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Risk, Return and Financing Basics

By Steve Dwyer

The RE3 Conference, scheduled for November 1-3 in Philadelphia, is fast approaching. The education lineup is solidifying as we speak.

Now in its 4th year, the Conference brings together the technical expertise and the concentration of decision-makers and thought-leaders you come to expect.

The Conference's Continuing Education program offers technical professionals the opportunity to obtain Professional Development Hours (PDHs) and Continuing Education Credits (CECs) through attendance at the technical program sessions during the conference.

Education is paramount across multiple industry disciplines, chief of which is identifying optimum environmental project strategies and implementing them as efficiently as possible—all through a framework built upon comprehensive financial analysis of redevelopment scenarios.

Timothy J. Havranek, president of Pennsylvania-based Optima Analytics Inc., told Renewal & Redevelopment recently that brownfield practitioners driving redevelopments "have been focused on either the low hanging fruit when it comes to development. There are a large number of other sites where redevelopment value may not be as obvious or remediation issues are not as pressing."

Havranek, who is on a short list to be tapped as an RE3 presenter, would provide RE3 attendees with an overview of a framework for comprehensive financial analysis of redevelopment scenarios. He says that the sites where redevelopment value may not be as obvious or remediation issues are not as pressing are "left to linger with carry costs continuing. This represents one component of the problem. The other and perhaps larger issue is that in many cases the sites are being viewed in non-integrated fashion, i.e., first let's get the cleanup done and then turn it over to real estate to see what if any value they can get out of the property."

Havranek says adopting this approach "means that the practitioners end up thinking from their area of specialty, and the risks that pertain to their specialty, rather than in a more comprehensive manner—this takes into account redevelopment/remediation options and their joint risks, constraints, and most importantly opportunities to add real value and maximize profitability."

The optimization models that Optima builds rely on information provided by various subject matter experts and stakeholders and are designed to include identified risks, constraints and opportunities to find an optimum solution, he says.

"I define an optimum as a solution that does the best we can do given the risks, constraints and preferences of the involved stakeholders. An optimum is not as an idea solution that would be one that solves all problems, has no drawbacks, and everyone gets what they want. Ideals seldom, if ever, exist but optimums do."

This is no new revelation, but Havranek told Renewal & Redevelopment that "when industrial properties are no longer useful, owners are often left with real estate that involves significant carrying costs. In addition, the value of the real estate may be encumbered by stigma, environmental liabilities and other economic factors."

Although various redevelopment scenarios can be imagined, he says "they often require costly remediation approaches or discounted sales prices. However, a non-bias financial analysis framework can identify redevelopment scenarios that optimize net revenue while accounting for various uncertainties, risks, and constraints."

Photo courtesy of flickr

A potential RE3 presentation would provide an overview of a framework for comprehensive financial analysis of redevelopment scenarios using a case study that involved identifying the "highest and best" use for a former manufacturing by finding innovative ways to monetize the various land assets associated with the facility. This monetization can take the form of new ways of generating revenue from available land assets, the reduction of current carrying costs, or a combination of both.

Havranek says the framework used in this case study consisted of three steps. The first involved a facilitated session to identify redevelopment scenarios for each area of the site (the site was large enough to be broken up into a number of distinct areas).

The second step involved constructing probabilistic financial models for each alternative use in each area to capture uncertainty around timing, costs and revenues to generate net present values. The final step involved creating an optimization model to define constraints and to find the best combination of alternatives for each area of the site.

Register now at www.RE3Conference.com to guarantee your spot! We are looking forward to seeing you in Philadelphia.

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