Clean Sweep.

AuthorMandell, Rick

Many companies believe they can improve returns if they remediate environmentally challenged real estate instead of buying existing properties or developing pristine land. New liability standards, specialized funds and insurance products are helping them convert these "brown-fields" to assets.

Many mid-size and large corporations own contaminated land for which, under new accounting conventions, liabilities should be booked. However, recent developments make it possible to convert many of these properties to cash.

Total equity in all investment-grade commercial real estate holdings in the United States is about $2.09 trillion. Of this, two-thirds -- $1.4 trillion -- is held by corporations. An unquantified but no doubt large fraction of this land bears the legacy of past unsound practices in the handling and disposal of chemical wastes. The fear of liability for cleaning it up causes many companies to refuse to sell it even when they no longer need it. Thus, property of enormous potential value sits idle, contributing nothing but tax bills.

New accounting rules require the booking of environmental liabilities. And three developments allow such lands to become assets:

* Relaxations in federal and state liability standards, and the creation of safe harbors;

* The emergence of about a dozen highly-capitalized funds specializing in the acquisition and redevelopment of contaminated properties; and

* New insurance products to cover residual risks.

"Today, owners of contaminated property can return those assets to the productive side of the business ledger. Modern cleanup technology, revised 'brownfield' laws, environmental risk insurance and a significant amount of directed institutional capital, all utilized by skilled professionals, can effectively provide comprehensive value-added assurances about risk transfer for sellers of brownfield sites," notes Jeffrey D. DeBoer, president of the Real Estate Roundtable in Washington, D.C.

FAS 5 mandates a charge to income for a loss contingency if it's probable that a loss has been incurred and the amount of the loss can be reasonably estimated. The force of this rule in the environmental context was expanded in 1996 when the AICPA issued Position 96-1, Environmental Remediation Liabilities. SOP 96-1 creates a presumption of an unfavorable outcome if litigation, a claim or an assessment has been asserted, or is probable of assertion, and if the entity is associated with the site. The entity would then need to accrue at least the amount that can reasonably be estimated as the cleanup liability.

Toxic Shock

Moreover, SEC Regulation S-K requires the disclosure in SEC filings of any material effects that costs of environmental compliance may have on earnings, capital expenditures and competitive position. It also requires disclosure of administrative or judicial proceedings under the environmental laws if certain materiality thresholds are met. In 1998, the SEC imposed sanctions against Lee Pharmaceuticals and its CEO and CEO...

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