Along the western slopes of Pike’s Peak in Colorado sits the legendary gold rush town of Cripple Creek, which spawned 500 mines and 21 million ounces of gold — more of the precious metal than was produced in the California and Alaska rushes combined. One of the five original ore-processing plants serving the mines was the Golden Cycle Mill, built in 1906 on a 210-acre tract of land in the heart of what is now the picturesque city of Colorado Springs.
The mill was shuttered in 1949, and eventually the U.S. Environmental Protection Agency classified the surrounding land as a “brownfield” site, an abandoned or underutilized piece of contaminated real estate that requires extensive environmental cleanup before it can be sold or redeveloped.
The Golden Cycle property is just one of the 400,000 brownfield sites that the EPA estimates are in the United States. Cleanup of these sites will cost between $520 billion and $2 trillion, depending on final reuse plans, according to figures released by the EPA and the National Brownfields Association. To date, only $2.3 billion in capital has been raised to remediate brownfield sites, which means the potential cleanup and attendant redevelopment market is enormous.
That puts the mill, now owned by Gold Hill Mesa Development, at the crossroads of another potential rush — the rush to clean up, and then redevelop, brownfield sites. Indeed, several market and financial factors are conspiring to push the redevelopment of contaminated land forward, not the least of which are a shortage of real estate near thriving city centers and an obscure accounting rule known as FIN 47.
FIN 47, Accounting for Conditional Asset Retirement Obligations, is a new interpretation of the five-year-old accounting rule FAS 143. Issued in December 2005, FIN 47 requires companies to disclose, and carry on their balance sheets, the future cleanup costs of brownfields and other polluted real estate.
Although most CFOs say the FIN 47 charges are immaterial, the potential environmental cleanup cost is now in plain sight of directors and investors, who may think it is imprudent for a company to retain unproductive assets that are weighed down by liabilities that grow larger as facilities get older and closer to retirement.
Before FIN 47, many companies followed standard industry practices of either lowballing cleanup estimates, claiming that the future cost could not be estimated properly, or taking a “don’t ask, don’t tell” attitude. Indeed, pre-FIN 47, property sales, facility retirements, or discovery of contaminants were the only events that triggered the disclosure of the costs, so as long as companies put assets into semiretirement and “mothballed” plants, balance sheets remained clean of these cleanup costs.
FIN 47 changed that, and several market constituents, notably those that see burgeoning market opportunities, are making noise. For example, in July, the American Bar Association’s special committee on environmental disclosure issued a 26-page newsletter devoted to FAS 143 and FIN 47, underscoring legal issues that could form the basis of shareholder lawsuits.
Meanwhile, environmental-engineering firm BLDI and Steve Goldberg, head of accounting at Grand Valley State University in Michigan, are working on a FAS 143/FIN 47 study — due out in January — that examines FIN 47 disclosures, and assesses accounting firms and their response to the rule. The initial results “surprised me,” noted BLDI president Joe Berlin, who says that so far there are fewer disclosures than he expected.