EFAB
Robin L. Wiessmann
Chair .
T
Richard B. Geltman
Vice Chair
John C. Wise
Executive Director
Members
Honorable Pete V. Domeoici
Honorable Beryl F. Anthony
Honorable Stephen Goldsmith
Honorable Maynard Jicluon
Mitchell W. Berger
George H. Butcher
Pete Bulkui
William H. Chew.
Eufird L. Cooper
Michael Curley
Peter M. Emerson
Oeeohn Ferrii
Shockley D. Gardner
Anne Pendergns* Hill
William B, James
Suian P. LeGroi
Robert O. Lenna
Oavid M. Lick .
Marlin L. Moaby
George V. Pednza
Deborah A. Photiadii
George A, RaAelia
Heather L. Ruth
Robert P. Schwartz
JimJ.Tozzi
Warren W. Tyler '
Suaan F. Vogt
Frieda K. Wailison
Mary Ellen Whitworth
Neil Yoskin
Joseph L. Young
Elizabeth Ytell
Brownfields Report No. 3
FINANCING STRATEGIES
FOR
BROWNFIELDS REDEVELOPMENT
This report has not been reviewed for approval by the
U.S. Environmental Protection Agency; and hence, the views
and opinions expressed in the report do not necessarily
represent those of the Agency or any other agencies in the
Federal Government.
March 1996
Printed on Steydtd Paper
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Financing Strategies for Brownfields Redevelopment
TABLE OF CONTENTS
EXECUTIVE SUMMARY i
I. INTRODUCTION 1
n. THE BROWNFIELDS REDEVELOPMENT PROCESS 2
Site Identification 4
Initial Site Assessment (Phase I Investigation) 4
Economic Assessment '. 4
' Match Coals to Sites 6
Strategies for Viable Sites 6
Strategies for Threshold Sites 6
Strategies for Non-Viable Sites 7
Detailed Site Assessment (Phase E Investigation) 8
Project Development and Financing 8
Cleanup Planning and Execution 8
Redevelopment of Property 8
Bd. BROWNFIELDS FINANCING STRATEGIES 9
DIRECT STRATEGIES 9
Equity Participation , . 9
Lease Arrangements 12
Public Ownership 12
Land Reclamation Banks 13
Fees 13
Land Registration Fee 13
Inspection/Site Assessment Fees , 13
Taxes 14
Special Assessments 14
Tax Increment Financing 14
Real Estate Transfer Tax IS
Tax Abatements , 15
Debt Finance 16
Subsidised Low-Interest Loans 16
Revolving Loan Funds . . . 16
Bonds 16
Grants. 17
EPA Browfields Demonstration Grants 17
EZ/ECSSBG and EDI Funds 18
Other Federal Programs 18
State Grant Programs , 19
Private/Nonprofit Grants , 19
INDIRECT STRATEGIES 20
Informational/Advisory Services 20
Land Registry 20
Brokering/Facilitation 21
Regulatory Compliance Assistance 21
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Financing Strategies for Brownfields Redevelopment
TABLE OF CONTENTS (CON'T)
Liability Assurances 21
No Further Action Leaer ....'. 22
Covenant-Not-To-Sue . .' 22
Certificate of Completion 23
Liability Release 23
Financial Assurances 23
Loan Guarantees 23
Bond/Loan Insurance .............24
Legislative Reforms _ 24
Voluntary Cleanup Programs , 24
' Cleanup Standards 25
IV. FINDINGS AND CONCLUSIONS 27
V. ENDNOTES '.... 29
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Financing Strategies for Brownfields Redevelopment
EXECUTIVE SUMMARY
EPA's Brownfields Initiative seeks to empower stakeholders in economic
redevelopment to work together in a timely manner to prevent, assess, safely cleanup, and
reuse "brownfields" in a sustainable way. Brownfields are abandoned, idled, or under-used
industrial and commercial sites where expansion or redevelopment is complicated by real
or perceived environmental contamination. The initiative is designed, in part, to free the
market mechanisms of redevelopment to facilitate environmental cleanup and protection.
The Environmental Financial Advisory Board (EFAB) is focusing on the financial
issues associated with this effort to revitalize "brownfields". EFAB seeks to encourage
and facilitate investment in brownfields. The Board intends that its work support and
complement the Brownfields Initiative underway at EPA. This .report is designed to assist
the many parties involved in brownfields redevelopment communities, developers,
federal and State agencies, capital providers, community groups, and others.
The report examines financing strategies that can help revitalize brownfields. First,
it lays out a seven-stage process for brownfields redevelopment encompassing site
identification, initial site assessment, economic assessment, detailed site assessment (if
needed), project development and financing, cleanup planning and execution, and
redevelopment of property. It then depicts the economic redevelopment potential of
brownfields by classifying sites as viable, threshold, and non-viable, and suggests
governments may wish to leverage limited public resources and attract private investment
by targeting threshold and non-viable sites. The report also presents a wide variety of
financing strategies currently being used in brownfields redevelopment, including equity
participation, fees, taxes, debt finance, grants, informational/advisory services, liability
assurances, financial assurances, and legislative reforms. The report matches the financing
strategies, where possible, to the stages in the redevelopment process. Finally, it provides
seventeen real-life examples of how financing strategies have been applied in practice.
EFAB finds that there are many financing strategies available to facilitate
brownfields redevelopment. Clearly, different strategies may be appropriate at different
stages in the redevelopment process, and a combination of strategies may be needed to
meet the financing demands of any single brownfields project. The Board further notes
that successful implementation of financing strategies requires collective and cooperative
action on the part of all parties involved in brownfields redevelopment. An understanding
and sharing of information on brownfields financing strategies among all parties involved
are keys to successful projects.
