only deep pocket in the picture - so it won't be the only viable target if the cleanup goes wrong and the buyer doesn't have the capacity to pay the unanticipated costs.

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