New York Times, Wealth Matters
By Paul Sullivan
Decades ago, Ideal Uniform Rental operated a dry cleaner in Garden Grove, Calif., and some of the solvents it used leaked into the ground and the water supply.
The contaminants traveled downhill to the city’s vehicle maintenance yard and may have crossed the street to Woodbury Elementary School.
In 2006, the family trust that owned the land entered into the California Environmental Protection Agency’s voluntary cleanup program, but a couple of years into the process, the trust and Ideal realized the cleanup was going to cost much more than they had expected and stopped work, according to officials at the agency’s water board.
The case may have ended up in the courts for years. But a private investor came in two years ago, offering to buy the property. That buyer, Matthew Winefield, an environmental engineer, said that he paid less than $500,000 and that he believed he could turn a profit of two to four times his initial investment.
I wrote last week about contaminated properties that are left to unsuspecting heirs who find themselves obligated to clean them up.
But there are people like Mr. Winefield who are seeking out these properties. They are getting backing from wealthy investors who have the resources, the patience and the desire to return the properties to productive use — all for an expected profit. In the case of the Garden Grove property, Mr. Winefield has worked with Reid Breitman, a real estate lawyer, and said the two have access to $50 million more from other investors to buy additional properties.
As investments, the returns range from enticing to frightening. Mr. Winefield says the profit at the Garden Grove site might eventually be four times the initial investment. But if what is below the ground is worse than their research says, they could end up making little or losing money.
Cris Carrigan, the director of the enforcement office at the California state water board, said interest was increasing among private investors in these smaller but still difficult waste sites.
“In the last few years, we’ve seen people who are remediation specialists who have a business model to do site cleanups,” Mr. Carrigan said. “Previously, the model was land speculation. Under that model, we didn’t see as many people going in with their eyes wide open.”
“We’re cautiously optimistic that they will go in and clean them up and make a profit,” he added. But if they don’t succeed, they will be subject to the same enforcement actions and possible penalties as the previous owner.
Turning a profit on these sites is a complicated proposition.
Mr. Winefield’s background as an environmental engineer, with knowledge on how contaminated sites get cleaned up, helps. But what made the Garden Grove property a viable investment was the discovery of five old insurance policies from the late 1970s and early 1980s.
Under the terms of these comprehensive general liability policies, the insurer, in this case, the American International Group, was obligated to pay for the cleanup of any environmental damage that was deemed sudden and accidental during the time of the coverage. (Insurers changed the language of these policies in the mid-1980s to exclude environmental damage like this.)
After 10 months of work, at a cost of $150,000 of his own money, Mr. Winefield said, A.I.G. agreed to pay for the cleanup in September 2014. That was when he and his partner moved to close on the property. Matt Gallagher, a spokesman for A.I.G., declined to comment on the case.
For many of these sites, the viability of the investment hinges on finding these older insurance policies.
Thomas deArth, a hydrogeologist by training, owns both an insurance archaeology company that finds these policies and Genesis Engineering & Redevelopment, which cleans up contaminated sites. While he does work for other investors, he said he owned four properties that he’s cleaning up.
The insurance is key. On one dry cleaning site, he found a policy for $50,000 from 1971. That insurer has so far paid $1.3 million in cleanup costs.
“We’re extremely aggressive in finding policies, because without any policies, we don’t have any projects,” he said.
Mr. deArth said he typically paid $1 to buy properties worth $1 million to $2 million, but he was buying them from people who do not have the money or desire to clean them up. The price is low, he said, because he has to take over the cleanup and the continuing risk of putting himself on the title as a party who could be sued in the future.
Brent Anderson, chief executive of Resight Advise Invest in Denver, which raises money from wealthy individuals to do these cleanups, said his company looked for properties where only 10 to 15 percent of the invested capital would go to clean up a part of the property.
But the properties also have to be in primary or secondary markets and in a high-traffic area, like an old dry cleaning operation in a strip mall.
“We’re not so concerned with the contamination but with it being a fundamentally strong real estate holding,” he said. “A tire factory at the end of the road in Oklahoma, well, it’s going to be hard to fill up two million square feet there.”
Most of these buyers avoid the most contentious parcels. “I try not to buy the highest-risk properties,” Mr. Winefield said. “I try to buy industrial properties that will stay industrial. I try not to buy ones that are the highest risks to human health.”
Mr. Winefield began looking at the Garden Grove site in 2013. But work didn’t begin until this week, when city officials finally allowed soil testers access to the maintenance yard next door to begin to assess how far the pollution had traveled. He predicts it will take another three to five years to complete the cleanup.
Mr. Anderson said he bought a portfolio of nine contaminated properties. Over six years, his company spent $10 million cleaning them up. But when the company sold the portfolio, the percentages of returns were in the triple digits.
The projects do not all take that long. Sometimes, it can take just a few months to remove and replace contaminated soil. In one instance, Mr. Anderson said, he bought a property at a large discount, sorted out paperwork and sold it a year later at a substantial profit to some people who had initially balked at buying it.
But these deals don’t always work out. Mr. Anderson said he had a smaller shopping center property that should have been easy to turn around but became caught up in regulatory approvals. Over the last few decades, his investments have averaged a return of about 22 percent.
In the case of Garden Grove, the site would not have been worth the investment without A.I.G. paying the cleanup bill. When Mr. Winefield bought it, he said it was probably worth $2 million uncontaminated but the trust had already spent $600,000 on cleanup and additional expenditures of at least $1.5 million were expected.
“We’re glad that they pushed this forward,” said Nick Amini, the Santa Ana Regional Water Quality Control Board’s project manager for the Garden Grove site. “Otherwise, it would be difficult to clean up. If we issued a cleanup and abatement order, we’d go to court. They’d claim they have no money. We’d have to go after their assets. That would take years. This makes it much more efficient. It’s almost a partnership between investors and the regulators.”