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Financing Strategies for Brownfields Redevelopment
I. INTRODUCTION
In communities across the nation, there are numerous abandoned, idled, or under-
used industrial and commercial sites where expansion or redevelopment is complicated by
real or perceived environmental contamination. These sites, known as "browiifields", are
often avoided by developers, businesses, and the capital providers (lenders and investors)
because of uncertainties regarding contamination. The magnitude of the problem is
considerable. For example, the City of Chicago has identified over 2,000 brownfields in
its metropolitan area alone. Although no one knows exactly how many brownfields exist,
estimates for the number of sites nationwide range from tens of thousands to over 500,000.
Developers are reluctant to risk the potential costs associated with hazardous waste
assessment and cleanup, for which owners can be liable even if they were not involved in
the original contamination of the property. Lenders are often unwilling to participate in
brownfields revitalization projects due to potential liability, risks to collateral, and the risk
of bankruptcy of the project sponsors. The result is increasing development of greenfield
areas which had not previously experienced such activity, urban sprawl, and continuing
economic and environmental decline in former industrial or commercial areas.
This report examines financing strategies used in brownfields revitalization
projects, and looks at how these strategies can overcome the reluctance by lenders,
developers, and community members to participate in these projects. Part n of the report
Mist presents brownfields redevelopment as a process, and outlines its principal stages -
site identification, initial site assessment, economic assessment, detailed site assessment
(if needed), project development and financing, cleanup planning and execution, and
redevelopment of property. Fart n also evaluates brownfields by their redevelopment
potential to help target limited resources, and provides information on matching financing
strategies to the seven stages of brownfields redevelopment.
Part in presents many of the financing strategies currently being used by state and
local governments in brownfields redevelopment projects. Two main types of financing
strategies are discussed - direct strategies, which provide funding directly for assessment,
cleanup, and redevelopment, and indirect strategies, which enable or facilitate financing.
Direct strategies include equity participation, fees, taxes, debt, and grants. Indirect
strategies include legislative reforms, financial assurances, informational/advisory services,
and liability assurances.
In presenting the financing strategies, Part in provides brief, real-life examples
of their application in brownfields and related redevelopment projects. The examples are
designed to assist local governments, developers, capital providers, State and federal
agencies, nonprofit organizations, community groups, and others involved in brownfields
redevelopment. All parties interested in using the financing strategies described in these
examples should determine their legal status under applicable State and local laws.
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Financing Strategies for Brownfields Redevelopment
II. THE BROWNFIELDS REDEVELOPMENT PROCESS
The brownfields redevelopment process can be divided into seven basic stages.
These stages may be undertaken by private and/or public sponsors serving as developers.
The stages in the redevelopment process and the particular activities associated with each
stage create different financing needs. In addition to matching financing strategies to the
type of brownfields site, developers need to consider what stage(s) of the redevelopment
process must be funded. The seven basic stages of the brownfields redevelopment process
and the associated activities include:
Site Identification. Development and maintenance of a registry of sites,
helping developers find ones that meet their needs, and advertisement and
marketing of abandoned sites;
Initial Site Assessment (Phase I Investigation). Review of public
records, physical surroundings, and other readily-available data regarding
the site;
Economic Assessment. Evaluation of site characteristics, advantages, and
limitations, and comparison to the initial site assessment to determine
whether a site is currently viable, potentially viable, or non-viable for
redevelopment;
Detailed Site Assessment (Phase n Investigation, if required).
Environmental engineering investigation, sampling, and chemical analysis
of the site;
Project Development and Financing. Selection and financing of a
cleanup and redevelopment project(s) for the site;
Cleanup Planning and Execution. Selection and implementation of a
cleanup approach; and
Redevelopment of Property. Construction or alteration of the property to
suit the new use for which it is being redeveloped.
Exhibit 2.1 on the next page illustrates these seven basic stages of the brownfields
redevelopment process.
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Exhibit 2.1
Stages of the Brownfields Redevelopment Process
Economic Assessment
Redevelopment
of Property
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Financing Strategies far Brown fields Redevelopment
Site Identification
State and local governments can assist with site identification by developing and
maintaining an inventory or registry of sites, helping developers identify sites with
desirable characteristics, undertaking advertising and marketing activities to promote site
assessment, cleanup, and redevelopment. In the private sector, developers can look for
potential sites,by using these public resources. These are primarily low initial capital cost
activities that need a continuous low level of financing to operate and maintain.
Initial Site Assessment (Phase I Investigation)
f *
Initial site assessment activities can often be performed at relatively moderate cost.
There are a number of ways to identify suspected contamination that rely on existing
records, historical data, and other readily-available sources:
Examine historical data to review historical uses and applicable federal and
state reports of hazardous substances on the property;
Research the chain of title/zoning history - who were past owners of the land,
what activities were licensed;
* Examine similar characteristics for neighboring properties;
* Check for prior environmental audits and assessments (OSHA safety reports,
etc.);
* Review insurance policies to determine covered activities that might have
involved potentially-hazardous chemicals; and
Check local revenue* departments to see if hazardous substances fees/taxes have
been paid (indicating potential use of hazardous chemicals on the site).
Economic Assessment
A key distinction must be made between sites that are in desirable locations and
have the potential to attract buyers and developers, and sites that have no interested buyers
and few potential uses. If there is no potential economic return to outweigh the cost of
restoring a site to a useful state, no financing strategy will induce its redevelopment until
and unless this' condition changes. To determine what the redevelopment potential of a site
. is, an economic assessment must be performed.
As with any investment, the expected return on a brownfields project must be
commensurate with its associated risk.1 It is important, therefore, to first determine as
accurately as possible the relationship between risk and return for the individual project.
