Up on Cripple Creek, a New Kind of Gold

An obscure accounting rule, combined with a shortage of urban real estate, is creating a rush to reclaim contaminated land. Now one company that made its fortune in the gold-rush era is cashing in again.

After carrying the abandoned mill site on its books for 50 years, Gold Hill Mesa Partners decided to convert the property into a productive asset. In March, the company signed a first-of-its-kind deal with newcomer Brownfields Capital, a specialty financing company that uses a patented bondlike debt instrument to replace “costly and dilutive equity,” says James Harasimowicz, Brownfields’s president and chief operating officer.

The deal worked like this: Gold Hill Mesa Partners contributed the polluted property to a special-purpose vehicle (SPV) known as Gold Hill Mesa Development (GHMD). That erased the asset from the company’s balance sheet, but Gold Hill Mesa Partners retained a stake in the SPV. Brownfields Capital issued a revolving debt facility for the entire life of the project; that is, for both the remediation and redevelopment of the site.

Traditionally, each phase of a brownfield redevelopment is permitted, planned, and financed separately, with different constituents — the property owner, developer, construction company, state and local officials, finance companies — all vying for the best deal for their particular stage. As a result, there is no way to identify the net present value of the completed project because too many disconnected entities are working on it as a piecemeal endeavor, never financing the next stage until the previous stage is completed.

Because the GHMD was planned and funded from start to finish, the net present value of the “cleaned and developed” project could be determined, and was used as “bankable equity” to finance the work, explains Harasimowicz. What’s more, because the redevelopment is tightly managed as a single project, capital is deployed more efficiently.

The GHMD project, which will result in a mixed residential/commercial development, produces a fixed-coupon return for bondholders. The aim is to create the highest residual value from the redevelopment as possible so that bondholders receive a return in the 16 percent to 20 percent range, and the SPV’s total cost of capital is less than 10 percent.

In essence, says Brownfields Capital founder and CEO Cheryl Hoffman, the project financing has the functionality of construction revolver with the virtues of corporate debt. GHMD received a 39-month term on a $19 million revolving debt facility, which has no recourse back to Gold Hill Mesa Partners.

Housing and retail stores will be built in stages, and the positive cash flows from the project will first pay off the loan principal and interest, then be distributed to the equity holders of the SPV. Brownfields Capital calculates that sales proceeds from the completed project will be $62 million, and that Gold Hill Mesa Partners will reap $27 million for their once-contaminated mill site.

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