Diamonds in the dirt

There are 100,000 toxic properties in Canada. The good news? Many have to be cleaned up fast

By Nick Rockel
Globe Investor Magazine,
November 18, 2008
Photograph Courtesy Kilmer Brownfield Management Ltd

When Kenneth Tanenbaum started raising the Kilmer Brownfield Equity Fund in early 2006, he knew he'd found a niche. While other infrastructure funds were piling into roads, bridges and utilities, Toronto's KBEF would specialize in Canadian brownfields: contaminated sites with second-life potential. The market liked Tanenbaum's pitch, not to mention the fact that KBEF parent company Kilmer Van Nostrand Co. had already kicked in $20 million. Tanenbaum and his fellow managing partners closed the fund last December with $100 million in assets, most it from institutional investors.

Tanenbaum bills KBEF as the nation's only private-equity pool dedicated to brownfields. It buys properties for $5 million to $15 million, finances cleanup and rezoning, and sells the shovel-ready land to commercial and residential developers. By this fall, it had sold one project, a former factory site in Mississauga. It also had a second sale under way and was negotiating several other purchases. Tanenbaum, son of Kilmer CEO and Maple Leaf Sports & Entertainment chairman Lawrence Tanenbaum, says the fund's centre of gravity is urban Ontario, but it is also active in Alberta, B.C. and Quebec.

Although as many as 100,000 contaminated sites dot the Canadian landscape, the KBEF president explains that very few are ripe for brownfield plays. His fund zeroes in on a small group of properties that have manageable risks and appeal to builders.

Tanenbaum gives three reasons why Canadian brownfield investment is taking off. First, buyers like KBEF can now limit their risk because most provinces have spelled out the environmental standards that have to be met. Then there are government programs such as Ontario's Places to Grow, which seeks to confine 40% of all new residential development to urban cores. Third, new disclosure rules force Canadian public corporations to include polluted properties as a liability on their books, so owners are often keen to unload them.

With a minimum commitment of $1 million, KBEF was designed for institutions and wealthy individuals. Tanenbaum won't talk about compensation, but private-equity funds typically charge a 2% management fee and a 20% performance fee. Retail investors can buy into KBEF through Kensington Capital Partners, a Toronto private-equity fundof- funds shop that manages some $400 million in assets.

While traditional infrastructure funds target utility-type returns in the low teens, Tanenbaum says, so far, KBEF has exceeded its goal of at least 20%. By turning dirty land into clean, the fund does more than seek a profit, says Tanenbaum. "It's helping to solve problems for communities-and, I think, to build them."