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OPPORTUNITIES ABOUND
IN DEVELOPMENT
OF CONTAMINATED PROPERTIES
Risk Management is the Key to Brownfields Projects
Good risk management is not only the preventing of bad things from happening -- at its most ingenious it is minimizing risk to create positive opportunities. Go where others fear to go by having greater ability to control the risks.
The federal Superfund law has had real estate developers, buyers and lenders staying as far away from contaminated property as they could possibly get without actually leaving the country. The result has been such properties have lain vacant and unproductive, the unintended result of misguided legislation. Government has seen and reversed its error; it has now passed a series of federal, state and local "Brownfields" laws and regulations to remedy the situation. These have provided sufficient limitations of liability to make real estate deals feasible where they had previously been impossible. They also provide funding to help grease the way.
EXPOSURES NOW MANAGEABLE
Exposures under Superfund had been absolute, making it impossible to insure the risks or to transfer them effectively to other parties via contract. The exposures have now been mitigated via Brownfields laws to the extent that they are now responsive to normal risk management strategies. Certainly, there is still residual risk, but it can now be managed and managed well. For example, if cleanup costs can be estimated, the possibility of the estimates being exceeded can be insured under "cost cap" insurance. Relief from third party liability can be obtained via contractual transfer or via insurance. All possible risks -- property damage, bodily injury liability, business interruption, diminution of property value, etc, -- are contemplated and handled, the cost of the risk management baked into the deal.
Wait, you say, the risk management costs will overwhelm the project, extinguishing the profit from the deal. Well, this is not true. Under Brownfields the risks are no longer of the magnitude to make their management prohibitive. There is certainly extra cost over the cost of a clean deal, but the government is providing the funding to make up (or more than make up) that difference. Depending on the project, federal funding is available from the EPA, HUD and the Commerce Department, possibly from two (maybe even three) sources on the same deal. Most states, including Massachusetts, have their own funds that can be tapped. Municipalities may be another source, creating something of a benevolent perfect storm.
INSURANCE MANAGEMENT IS PARAMOUNT
A complete risk management program will involve a combination of insurance policies and surety bonds (guaranteeing the work of remediation contractors), and gaps can result from failure to mesh the two. Additionally, the three most frequent complaints about Brownfields insurance (1. it's too expensive, 2. they ask too many questions, and 3. they never seem to want to pay claims) can certainly be avoided. These complaints are caused by a misunderstanding of the use of the insurance, a failure to understand the terms and conditions of the insurance and a failure to properly negotiate the coverage.
Brownfields give developers, new owners and lenders an opportunity for an edge over competitors, and the possibility of a windfall profit. They offer players the chance to go head to head on a basis (risk management) with which their competitors may very well be unacquainted. With the passage of the last domino, a new federal Brownfields law just this past month (January, 2002), all the pieces are now in place; the window will not open any wider and will close at some point from here. The winners will be those who move expeditiously with a knowledgeable team at their side. Once again knowledge is king.
Given the inevitability of losses, you'll be judged not by whether you were the victim of an event, but by how well you planned for it.
(C) 2002 Licata Kelleher Risk and Insurance Advisers, Inc. Permission granted for distribution as is (with full attribution).
Contact us for risk management strategy and implementation.
Licata Kelleher is a risk management and insurance advisory firm. The firm does not sell insurance, but does counsel clients on the effectiveness of insurance, on reducing the cost of insurance and on the risk management process.
The above is intended to be general information, and should not be construed as specific recommendations.
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