This relationship can be graphically depicted as a point on the risk/return field in which
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Financing Strategies for Brmvnfields Redevelopment
a project lies (see Exhibit 2.2 below). Brownfield sites exist across the entire range of the
economic development spectrum. For the purpose of developing financing strategies,
however, the sites can be divided into three basic categories outlined below:
Viable Sites. Sites that are already economically viable, and where the private
market is already working towards redevelopment without public assistance.
These sites either have very low potential for environmental liability, or such
high potential rates of return that the advantages outweigh the risks from the
project sponsors' (developers and investors) perspective.
* Threshold Sites. Sites that are only marginally viable, and will not be
redeveloped without some public assistance. These sites may have either fewer
economic advantages than the viable sites, or they may have greater potential
for environmental liability.
Non-Viable Sites. Sites with significant potential for environmental
liability, and/or whose economic advantages are minimal at best.. These
sites require substantial public assistance to redevelop (in the form of
subsidies), or should be left alone, if possible.
g
I
14
§
&
-a
o.
X
PJ
Exhibit 2.2
Redevelopment Threshold:
Redevelopment Potential of Brownfield Sites
Redevelopment Occurs
Risk of Environmental Liability
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Financing Strategies for Brown fields Redevelopment
Match Goals to Sites
Decisions to invest in any of these three kinds of brownfield sites depend on the
goals of the particular investor. To better leverage public investment, state and loqal
governments should consider directing public resources to brownfields where the private
sector is unwilling or unable to finance projects - threshold and non-viable sites. They
should also consider strategies, where appropriate, that mix their public investment with
private monies. One goal of any public investment strategy should be to move threshold
sites into the viable category, and nonviable sites into the threshold and viable categories
so that private investment can be attracted to them.
Strategies For Viable Sites
Typically, viable sites should need less or no direct investment of public capital.
However, private owners and developers interested in a viable site may still require
assistance in dealing with the regulatory and liability difficulties associated with
brownfields assessment, cleanup and redevelopment. Strategies that may be appropriate
for viable sites include:
timely review and comment of. assessment and/or cleanup plans and
proposals by regulators;
land use-based cleanup standards, reflecting the intended use of the
property;
liability clarification (apportionments and/or likelihoods) so that risk can
quantified, and then managed or sold; or
liability release (such as a covenant-not-to-sue or certificate of completion)
after the cleanup is completed.
These strategies facilitate private sector investment in brownfield assessment, cleanup and
redevelopment projects while conserving public resources for sites that would not
otherwise be commercially viable.
Strategies for Threshold Sites
Threshold sites may possess significant potential for assessment, cleanup and
redevelopment but need some public assistance to increase the rate of return on the
possible investment or to limit the potential for environmental liability before developers
will consider investing in them. Financing strategies can be selected to target either need,
as illustrated in Exhibit 2.3 at the top of the next page (adapted from a graphic that
appeared in the Economic Development Quarterly).2
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Financing Strategies for Brmvn fields Redevelopment
Exhibit 2.3
Redevelopment Threshold:
Increasing the Redevelopment Potential of
Brownfield Sites
CO
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Financing Strategies for Brownflelds Redevelopment
Detailed Site Assessment (Phase II Investigation)
At this stage, a site is assessed to determine the level and extent of environmental
contamination. The costs can vary widely depending on the severity of the problem, and
the intensity of the site investigation required under state law. If the initial site assessment
shows that there is potential contamination, a more-expensive, detailed assessment is then
performed. This involves:
Environmental engineering;
* Sampling; and
Chemical analysis.
In some cases, the private sector may be unwilling to pay for this stage of the process,
because if a site-is found to be too contaminated, the project may never be developed due
to the cost of the cleanup. This suggests that additional financing tools may be required
at this point. (This can be seen in Exhibit 3.1 on page 10.)
Project Development and Financing
At this stage, feasibility studies may be required and the project's financing must
be arranged. Activities at this stage include:
* Financial feasibility studies for the project: and
Development of a financing plan for cleanup and for redevelopment.
This stage might include meetings with lenders, insurers, proposed project partners, and
affected neighboring communities (their representatives and citizen groups).
Cleanup Planning and Execution
This stage can involve high capital costs, because of
Site remediation;
* Associated public notice requirements; and
Preparation of reports for regulators.
Redevelopment of Property
Depending on 'the type of project selected, this stage can involve construction,
clearance, and reuse of the property. Activities at this stage include:
* Site clearance/demolition (after remediation); and
Construction of facilities.
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Financing Strategies for Brownfields Redevelopment
III. BROWNFIELDS FINANCING STRATEGIES
Brownfields project sponsors use many different financing strategies to implement
the seven-stage brownfields redevelopment process. However, there are only two basic
types of financing strategies, and these are:
* Direct strategies - that generate funds that may be used for cleanup and
development; and
Indirect strategies - that enable or facilitate financing redevelopment.
Many project sponsors use a combination of these two types of financing strategies
in redeveloping a specific brownfields site. Exhibit 3.1 on page 10 shows some of the
strategies that may be useful at particular stages of the redevelopment process. Selection
of suitable strategies will often depend on a particular barrier to finance. For example,
sometimes die barrier .will be lack of information about suitable sites. In this case, a land
registration fee financing a central land registry, or other informational/advisory service,
may be needed. In other cases, an inability to obtain capital market financing may be the
barrier, and loan guarantees or equity participation may be needed from the public sector.
Exhibit 3.2 on page 11 illustrates a broader range financing strategies used in the
redevelopment process. This section of the report describes these strategies and provides
brief examples of how some of them have been applied in practice.
DIRECT STRATEGIES
Direct financing strategies provide resources for assessment, cleanup, and
redevelopment of brownfields to project sponsors who can be communities, States, private
developers, nonprofits, or a combination of these. Typically, these strategies increase the
rate of return on a project by reducing the cost of capital or providing equity participation.
