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The story goes something like this: The sun was setting on a fall day in 1997, its rays illuminating the pollution in the sky in shades of purple and red. Michael G. O'Neill, CEO and founder of Preferred Real Estate Investments Inc., was cruising down the Delaware River on a boat tour, and there, on the shoreline, rose up the Chester Waterside Station power plant.

The building, with its twin coal towers facing the water like broad shoulders, was completed in 1918 to provide juice to one of the nation's busiest industrial hubs. And it was completed in style, to be a monument to the permanence of the Industrial Age.

The deal with that first prospective tenant didn't pan out, but the deal with Exelon did. Preferred bought the station and the surrounding 63 acres for $1 in May 2001.

By 2006, all but the top floor of the "Wharf at Rivertown" is leased. The rest of the plot is slated for residential construction, and a public park is open underneath the Commodore Barry Bridge, the first time the waterfront has been accessible in years.

In dollar terms, the power plant came on the cheap. But it also came with deep environmental responsibilities. Philadelphia Electric Co., the original owner of the site, ran a coal-fired station there until 1981. Over the course of nearly 120 years, the land had also been home to a coke plant, waste treatment sites and chemical companies. Most of the site was an old fill--soil choked with hydrocarbons and tar, and groundwater tainted with toxic acronyms like BTEX and SVOC.

Preferred was driven to buy the building, though, by O'Neill's founding vision, which, paraphrased, is: Reclaim skeletons of the industrial past, transform them into vibrant, 21st century commercial or residential properties, and in the process save decayed "company towns" like Chester, Pa., home of its namesake station.

"The vision of our company is what redeveloped this building from a power plant to a working office building," says Kevin Traynor, executive vice president at Conshohocken, Pa.-based Preferred.

Exelon, the other half of this redevelopment, got one big environmental liability off its books with its $1 deal. But it's also an energy company, and energy companies can use all the help with reputational risk that they can get.

"Our reasons for remediating the site went further than fulfilling the environmental responsibility," says Exelon spokesman Ben Armstrong. "We realized that there was a need for an economic stimulus in that area . . . and hoped that that project would either kick off or help kick off that movement to bring industries back to Chester."

So in other words, the Chester Waterfront Redevelopment project demonstrates that brownfields can help companies build good karma with community-based benevolence, earnest in practice if not in word.

All parties involved in the project can point with pride to the fact that their brownfield won a 2005 Phoenix Award, an award for innovative yet practical reuse.

"Anytime you get a Phoenix Award at a brownfield site, that's a significant project," says Jeff Pintenich, vice president and technology director at Brown and Caldwell, the national environmental engineering firm that helped Exelon with its end of the cleanup.

GOOD KARMA HAS RISKS

At the heart of this success was the Buyer-Seller Agreement and the Environmental Easement Agreement and Use Restriction negotiated between Exelon and Preferred. Along with the $1, the agreements involved the assignment of who would clean up what.

"Both (Exelon) and Preferred were pretty sophisticated buyers and sellers," says Dave Fennimore, president, Earth Data Northeast, an environmental contractor hired by Preferred. "They ground it pretty fine when they were going through the contracts."

It basically came down to Preferred handling the building's interior issues--a $10 million item, says Peter Fontaine, an environmental attorney with Cozen O'Conner who works with the developer--and Exelon cleaning the outside acreage.

Exelon had cleanup on its mind since 1993, when it brought in Brown and Caldwell to conduct a risk assessment for the site. About 17 acres of the site had been home to a hazardous waste treatment plant, which was regulated by the federal Resource Conservation and Recovery Act.

Federal environmental regulators pressed Exelon to clean up seepage into the Delaware, the groundwater and soil, and were placing the entire waterfront under RCRA rules.

Instead, the energy company, with Brown and Caldwell's help, offered an innovative solution: Exelon agreed to clean up the entire site following Pennsylvania's new Land Recycling and Environmental Remediation Standards Act, or Act 2, the commonwealth's brownfields law.

As Pintenich explains it, the federal and state officials agreed that, instead of multiple regulations, Act 2 would be the one rule to follow, and the Environmental Protection Agency made the site one of the first four RCRA Brownfields Pilot Projects in the nation.

The cooperation afforded Exelon "greater flexibility," Pintenich says, because the plan was no longer just cleaning up for cleaning up's sake. Act 2 allowed them to make something of the site, while saving Exelon time and millions of dollars.

"We saw this opportunity and said, 'Boy, you know, it's right along the river. This area could really use a shot in the arm, if you will, with respect to economic development,'" Pintenich says.

Then Preferred's O'Neill floated along on his river tour, and Exelon had the brownfield redeveloper with local knowledge and contacts needed for success.

The job ahead was messy.

"The guts of the building were great," says Traynor. But everything else inside needed to be removed, including heavy equipment that needed to be decommissioned, mercury, PCBs and asbestos. Traynor remembers first visiting the site in a Tyvek suit and a respirator.

"I lost a lot of years here," he kids.

Kids in part. During redevelopment, according to multiple sources, there was an unexpected find on the site--oil contamination.

"Stuff happens," says Gary Brown, president of RT Environmental Inc., consultants Preferred called in to review the project, certify it and secure financing from Citizens Bank. "The chances of finding unknowns at older sites with a long industrial history are significant."

Preferred would not comment whether a claim was made on its pollution legal liability policy, with $5 million limits for coverages such as cleanup of pre-existing and new conditions, third-party liabilities and business interruption.

Indications are that a claim was made, and that disagreement ensued. If that's the case, it begs the question of whether such coverage, or remediation cost-cap insurance, is even worth it. For smaller projects, it wouldn't even have been available.

"Very small projects don't do well with remediation stop-cap, or cost-cap, policies, because there's not enough money in it," says Veronica Benzinger, senior vice president at Aon Environmental.

Brown from RT Environmental agrees. "To be brutally honest with you," he says, "very few projects get that. It's got to be really, really big."

For their work, environmental contractors like RT Environmental generally must go into such projects with pollution liability and professional liability insurance, typically with limits in the $1 million to $5 million range.

. . . AND REWARDS

Insurance money or not, Preferred had to clean the mess to get its brownfield covenant, says Brown. The real estate developer did not let the issue sidetrack its vision, along with help from Pennsylvania, which gave $5 million worth of support to help construct infrastructure around the old power plant.

The finished product, the Wharf at Rivertown, delivered in 2004, is unique, like setting up shop in a temple to capitalism. One tenant, Synygy Inc., leases 130,000 square feet (out of the total 400,000) that includes the old turbine hall with its 60-foot ceilings and old control room, now the company boardroom.

"You could never afford to build this today," says Traynor.

Moving forward, Preferred aims for the second phase of redevelopment, in which 400 to 500 residential units will be built on the land around the power plant, along with a river walk, restaurants, and two marinas.

Perhaps the only big issue left now is the town they're trying to save--Chester.

The Wharf at Rivertown has brought about 2,000 new jobs into a community where before only 4,500 existed. Including the Preferred project, more than half a billion dollars of new development has flowed into the city.

But that doesn't mean folks will want to live in the area.

Even Traynor admits, "Chester has not had the best reputation over the years."

But one hopes these stretches of risk management imagination, which empower companies to believe they can transform an entire town, come true, Disney style. Everybody should win--it holds such great promise and pride for everyone involved.

"We absolutely love these projects," says Brown. "They're very professionally satisfying."

MATTHEW BRODSKY is associate editor of Risk & Insurance®.

August 1, 2006

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