Financing brownfield cleanup and redevelopment.

• Author: Bartsch, Charles

Lack of adequate and affordable financing is the most significant obstacle to brown field redevelopment. governments can catalyze private investment in these projects by leveraging available federal, state, and local resources.

With as many as 600,000 potential sites nationwide, brownfields continue to be an important issue for local governments of all sizes. Brownfields come in all shapes and sizes, including defunct or partially operating manufacturing plants, abandoned gas stations, dying or dead strip shopping and commercial centers, agricultural operations, and even residential areas. They are found in urban, suburban, and rural locations. The cleanup and reuse of these sites has become the subject of considerable government and political attention, with broad interagency and bipartisan support for such initiatives. More and more, the public and private sectors are forming partnerships to realize the economic and environmental benefits of brownfield redevelopment.

The realm of brownfield finance is rapidly evolving. To solve the brownfield financing puzzle, local leaders and agencies need to make imaginative use of the various public and private financing tools, identifying new funding combinations and approaches that make projects work. This article identifies the financing barriers to brownfield reuse, discusses public-sector approaches for facilitating brownfield redevelopment, and summarizes the litany of available brownfield financing resources.

Barriers to Brownfield Reuse

Lack of adequate and affordable financing is the most significant barrier to reusing contaminated sites. Lender liability concerns, investor expectations for return on investment, and the creditworthiness of borrowers must all be addressed within the context of the nature of the contamination, the costs of site preparation, the impact of contamination on collateral value, and marketable reuse of the site. Site remediation and related preparation costs make many sites economically uncompetitive, placing too much pressure on the bottom line--at least initially. Private parties often are not able or willing on their own to invest the resources needed to take a brownfield through its full redevelopment cycle.

Developers often have trouble putting together a complete financing package for brownfields. Specifically, developers have difficulty acquiring the capital to pay for three activities unique to brownfield redevelopment: the site assessment, the site remediation plan, and the actual site cleanup. The purpose of the site assessment is to determine the type and level of contamination by means of both primary (e.g., on-site sampling) and secondary (e.g., maps, historical records, etc.) research by technical experts. The site remediation plan is required for participation in a state voluntary cleanup program, which can streamline the cleanup process and help clarify the liability of prospective purchasers, lenders, property owners, and others with regard to the site.

Other factors make brownfield remediation a financial twilight zone for prospective developers. For starters, they will likely have to pledge a higher rate of return to their investors or lenders to persuade them to take on a project with greater perceived risk. This so-called "brownfield premium" may translate into an extra 10 to 20 percent return on investment, or one or two additional interest points on a loan rate. Project underwriting needs are inherently more extensive and, consequently, more expensive. Before assuming the risks of such a project, many lenders require environmental data collection and analysis, additional testing, and independent corroboration of collateral value. These requirements complicate loan processing and review procedures and increase transaction costs. Some banking analysts have estimated that these transaction costs have tripled since the emergence of the brownfield issue 10 years ago.

Finally, lenders tend to impose a number of conditions on the financing that they provide for contaminated properties. For example, they usually require developers to have at least 25 percent equity in the project to make sure that the borrower has sufficient capital at risk--a seriousness threshold, so to speak. Most banks also adhere to an informal rule of thumb in evaluating the viability of a project--cleanup costs should not exceed 25 percent of the fair market value of the property once it is clean. All of the foregoing considerations make brownfield redevelopment a thorny undertaking for private developers.

The Public Sector: Catalyst for Brownfield Redevelopment

Clearly, many brownfield projects simply do not work without some kind of public-sector involvement--especially at the local level. Hundreds of successful brownfield reuse projects have demonstrated that the public sector must make the first move to get these projects off the ground. Indeed, some form of local, state, or federal financial participation--even at seemingly miniscule levels of just a few thousand dollars--is often needed to jump start a brownfield reuse project and to reduce the risk thereof to a level that the private sector will accept. Public financing initiatives typically employ one or more of the following four strategies:

1. Reducing the lenders risks can make capital more available. Incentives such as loan guarantees or companion loans can ensure a minimum return by limiting the borrowers exposure to unforeseen problems that can affect the value of collateral or the borrower's ability to pay.

2. Reducing the borrower's financing costs can make capital more affordable. To this end, local officials have subsidized interest costs through tax-exempt financing and low-interest loans, and have reduced loan underwriting and documentation costs through loan packaging assistance and technical support.

3. Improving the borrower's financial situation through tax credits, tax abatements, or re-payment grace periods can improve the project's cash flow and make it easier for the project numbers to pencil out. Similarly, training and technical assistance can offset a user's start-up costs and allow available cash to be devoted to meeting brownfield needs.

4. Providing direct financial assistance for site assessment and cleanup in the form of grants and forgivable loans is an increasingly popular strategy among local governments.

Because competition for public monies is increasingly fierce, local officials need to recognize that resources devoted to brownfield reuse represent an investment that often is recoverable from either the sale of the site or from new tax revenues. Public investment in brownfield reuse also can he used to leverage private investment by legitimizing the economic viability of an area. In essence, this is simply putting a brownfield spin on the public sector's classic role in economic development finance--that of catalyst.

Some cities have overcome the financing barriers by simply paying for site assessment, cleanup, and preparation themselves and then delivering a clean, "shovel ready" parcel to a private developer for reuse. The City of Minneapolis, for example, advanced its own goal of commercial development of brownfield sites by assembling and cleaning up what is now known as the Quarry...