Equity Participation
Many communities consider equity participation an excellent tool to stimulate
projects. This can take the form of lease arrangements, reclamation banks, or city
ownership and development of property on its own behalf. The important aspect of equity
participation is that the public sponsor assumes part of the risk of the project. For many
communities, this is a worthwhile risk because the assessed, cleaned up, and redeveloped
property will provide a source of tax revenue. In addition, although state and local
governments only enjoy a statutory liability exemption when acquiring property
involuntarily, federal regulators have historically been more reluctant to pursue legal action
against public agencies than against private landowners, thus lowering the effective risk.
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Exibit3.1
Financing Strategies for Stages of
the Brownfields Redevelopment. Process
Econumic Assessment
Silc
Identification
Initial Site
Assessment
Phase I:
Investigation
Equity
Vrrangemcms
Fees
nfomwtional/i
Advisory
Services
Threshold
Sites
Nun- Viable
Sites
^^
Detailed Site
Assessment
Phase II:
Investigation
I
.. _ ^--
l-iiiuncial
Project
Development
and
Financing
~~|
Cleanup
Planning
and
Execution
r
Redevelopment
of Property
i i
Liability
Assurances
I
I axes
(iranls
Assurances
lanes
Grants
Loans
Liability
Assurances
Secured
Granted
-
)
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Exhiuit 3.2
Brownfields Financing Strategies
Direct
Strategies that Generate Funds for Financing Redevelopment
Public
Ownership
Land
Reclamation
Banks
Inspection/
Site
Assessment
Tax
Increment
Financing
Real Estate
Transfer Tax
Tax
Abatements
Revolving
Loan Funds
Bonds
EPA
Brownfields
Demonstration
Grants
SSBG&EDI
Funds
Other
Federal
Programs
State Grant
Programs
Private/
Nonprofit
Grants
Indirect
Strategies that Facilitate Financing/Redevelopment
Land
Registry
Brokering/
Facilitation
Regulatory
Compliance
Assistance
Covenant-
Not-To-Sue
Certificate
of
Competition
Liability
Release
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Financing Strategies for Brmvnfields Redevelopment
Lease Arrangements
Some communities find that brownfield projects can be stimulated by using a public
agency to buy sites (or take title to abandoned property), assess and cleanup contamination,
and lease to private developers. The lease shields the developer from environmental
liability as an owner (but not as a transporter or generator of hazardous waste), and gives
the community a source of revenue. In some cases, the local government finds a lessor
before starting the project. In others, it pursues the project before identifying tenants.
Lease Arrangements - UniroyalTire Factory, Commerce, California
In 1984, the Commerce Redevelopment Agency purchased the 35-acre.Uniroyal Tire
Factory complex for $14 million. The agency spent $3 million on investigation and
remediation of the contaminated soils on the site (some of which was later recovered in a
settlement with the company responsible for the contamination), and sought a private
developer who would be interested in leasing the redeveloped land. Ultimately, a factory
outlet mall, offices, and a hotel were built on the site, and the project is expected to produce
approximately $592 million in lease income over 65 years, plus $7.5 million in property
taxes that the redevelopment agency intends to devote to other redevelopment activities.
Public Ownership
A second option that has been pursued is to assess, cleanup, and redevelop the
project as a publicly-owned parcel. After the local government has assembled the property
and begun the first stages of cleanup, it can either sell the property to the private sector
or retain ownership on its own behalf.
Public Ownership Chrysler Corporation
Jefferson North Assembly Plant, Detroit, Michigan.
In 1990, due to strong demand for Jeep Cherokees, the Chrysler Corporation sought a
site for a new plant. The company planned to invest $1 billion and create 3,000 jobs.
One location considered was a 283-acre tract owned by the City of Detroit with a mix
of land uses, including industry, scrap yards, old gas stations, and abandoned lots. The
site had access to rail transportation, was centrally located, and was close to a well-
trained work force. The City of Detroit, which strongly supported the project, acquired
the property, and worked with the State of Michigan and Chrysler to negotiate a $25
million cleanup plan to contain and stabilize the contamination.2 Chrysler purchased the
parcel upon conclusion of the cleanup, and opened the plant in January, 1992.
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Financing Strategies for Brownfields Redevelopment
Land Reclamation Banks
Some communities use land reclamation banks. Such banks take title to potentially
contaminated property (via property tax foreclosure, eminent domain, or purchase). They
assess and clean it up, redevelop, and sell to prospective developers. Some communities
use the proceeds from the lease or sale of the property to finance future projects.
Land Reclamation Banks Minneapolis Light Industry Land Acquisition.
Program
* *
The City of Minneapolis spends about $5 million per year to acquire, assess, cleanup,
and redevelop potentially contaminated industrial sites. The funds are generated by a
tax-increment financing plan and used for both purchase and site remediation. The City
assumes all liability for cleanup and resells the land to private purchasers after
redevelopment.
Fees
A fee is generally a charge for services rendered. Fees establish direct links
between the demand for services and the cost of providing them. In the case of
brownfields, however, property owners may not be able or willing to pay fees to cover the
substantial capital costs of cleanup. Nor is the fee mechanism typically appropriate for
cleanup activities, which require significant capital investments. They may, however, be
able to pay for land registration and inspection fees that could finance a central land
registry and assessment of sites that would lead developers to an appropriate site.
Land Registration Fee
Developers could pay fees to use a city land registry that would maintain listings
and descriptions of brownfields and other sites available for development, and their levels
of environmental contamination.
