Cashing in on pollution

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(Fortune) -- When General Motors closed down a manufacturing plant in Boisbrand, Quebec, a private investment company called Cherokee Investment Partners bought the tainted industrial site.

After Burlington Mills shuttered a textile factory in Mooresville, N.C., Cherokee acquired the property even though it was contaminated by asbestos and toxic chemicals known as PCBs.

And just across the Hudson River from Manhattan, Cherokee and developer Donald Trump are tackling another dirty job. They intend to build homes, apartments, stores and a world-class golf course atop four garbage dumps in the New Jersey Meadowlands.

Like a value investor who buys out-of-favor stocks, Cherokee is a real estate investor company that sees opportunity in assets that others don't want. Based in Raleigh, N. C., Cherokee buys properties known as "brownfields" that have been polluted and abandoned, cleans them up and either sells or redevelops them.

Cherokee launched its first private equity fund in 1996, raising money from institutional investors and high net worth individuals; the company takes about a 1.5% management fee and 20% of the profits. Since then, Cherokee has raised more than $2.1 billion and cleaned up more than 500 sites in the United States, Canada and Europe. It has acquired hollowed-out Kmart stores in Canada, a General Mills (GIS, Fortune 500) flour mill in Vallejo, Ca., industrial properties formerly owned by United Technologies (UTX, Fortune 500) and Halliburton (HAL, Fortune 500), and an abandoned Shell Oil (RDSA) refinery in Trieste, Italy.

"It's a contrarian strategy," says Tom Darden, Cherokee's chief executive. "We try to find value in something that's unpopular."

But there's more to Cherokee than cleaning up pollution, as I learned last week when I met Darden in Washington, D.C. The soft-spoken 52-year-old executive has had a passion for the environment since his days as a Morehead Scholar at the University of North Carolina, where he wrote his senior thesis about impact of globalization on the environment in the developing world. He earned a masters in environmental planning, and went on to Yale Law School, intending to be an environmental lawyer.

Instead, Darden spent several years as a consultant at Bain & Co. before returning home to Carolina to take over his father-in-law's brick business. He helped revive the business with a "green to gold" strategy, using waste sawdust instead of costlier fossil fuels to power the firm's brick plants. He also learned how to clean up pollution after acquiring brick factories on contaminated sites.

Darden soon saw that the environmental benefits of redeveloping brownfields go beyond the process of removing, sealing or neutralizing contaminants. Because brownfields are often located in or near urban areas, the new homes, stores or offices built on the sites are centrally located close to public transport.

"It's density versus sprawl," says Darden. "One of our goals is always to fill in the holes, rather than build out at the edges."

So, for example, in Boisbriand, Cherokee and its partners have begun to build energy-efficient homes and apartments, retail, and either office or light industrial buildings on the site north of Montreal. They want to get an old transit line working again, and plan to build three miles of pedestrian paths to connect homes, schools and stores. One goal is to meet a new standard called Leadership in Energy and Environmental Design for Neighborhood Development (LEED-ND), which is being drafted by the U.S. Green Building Council, the nonprofit that sets standards for green buildings.

In Mooresville, Cherokee and its partners will preserve five historic mills and add stores, offices and homes to create what will look like "a turn of the 20th-century industrial village." The $150-million project is still in the planning stages, but local officials hope it will revitalize a tired downtown.

The New Jersey landfill redevelopment deal has been more problematic. Plans stalled as Cherokee, state officials and politicians wrangled over who should fund the cleanup costs. New Jersey's inspector general is now investigating a Cherokee partner called EnCap Golf Holdings, and the state's Sierra Club branch says putting housing atop unstable landfills is a bad idea. "It's been an interesting learning experience," says Darden, who brought Trump into the deal last fall in hope of moving the project along.

Cherokee and Darden are also working to help rebuild New Orleans' Lower Ninth Ward with the actor Brad Pitt and the "green" architect William McDonough. Their joint project, called Make It Right, calls for building 150 affordable, environmentally-friendly homes.

Like all real estate firms, Cherokee has been affected by the subprime mortgage crisis, the resulting credit crunch and declining home prices. But because the firm is both a buyer and seller of real estate, the impact has been mixed. "It's a fabulous time to be a buyer, and not a good time to have assets on the market," Darden says. "I'm like the guy with his head in the oven and his feet in the freezer. I feel about average." 

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