Deriving Value From Surplus Property

Winter 2015/2016
Is this unusable surplus property or a valuable asset? Advanced business analytics can help owners, lenders and other stakeholders identify optimal redevelopment strategies for decommissioned surplus properties. Photos courtesy of Cardno

A new type of transactional support service goes beyond standard due diligence practices, using advanced business analytics to help property owners find new value in old properties. 

MANY COMPANIES own surplus properties, those at which business operations have ceased for various reasons. Decommissioning and environmental remediation may already have been completed. Regardless of their cleanup status, these properties often retain a stigma or are located in areas of reduced economic activity and seem of little value upon initial analysis. This is especially true when they are evaluated simply in terms of their potential for light industrial, other commercial or residential redevelopment. Nevertheless, value can be found at such sites by examining redevelopment scenarios along with built and natural resource assets.

Advanced business analytic techniques such as quantitative decision analysis, Monte Carlo simulation and probabilistic optimization can be used to identify the redevelopment scenario that provides the highest value and least risk for property owners. In addition, such assessments, which also involve the advice of industry experts and use state-of-the-art software and programming techniques, can shorten the time required to complete transactional services to weeks rather than months. This approach can generate significant positive financial benefits for property owners, investors and lenders.

Cardno, an international infrastructure and environmental engineering services company, has developed a process to identify and evaluate redevelopment alternatives. The firm’s studies use a four-step quantitative decision analysis that identifies optimum strategies while incorporating stakeholder goals, preferences, available choices, uncertainties and known facts. The four steps are as follows:

1) A Framing Session helps decision makers, expert consultants and other stakeholders develop a shared understanding of project goals and identify strategic alternatives for model analysis.

2) Model Development creates probabilistic Monte Carlo simulation models for each alternative, using information obtained during the framing session. Software packages, such as Palisade’s DecisionTools Suite and Stata, can aggregate and modify data quickly and incorporate probabilistic inputs into a model structure.

3) Strategy Evaluation runs the model and reviews output, including financial results such as internal rate of return (IRR), net present value (NPV) and payback period, as well as other findings such as job creation and/or greenhouse gas reduction.

4) Strategy Selection results in the choice of a strategy, based on the output results.

exterior view if a building on a pond

Advanced business analytics helped the owner of this property near Tampa Bay identify a redevelopment strategy that made the most of a site with a variety of adverse environmental conditions.

The following examples demonstrate the unrealized value that can be identified using this approach.

Example No. 1. A Fortune 500 chemical manufacturing company owned a 30-acre property located in the mid-Atlantic region of the U.S. that was listed as a Superfund site. Ten acres, once occupied by a manufacturing plant and other buildings, had been decommissioned and the structures demolished. The remaining 20 acres consisted of low-quality wetlands.

The total life-cycle cost for soil and groundwater remediation in the former manufacturing area was estimated at $7.5 million. The company wanted to reduce its costs or, ideally, generate revenue. Cardno conducted a natural resources and land use feasibility study to determine the property’s highest and best use.

The redevelopment alternative selected had two components. The first included implementing an anaerobic sludge digester in the former manufacturing area. Anaerobic digestion breaks down biodegradable material where oxygen is not present and is used to manage waste. This green energy alternative fit the site perfectly because of its industrial setting, available acreage, nearby interstate and rail transportation networks, location of large population centers and state reports regarding demand for municipal sludge disposal. The second component involved creating a wetland mitigation bank by enhancing the wetland area to offset anticipated adverse impacts to wetlands in the watershed.

Revenue from this combined alternative is anticipated to pay all costs associated with remedial activities and generate significant profits for the company. The results from the Monte Carlo simulation indicated that this alternative has a mean NPV of $15.5 million, an IRR of 25 percent, and payback over four years.

Example No. 2. A national office park developer acquired a large tract in a redevelopment area near Tampa Bay. The site, however, had many constraints. Some portions were below the 100-year floodplain and others were underlain with organic soils not compatible with building construction, some of which were wetlands. Regulations required stormwater runoff treatment and flood attenuation. These areas of the tract were considered undevelopable.

The evaluation team identified a redevelopment strategy for the highest value land use that evaluated human use and environmentally sustainable options. After considering the property zoning, local and regional demographics, demand drivers and financial impacts of each alternative, the evaluation pointed to a land use strategy that included high-end office park development combined with environmental mitigation and conservation efforts. The analysis indicated that by using some of the “undevelopable” land for wetland and floodplain mitigation and stormwater runoff treatment and attenuation, the site would provide a significant return on investment as long as the high-end office park was developed alongside mitigation/conservation efforts.

Cardno professionals collaborated with the developer’s team to generate a site plan that maximized the buildings’ and ancillary structures’ footprint while accommodating adverse wetland, floodplain and soils conditions. The development team proposed and obtained permits for wetland encroachments to facilitate a usable office park configuration. The final development plan included mitigation for encroachments into the wetlands below the 100-year floodplain. The office park was developed using inherent natural resources and an innovative infrastructure to overcome the site’s physical and environmental constraints.

Generating strategic land use scenarios that involve built and natural assets — and evaluating them with appropriate financial analysis techniques — can identify significant value at properties that initially seem of little use. This systematic and comprehensive approach can help commercial developers, property owners and lenders protect their bottom line and achieve long-term goals.