Inspection/Site Assessment Fees
Developers might be willing to pay for assistance with assessment and remediation
of potential development sites. In some cases, voluntary cleanup programs already run on
a fee-for-service basis, with state environmental agencies assisting property owners with
site investigations, selection of remediation options, and coordination with federal
regulatory agencies. In such instances, the private party usually reimburses the state for
its costs in reviewing the private party's proposed actions against statutory and
administrative requirements and providing guidance on those requirements.
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Financing Strategies for Brownfields Redevelopment
Inspection/Site Assessment Fees
Minnesota Voluntary Investigation and Cleanup Program
The Minnesota Voluntary Investigation and Cleanup Program is run on a fee-for-service
basis. By obtaining approval from the Minnesota Pollution Control Agency (MPCA) for
site investigations and response action plans, potential developers can determine the most
appropriate cleanup action and can easily calculate the cost of cleanup measures needed
to satisfy statutory requirements. Property owners may request assistance from-the
MPCA in anticipation of future property transactions, to obtain financing for current
redevelopment plans, or simply to avoid the high transaction costs associated with
Superfund cleanups. Historically the cost for these review services has ranged from *$6S
to S85 per hour.
Taxes
Most taxes are charged against either personal or corporate income, property, or
sales of a commodity. Typically, brownfields may be located in areas where traditional
sources of tax revenue such as property and income taxes generate little revenue. As
a result, non-traditional taxes and real estate-based taxes that do not depend directly on
current property value may be most appropriate.
Special Assessments
Special assessments are a charge levied against beneficiaries of a service or
improvement. In the case of a brownfield, an entire business district or neighborhood
could be considered the beneficiary of assessment, cleanup, redevelopment. In some
cases, special assessments are charged differentially, with those receiving the greatest
benefit paying a larger proportion of the cost. For example, property owners that were
closest to a brownfields site might pay a larger share of the cleanup costs because they
would experience greater increases in their property values after the cleanup.
Alternatively, special assessments can be charged at a flat rate per individual or business.
Tax Increment Financing
Tax increment financing is a particular kind of special assessment that generates
revenue from fhe incremental change in property values caused by the improvements being
. financed. For example, a number of governments have issued bonds backed by the
anticipated increase in property values after a brownfields cleanup has been completed.
This type of financing is generally used for a specifically-defined geographic area and
often for a well-defined period of time such as ten years. However, if improvements do
not yield the expected benefits, bonds may have to be repaid by other means.
Environmental Financial Advisoty.Board 14
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Financing Strategies for Brownfields Redevelopment
Tax Increment Financing Downtown Wichita, Kansas
In 1990, a serious contamination problem was discovered in downtown Wichita, Kansas,
threatening more than 500 companies with liability, and preventing economic development
in the area. The city accepted liability for the contamination and negotiated a cleanup plan
with EPA, which they planned to finance with an innovative tax-increment financing plan.
The city reduced the property values in the affected area to reflect the decrease in values
due to contamination. Then, the city issued bonds backed by the anticipated increase in the
property values following a cleanup. This mechanism effectively dedicated future property
taxes from the area to the cleanup.
Real Estate transfer Tax
Real estate transfer taxes are charged to a buyer or seller of real property at the
time of transfer based on a percentage of the assessed value of property transferred, a flat
deed registration fee, or a combination of both. This financing tool is used by .both state
and local governments to fund land-related initiatives, including natural lands acquisition.
Although no state or local government has, to our knowledge, dedicated this tax to a
brownfields project, a transfer tax might be initiated in conjunction with new property
transfer laws that require sellers to report the environmental status of land to new owners.
Tax Abatements
A tax abatement is a temporary moratorium on charging the usual tax rate on
property or other tax base. Several states and communities are using them to attract
investment to brownfields. In some areas, tax abatements can be approved on a project-
by-project basis; in others, they can only be enacted by the state legislature or local
governing body. They can be permanent or only last the first few years of a project. Tax
abatements can make otherwise.uneconomical projects more attractive and provide a
guaranteed incentive.
Tax Abatements Ohio Tax Abatement Program
The State of Ohio has a tax abatement program for property owners who have been given
a covenant-not-to-sue agreement from the state. The program grants these property owners
a ten-year exemption from any increase in property taxes due to an increase in the assessed
valuation on the land where the voluntary action was undertaken. In addition, the owner
is exempt from property taxes on improvements, buildings, and fixtures for ten years.
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Financing Strategies for Brown fields Redevelopment
Debt Finance
A loan is money that must be repaid in a set amount of time at a negotiated interest
rate. Brownfields project sponsors may be able to identify state and federal debt finance
programs that will provide capital at subsidized rates for projects that meet their eligibility
criteria. Some debt finance programs are revolving, meaning that the program is at least
partially financed by repayment of earlier debt.
Subsidized Low-Interest Loans
Subsidized low-interest loans reduce the cost of capital for project sponsors. They
also provide full or partial financing for projects that might otherwise be unable to obtain
financing on the private capital markets, or that would be expected to pay a higher interest
rate to compensate for the potential additional risk involved in a brownfields project.
Many projects have made use of existing state and local loan programs for redevelopment.
Others have made use of loan programs specifically targeted to brownfield assessment,
cleanup, and redevelopment.
Subsidized Low-Interest Loan WorldClass Steel, Ambridge, Pennsylvania
In Ambridge, Pennsylvania, the Commonwealth of Pennsylvania is providing subsidized
loans to redevelop a 100-acre brownfield site. The site, which formerly belonged to the
U.S. Steel group, had been vacant for 10 years. In 1991, WorldClass Steel took
ownership of the site and redeveloped 16.5 of the 100 acres. In 1994, WorldClass and
the city made plans for a $375 million expansion that would redevelop the remaining
acres. The Commonwealth is expected to finance 10 to 15 percent of the entire package
at a subsidized interest rate of approximately 4 percent.
