Taking a risk to revive ruined land

RALEIGH -- The dry-erase board bears the markings of number-hashing sessions in 1992, when Thomas F. Darden II was desperate to steer a struggling brick business into the black.

The scrawled statistics and notes are preserved on the wall of his modest office as a reminder: "Pursue the problem," Darden says.

Darden has built a career on that mantra, expanding that problematic brick company into Cherokee Investment Partners, the world's largest private equity firm specializing in the most problematic properties.

During the past decade, Cherokee raised more than $2 billion to invest in "brownfields." The company has built an empire of 535 oil- and chemical-soaked properties with the aim of cleaning them up and developing or selling them for big gains.

Cherokee's successes -- for instance, siphoning tens of thousands of gallons of gasoline from the land where Raleigh's North Hills shopping center sits and cleaning up a former paint factory in San Francisco to make way for a biotech campus -- have attracted movie-star partners, some of the world's smartest investors and cult status among business and urban-planning students.

Lately, however, the company that operates quietly in a former furniture store in downtown Raleigh has been thrust into an unflattering spotlight as several major deals in New Jersey languish.

Cherokee is drawing criticism from political leaders and inquiries from investigators as it realizes the state that looked like a gold mine may actually be a land mine. In East Rutherford, N.J., Cherokee is scrambling to refinance a delayed, over-budget, 785-acre landfill-to-golf-course redevelopment in the Meadowlands. There's a chance the project won't be profitable.

The company also is weighing whether to continue a venture in Pennsauken, on the banks of the Delaware River near Camden, where it abandoned plans for a similar reclamation project.

The fractured deals illustrate the pitfalls in the emerging world of contaminated-property investment, a universe of poisoned dirt, red tape and finger-crossing investors who are rewarded handsomely when things go right.

"It's a high-risk, high-reward business," said senior policy analyst Evans Paull at the Northeast Midwest Institute, a Washington research group that studies economic and environmental issues.

"Part of the risk is that things are going to go wrong. Either you're going to discover contamination that wasn't discovered in your site assessment, or you'll run into regulatory problems you weren't anticipating."

Cherokee has run into both in the Garden State. But it has picked up lessons that are changing how it does business. Meanwhile, the rewards of deals done right keep the company humming and investors faithful.

Darden takes a chance

Developers and financiers have long avoided the pricey complications and liabilities associated with brownfields, preferring the predictable returns from offices and apartments built on clean land, or greenfields.

Not Darden. In 1984, after a stint as a turnaround consultant at Bain & Co. in Boston, the North Carolina native bought four underperforming brick plants.

He soon learned that oil had leaked into the clay below one of the plants.

Instead of taking the contaminated soil to a landfill, as regulators suggested, Darden got permission to use it for bricks.

Soon after, companies were paying Darden to haul away their dirty clay, further reducing his brick-making overhead.

A winning strategy

The company's plants became profitable, and by the early 1990s, Darden and his partners began focusing on remediation.