Environmentally sound

Cherokee Investment Partners find value where others find toxic waste. By Torrey Kleinman and Aaron Lovell

“When we see a transaction, it's not a transaction,” says Tom Darden, founder and chief executive officer of Raleigh, North Carolina-based Cherokee Investment Partners. “It's a thought. And it has to be forged into a transaction.”

Over the past ten years, Cherokee has built a business on forging these thoughts – largely urban infill properties that are environmentally contaminated – into transactions. With its first two opportunity funds, the firm has sought out former factories, landfills and otherwise maligned sites and enacted comprehensive redevelopment plans.

In 1996, Cherokee received a $50 million commitment from a Wichita, Kansas-based chemical company called Koch Industries. While not a limited partnership, the agreement gave Cherokee access to enough capital to pursue and execute larger transactions. Three years later, the firm returned to the capital markets, this time with a multiple-investor limited partnership vehicle. Cherokee Investment PartnersII, which closed in 1999 on $250 million, was followed in 2002 with a $620 million fund. And with the enhanced capital base came additional offices in Denver and London.

Currently investing at the end of its third fund, Cherokee is redeveloping property in the US, Canada and Western Europe, with multiple projects in major markets like New Jersey, North and South Carolina, and California. Although Cherokee focuses on deals that are at least $10 million in size, given the labor-intensive nature of redeveloping environmentally damaged properties, the firm prefers larger transactions.

“If you're working on a very large transaction that will be transformational for the community, it's going to become a controversial project.”

These include ambitious projects like the former Gates Rubber Factory in Denver, Colorado, a 1.2 million square foot mixeduse redevelopment that the firm purchased in 2001; the plan calls for an “urban village,” which will integrate the city's light railway into the development. In New Jersey, the firm is working on Cherokee Meadowlands, a 785-acre site that is comprised of six landfills directly across the Hudson River from New York City. The firm plans to develop the site with retail shops, 3,500 residential units and two public golf courses.

At the smaller end of the spectrum, the firm recently purchased a parcel of land in downtown Santa Cruz, California. Unlike the larger, more labor-intensive projects in New Jersey and Colorado, the environmental problems at the 1.3-acre site were largely addressed by a local firm before Cherokee's involvement, according to Darden. Still, the prime property is being redeveloped into commercial, residential and parking uses with a planned groundbreaking in 2006.

Overall, Cherokee has invested in more than 520 individual parcels of land. That investment record helps the firm with its deal flow. “We see a lot of transactions, because we've been doing this for awhile,” Darden says.

Nevertheless, turning a former New Jersey garbage dump into a golf course is still no easy feat. To do so, the firm must put together a plan for how to fix the environmental problems, as well as how to best take advantage of the site after its remediation.

“We need to figure out what the development plan is,” Darden says. “We need to interview the local officials. We need to talk to the environmental regulators. We need to read the environmental test reports to see what the pollution is.”

Because of the factors that can affect a development with environmental problems, Cherokee has a staff of 48 people spread over its three offices, as well as around 50 additional people working on-site at specific projects. The firm has 25 professionals working on its various New Jersey projects alone.

“It's not property management,” Darden says. “It is more planners, architects and attorneys who work on the implementation of the business plan for these redevelopments, as well as people with backgrounds in environmental remediation.”

In addition to the environmental clean-up and real estate development aspects of a brownfields project, there is oftentimes a component of community involvement. For example, Cherokee's large-scale Meadowlands project in Northern New Jersey was the subject of more than 100 community hearings.

But the community involvement with brownfields is not out of the ordinary, Darden says. “If you're working on a very large transaction that will be transformational for the community, it's going to become a controversial project.”

Cherokee has also been incrementally increasing its investing activities in Western Europe – which has a long-tradition of brownfields redevelopment – with investments in the UK and Italy. It is a natural step for the firm, Darden says, as clean-up standards, geology and remediation methods translate across the ocean.

“Colorado and Germany might have more in common than Colorado and California, in terms of the way things operate,” he says. “There are a lot of technical lessons learned that are transferable around the globe. Clean is clean.”

Thus far, the strategy has been working. According to Darden, Cherokee's third fund is close to fully invested, with all capital committed to future deals or to follow-on capital for other Fund III projects. He notes that the uncertainty that can surround a typical brownfields project necessitates the retention of significant capital reserves. The firm is currently talking to investors about a fourth vehicle, with a first close coming as soon as the third quarter of this year.

It will no doubt soldier on with the firm's strategy of scrubbing clean large-scale sites with environmental problems. “[In many sites, ] the complexities are so much that a lot of people would say, ‘life's too short,’” says Darden. “But if it's a site that is important enough to the community, then it might be worth going through the hassle.”