Revolving Loan Funds . .
In some cases, state and local loan programs operate revolving loan funds, meaning
that future bans are financed by current repayments. This mechanism may be particularly
appropriate for brownfields assessment, cleanup, and redevelopment, since repayment
terms tend to be more flexible than commercial loans.
Bonds
*
Bonds can extend payment for new projects over a period of fifteen to thirty years
- allowing time to generate sufficient income to repay the capital invested. Typically,
states and localities repay bonds with taxes, fees, or other sources of governmental
revenue. For brownfield projects, bonds backed by tax-increment financing can be
particularly popular because they rely on future tax revenues anticipated from the project.
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Michigan Environmental Bond Program
In 1988, Michigan voters approved issuance of $425 million in bonds to fund cleanup
actions, with $45 million dedicated to a site reclamation program which provides grants
to local governments to investigate and cleanup contaminated sites for economic
development.
Grants
Grants for different purposes are awarded by a wide range of entities, including
federal, state, and local governments, nonprofit organizations, and corporations.
Brownfield assessment, cleanup, and redevelopment projects may be eligible for many
existing grant programs, and EPA has a national demonstration pilot grant program
specifically targeted for brownfields-related activities.
EPA Brovmfields Demonstration Grants
EPA's Brownfields Initiative seeks to empower states, communities, and other
parties involved in economic redevelopment to work together in a timely manner to
prevent, assess, safely, cleanup, and sustainably reuse brownfields. As one component of
the initiative, 50 communities across the country will receive grants for demonstration
pilots for the redevelopment of their brownfields. The Agency is funding the 50
brownfields pilot projects for up to $200,000 each over a two-year period. These pilots
will:
Test redevelopment models,
Direct special efforts to removing regulatory barriers without sacrificing
environmental protection;
Encourage community groups, lenders, investors, developers, and other
parties to come together to cleanup sites and return them to appropriate
productive use;
- Provide a series of redevelopment models for states and localities struggling
with such efforts; and
* Provide guidance to cities for cleaning up and returning industrial
brownfields to productive use.
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Financing Strategies for Brownflelds Redevelopment
EZ/EC SSBG and EDI Funds
Each community participating in the federal Empowerment Zone/Enterprise
Community program is allotted a certain amount of Empowerment Zone /Enterprise
Community Social Service Block Grant (EZ/EC SSBG) funds. The EZ/EC SSBG funds
must pass through the state(s). States must obligate these funds in accordance with a
community's strategic plan within 2 years of the empowerment zone/enterprise community
designation. The statute, does not impose specific reporting requirements, although
communities are required to certify that entities administering funds will provide "periodic"
reports on their use of funds.
The Department of Housing and Urban Development (HUD) has made available
Economic Development Initiative (EDI) funds of varying amounts to empowerment zones
and enterprise communities. HUD is using these grant funds to encourage communities
to use the existing Section 108 loan program, which allows communities to obtain loans
for development projects at subsidized interest rates. Historically, communities have not
used all of their Section 108 loan authority because HUD regulations require them to
pledge their future grant funds as collateral. In the event of a loan default, the community
will have to repay the loan by using these future grant funds. Many communities have
been reluctant to risk future entitlements with loans to projects that may lose money.
To provide a financial incentive to communities to accept this risk, HUD is
requiring communities to use their Section 108 loan authority before they can receive an
EDI grant For example, if a community received a $22 million EDI grant, it would have
to use at least $22 million of Section 108 loan authority to use the EDI grant award.
Other Federal Programs
Some communities have pursued funding from other federal programs, such as:
HUD Community Development Block grants which can be used for grants,
loans, loan guarantees, and technical assistance. (HUD has explicitly stated
that the cost of environmental 'reviews and the actual cleanup of identified
hazards are eligible activities);
Economic Development Administration Public Works and Development
Facilities Grant Program;
Appalachian Regional Commission (ARC) Supplemental Grants; and
State Underground Storage Tank Trust Fund Program.
Eligibility criteria, amounts available, and application procedures for these
programs and others are described in the federal government's annual publication, the
Catalog of Federal Domestic Assistance.
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Financing Strategies for Brownfields Redevelopment
State Grant Programs
Many states have grant programs providing funding for localities and agencies
undertaking brownfield assessment, cleanup, and redevelopment. In seeking grants,
project sponsors should know that grant assistance can be found at a variety of agencies,
not necessarily the primary environmental agency. For example, communities may be able
to finance brownfield projects via a state economic development agency. Alternatively,
localities can seek grants not traditionally been used for site cleanup, such as groundwater
protection grants, which could awarded for protecting groundwater from contamination
from a brownfield. Since grant programs vary widely from state to state, localities should
seek grant catalogs or other information directly from their state governments.
State Grant Programs Industrial Communities Action Program,
Commonwealth of Pennsylvania
The Commonwealth of Pennsylvania has adopted an Industrial Communities Action
Program (ICAP) that provides grants to communities for redeveloping contaminated sites.
Project sponsors -- including local governments, development agencies, and
redevelopment authorities can apply for grants for the purchase of land and buildings, site
demolition and clearance, construction or renovation of infrastructure, cleanup, 'and other
activities that assist in preparing the site for redevelopment. ICAP supported 53 projects
for in its first year, and 117 in its second year.
Private/Nonprofit Grants
Private nonprofit organizations and corporations, can also be a source of grant funds
for brownfield projects. Publications such as the Grants Register and the Foundation
Directory can direct states and localities to organizations and corporations likely to provide
grants, as well as information on criteria, amounts available, and application procedures.
