Can You Find a Good Apple in This Orchard?

By Todd S. Davis, Esq.

Okay. So I read this fact pattern and I immediately broke out into a cold sweat. It reminded me of a question on a law school exam — the kind of exam constructed by an ultra-liberal, bushy-haired, tweed-jacket-wearing, bike-to-work professor, formerly employed by a regulatory agency.

But after reading it a second time, I quickly realized that as a brownfield developer, I have seen this scenario over and over again. Simply stated, you can find an “Orchard-Whitney” brownfield site in every American city. This site is what we call in the development business an “upside-down deal.”

Definition of an “Upside-Down Deal”

An upside-down deal is a transaction where the development costs exceed the development value. Consequently, in most instances, significant public subsidy is necessary to turn the deal “right side up” — in other words, make the transaction profitable from a developer’s perspective.

As long as I am over-generalizing, we all know that to attract an ultra-conservative, money-hungry, BMW-driving, single-malt-scotch-at-the-country-club-drinking developer to this project, the deal has to make economic sense. In other words, it has to make money. Therefore, it may be helpful for Rochester to understand how a developer would evaluate this project.

Development Hurdles

Seasoned developers look at the project by evaluating site constraints measured against site attributes. As described, the primary development constraints are as follows:

• Small size: At 4.1 acres, the site is relatively small, given its urban location and perceived value.

• Contingent tax liabilities: With $1.8 million in liens against a $765,000 value, the liens must be wiped out.

• Actual and contingent environmental liabilities: The extent of liabilities has yet to be fully quantified. Quantifying these costs is a must.

• Demolition costs: The building portrayed as an asset may actually hinder development due to the building’s functional obsolescence, and truly be a significant development constraint/cost. Certainly, keeping the building may hinder redevelopment flexibility.

• Location: Though near a new stadium, when a city describes a site as being in a “transitional area,” to a developer that is code for “bad.”  Further, zoning changes may be necessary, based on the community’s goals for the project.

Site Attributes

Notwithstanding the challenges, the site certainly has several positive attributes.

• Community priority: To a developer, a site that is a community priority is a huge plus. Few good brownfield projects are completed without a municipal champion —preferably the mayor. Finding the champion and teaming with a private developer often is the key to success.

• Viable potentially responsible parties (PRPs): Based on the facts, the liability of former owner/operators of the site must be carefully evaluated. Certainly, the ability to pursue legal claims against viable PRPs is an asset.

• Available grant funding: The availability of grant funding to conduct a comprehensive site assessment should be completed as soon as possible. Until the true nature of contingent liabilities is understood, the chance of making this deal a viable development project is significantly diminished.

Evaluate Community Goals

Obviously, the community must be intimately involved in supporting the project, both politically and financially. For instance, is the community’s true goal to eliminate blight, support the stadium project, create a new business location, etc.? These goals must be balanced against the city’s financial resources available for the project. 

I would argue that upside-down deals on brownfield sites are the perfect opportunity for a city to place a public project on the site — where the rate-of-return tunnel-vision developers employ is not an issue. In fact, placing a public project on a brownfield site would allow the city to address the toughest site in a “transitional area,” allowing private developers to chase easier deals contiguous to the site, building on the momentum of the public investment.

I am confident that this strategy is wholly underutilized in the public sector. Therefore, with a little cultivation, there may yet be a shiny new apple in this Orchard. BFN

Todd S. Davis, Esq. is the CEO of Hemisphere Development LLC, based in Cleveland. He is also the author of Brownfields: A Comprehensive Guide to Redeveloping Contaminated Property (2d. Ed. ABA).

Read Rochester’s Poster Child, the case study this article is based on, and other expert advice on the Orchard-Whitney site from the varying perspectives of the Brownfield News editorial board:
DEVELOPER’S DEPARTMENT Can you find a good apple in this orchard?
TECHNICAL DEPARTMENT What a personality!
INSURANCE DEPARTMENT Perfume and lipstick to help developers see past flaws
ACCOUNTING DEPARTMENT Financial reporting considerations not a deterrent
COMMUNITY DEPARTMENT A good place for all of us to live in
OWNER’S DEPARTMENT A potential for renaissance
U.S. EPA DEPARTMENT The classic brownfield story line

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