June 15, 2016 Charlotte-based Forsite Development got its start buying and rehabbing shuttered industrial buildings in small towns throughout the Carolinas. Now, the firm is becoming a leader in a more sophisticated line of business: acquiring contaminated industrial sites and assuming the responsibility to clean them up.
Last week DevelopCLT profiled Forsite’s pioneering eco-industrial park, ReVenture Park. Now, we’re talking to president and company founder Tom McKittrick about his push into a relatively new and obscure part of the commercial real estate market: Environmental Liability Risk Transfer. In this business, Forsite takes title to a contaminated property — sometimes being paid to do so — and assumes the responsibility to remediate it. Forsite is one of a handful of companies in the U.S. pursuing these transactions. Forsite has acquired a variety of sites via risk transfer including chemical plants and textile-dye facilities and recently closed on its third coal-fired plant in North Carolina. McKittrick talked with DevelopCLT about this business model and how more developers are needed.
Develop CLT: How does environmental liability risk transfer work?
Tom McKittrick: Risk transfer transactions involve a site that has legacy environmental contamination from its previous use and an owner who wishes to remove this contingent liability from their balance sheet. We underwrite the cost to clean up the site, and if we can agree on the scope and price we acquire title and assume full responsibility to remediate.
For most sites we pursue, the liability exceeds the value of the real estate. In this instance we are paid to take title. Our goal is to achieve a regulatory closure for that amount or less and then go to work on redeveloping the property. That’s obviously not a traditional real estate deal. It’s basically a risk arbitrage play wrapped in an industrial redevelopment project. Our goal is to put these sites back to a productive use in an environmentally responsible manner that is supported by the sellers, regulators and the communities. Risk transfer is becoming more and more of our core business. Too often these sites are viewed strictly as liabilities, however many can become assets for attracting new industry and jobs.
Develop CLT: What types of properties are you pursuing?
TM: We’re spending most of our time chasing shuttered coal-fired power plants, mostly in the Midwest. We’re shortlisted on four projects there and hope to be announcing a major project shortly. We’ve just closed on our third coal-fired facility in North Carolina. These are smaller plants (typically 35 megawatts) that were supplying electric and steam to large industrial plants. One is being repurposed as a large biomass project, while we have another facility that we may repower as a biomass project ourselves, or sell it to a biomass developer. Every coal plant has extensive infrastructure and usually a large land mass. Much of this infrastructure and excess land can be repositioned to attract new industry.
Develop CLT: Where are the projects you are interested in?
TM: Historically 90% of our business has been in the Carolinas, however our Risk Transfer platform is taking us more into the Midwest. There’s no shortage of shuttered, contaminated industrial facilities and coal plants. That’s unfortunate on one hand, but also a tremendous opportunity for our business model.
Develop CLT: Is there much competition?
TM: There’s very little competition – this is not glamorous real estate. We’re not building condos on South Boulevard, or glitzy mixed-use projects. This is ugly, industrial space often with complex environmental issues. Not a lot of developers are attracted to these big heavy, shuttered sites and even fewer are willing to assume the environmental challenges, which for us is fantastic. I believe most every problem is disguising an opportunity.
There’s so many of these sites, however, I wish there were a few more firms were interested in repurposing these facilities. There are over 300 shuttered coal fired plants in the U.S. and more are coming. Most utilities are only focused on demolishing the structures and closing out the ash basins. There’s typically little thought in how these sites can be redeveloped. I’m actually quite surprised more communities aren’t demanding these sites be used to attract new industry where possible.