Private/Nonprofit Grants - The Great Lakes Protection Fund
In My, 1995, the Great Lakes Commission received a $26,000 planning grant from the
Great Lakes Protection Fund to identify ways to spur brownfields projects in the Great
Lakes Basin. The Commission will use the funds for three tasks: reviewing the impacts
of brownfields on Great Lakes basin ecosystem health; planning and conducting a
regional workshop to assess the potential for cooperative arrangements on brownfields
redevelopment and greenfields protection; and preparation of a more detailed report and
project proposal.
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Financing Strategies for Brownfields Redevelopment
INDIRECT STRATEGIES
Some financing strategies available to state and local governments do not directly
increase the funds available for investment in brownfield projects. Rather, these indirect
strategies facilitate or enable site assessment, cleanup, and redevelopment by overcoming
a barrier(s) impeding the project's financing. Indirect strategies can help overcome three
kinds of barriers:
*
Knowledge Gaps. A developer or investor may be interested in, or willing to
consider, financing a brownfields project, but be unaware of suitable sites or
regulatory options. Informational/advisory services provided by state and local
governments can overcome these knowledge gaps.
Perceived Liability. Many lenders may be aware of brownfields-related issues
but fear the potential liability associated with a particular site, which may or may
not equate to the site's actual liability risk. In addition, lenders may fear the
public's perception of environmental contamination, and the associated stigma,
which can have a financial impact on a project if it deters customers from using it.
Informational/advisory services, and more importantly, financial assurances
provided by states and localities can overcome problems with perceived, liability.
Actual Liability. Some indirect financing strategies shield property owners and
redevelopers from environmental liability risk by providing liability assurances.
Informational/Advisory Services
Part of the barrier to brownfields redevelopment is that developers and capital
providers often lack information about sites, the site assessment process, and liability law.
By educating developers and capital providers about available sites, the site assessment
process, and environmental legislation, communities can help overcome reluctance by
developers and capital providers to participate in brownfields redevelopment. For
example, changes in environmental regulations can affect lending decisions by capital
providers. In addition, developers and capital providers should be aware of land use
controls, cleanup options, and potential reuses of property.
Land Registry
A number of communities have set up land registries that collect information about
potential redevelopment sites. These registries inform developers about the potential
advantages and disadvantages of sites, and allow projects to occur on sites that might
otherwise be overlooked. Some communities operate land registries conjunction with
programs that fund site investigation and assessments for the parcels. Subsequently, the
registry will contain detailed information about the sites and anticipated cleanup costs.
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Land Registry -Bridgeport, Connecticut
Hie city of Bridgeport, Connecticut is using EPA demonstration grant funds to
develop an inventory of contaminated sites. Currently over 500 acres of contaminated
land exist throughout the city.. The inventory will classify properties by the level of
cleanup required, the method and cost of the cleanup, and the anticipated time required.
Brokering/Facilitation
An agency or local government can broker or facilitate agreements between federal,
state, and local agencies and developers. In this case, the public sector can provide
proactive services to bring buyer and seller together, and to help negotiate brownfield
(assessment, cleanup, and redevelopment) deals, and assist in arranging project financing.
Regulatory Compliance Assistance
A public environmental agency can advise developers on regulatory options and
assist in obtaining cooperation from other agencies. Navigating the environmental permit
process can be difficult. Assistance with the process encourages developers to continue
projects that might otherwise be unacceptably delayed. To expedite the process, some
communities have formed task forces with membership from all agencies responsible for
regulating a particular brownfields site.
Regulatory Compliance Assistance Elizabeth, New Jersey
The Regional Plan Association, a nonprofit organization that studies land-use
issues in New Jersey, New York, and Connecticut, assisted a developer in acquiring
environmental permits to turn a 166-acre site in Elizabeth, once a municipal landfill, into
a 1.5 million square-foot commercial hub, including a 1,2 million square-foot factory-
outlet center. The Association worked with the developer and regulatory agencies to
ensure that cleanup plans were approved and deadlines were met.
Liability Assurances
Liability assurances help finance the assessment, cleanup, and redevelopment of
brownfields by giving needed certainty to lenders and other financial actors. Tools used
by states and localities include no-further-action letters, covenants-hot-to-sue, certificates
of completion, and liability releases. Each tool addresses a particular kind of uncertainty
that can impede access to capital. These assurances promote brownfield projects by
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Financing Strategies for Brownfields Redevelopment
shielding prospective and current owners from potential liability in exchange for cleaning
up contaminated property.
Most state voluntary cleanup programs offer some form of liability assurances to
prospective purchasers. Some also offer assurances to current owners who successfully
complete an approved cleanup. But, state laws vary widely as to whether current owners
receive any liability protection, even if they undertake a cleanup. Although there are no
standard definitions for liability assurances, they can be created in a number of different
ways, including legislative action, or administrative action by an environmental agency,
No Further Action Letter
After a site assessment determines that cleanup action is required on a brownfield
property, a state can inform a property owner what level of cleanup is necessary for
issuance of a no further action letter. This letter is only granted after a cleanup has been
done, or a site assessment determines none is required. The letter does not release the new
owner from liability, but does guarantee that the state will not take any new enforcement
actions at the site, barring discovery of new information unknown at the time of the letter.
Where an approved cleanup has been completed, a no further action letter is a promise by
the state not to require further cleanup. If state cleanup standards change, or new cleanup
technologies are developed, the new owner will not be required to do additional cleanup.
But, this varies from state to state. Some limit reopeners severely, while others do not.
Covenant-Not-Td-Sue
A covenant not-to-sue (CNTS) is granted after cleanup and offers protection from
future state suits for contamination found on the property. In some states, it may not cover
conditions or contamination that were unknown at the time the covenant was granted. In
some cases, a CNTS may be contingent on an approved land use for the property. For
example, the state may require that the property be maintained in industrial use, or that the
new use will not exacerbate the contamination that already exists.
Covenants Not to Sue ~ State of Michigan
The Michigan State Attorney General has the authority to issue CJNTS to sponsors
interested in redeveloping brownfields who are not affiliated with a potentially responsible
patty. The CNTS protects the purchaser from all liability to the State of Michigan
associated with past releases, known and unknown. It also provides protection from claims
by other responsible parties, in exchange for implementation of response activity.
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Certificate of Completion
A certificate of completion is issued after cleanup if the site meets the agreed-upon
state cleanup standards. In some cases, these standards will be individually negotiated for
each site, based on a risk assessment. In other cases, the standards will be voluntary
cleanup standards that apply to all sites statewide. The certificate of completion proves
to prospective purchasers that the cleanup has occurred, and that the state environmental
agency participated, and was satisfied with the results. In many states, possessing a
certificate of completion limits further liability for both potentially responsible parties
(laws vary by state on a PRP's eligibility for such a certificate) and nonresponsible parties.
Certificate of Completion - Culver City Kite Site, Culver City, California
The Culver City Kite Site is a 4.5 acre property formerly used by manufacturers of
wood products, plastics, and concrete blocks, die casting machine shops, and auto body and
painting enterprises. The Department of Toxic Substances Control participated in the site
remediation process and granted a certificate of completion at the site, which enabled the
development of the property as an industrial park containing retail outlets for electronic,
home building, and automobile equipment.
Liability Release
A liability release shields property owners from all liability, providing that they are
in no way responsible for the original contamination. It is intended to encourage
prospective purchasers to cleanup contaminated property, without exposing them to the
risk of being held liable for the original contamination. It may be granted prior to
cleanup, and may be conditional on an intention to clean and reuse the site. State laws
vary as to the liability protection afforded by these releases.
Financial Assurances
Financial assurances assure lenders and capital providers that they will be repaid
by another source if the project sponsor should default. By providing additional guarantees
for bond or loan repayment, financial assurances improve the ability of project sponsors
to acquire capital, or to acquire capital at a lower cost.
Loan Guarantees
To reassure capital providers regarding the safety of brownfields lending, state, and
local governments, and some federal programs, provide loan guarantees to project
sponsors. These guarantees assist sponsors in obtaining financing because they provide
an additional source of repayment in the event of project bankruptcy. For example, a
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Financing Strategies for Brownfields Redevelopment
HUD program called Section 108 provides loan guarantees that enable local governments
to command a more favorable interest rate.
Loan Guarantees Ohio Financial Assistance Programs
The state of Ohio provides loan guarantees from the state water pollution control
fund, the Ohio Water Development Authority, and the Ohio Economic Development
Authority. These guarantees are available to parties involved in cleanup or undertaking
voluntary actions including assessment, investigation, and remediation, and assist these
parties in obtaining project financing.
Bond/Loan Insurance
Bond and loan insurance are credit enhancements that assure lenders and
bondholders that interest and principal will be repaid in the event of default by the entity
that contracted the debt. States, communities, and private developers can use bond and
loan insurance to make debt offerings appear more secure from default, and therefore more
attractive to potential investors. These assurances would be particularly important for
obtaining debt for brownfield projects. To secure bond or loan insurance, project sponsors
can either seek out insurers on the private capital markets who are prepared to insure a
brownfield project, or the state or local government could create a bond or loan insurance
program specifically for them.
Legislative Reforms
A number of states have enacted legislative reforms to help reduce uncertainty in
assessing, cleaning up and redeveloping brownfields. These reforms have typically
addressed at least four key areas: liability limits; cleanup standards; administrative
oversight (distinguishing between sites appropriate for voluntary cleanup and sites where
state oversight is tighter); and public funding for cleanup.
Voluntary Cleanup Programs
Voluntary programs allow private parties to initiate cleanups and avoid some of the
costs and delays associated with state superrund or other enforcement-driven programs.
Such programs provide technical guidance, in some cases assisting with site investigation
and cleanup. Some apply special cleanup standards to parties in the program. Others
incorporate land-use controls that anticipate a future use that usually involves less public
exposure to the site (e.g. 500 employees at an industrial site rather than thousands of
consumers at a mall). The land use controls do not lower or eliminate risks to the human
health environment, but provide assurance of an appropriate public exposure/use of a site.
Finally, upon completion of cleanup, most voluntary programs offer some kind of liability
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assurances to protect purchasers, lenders, and municipalities from liability. Currently, 21
voluntary cleanup programs exist. Most states design their programs for sites that not
currently listed or being considered for the Superfund National Priority List (NPL).
Voluntary Cleanup Program State of California
In 1994, California established a Voluntary Cleanup Program to promote the
cleanup of low-priority hazardous waste sites in the state. The program is run by the
California Environmental Protection Agency's Department of Toxic Substances Control
(DTSC). The program offers a streamlined process for cleanups in order to put property
back into productive use. As of March 1995, over 100 voluntary projects had begun under
the program. To participate in the program, project sponsors and the state negotiate an
agreement specifying the extent of the cleanup planned for the site. On a fee-for-service
basis, the DTSC staff provides technical assistance at all stages of the process, from site
investigation to cleanup. Once cleanup has been completed, DTSC will issue a "certificate
of completion" and a "no further action" letter, limiting further liability for project sponsors.
Cleanup Standards
The broad discretion of state regulators under CERCLA leaves developers unclear
as to the cleanup standards to which they will be held. Since regulators have the power
to require a cleanup to pie-contamination levels, or in some cases, to permit deviations
from state determined minimum levels, the extent of final cleanup required can be
uncertain. This uncertainty prevents developers from quickly estimating the costs required
for a site cleanup. To encourage cleanup and redevelopment, many states have attempted
to develop clearer cleanup standards. These new standards employ site-specific criteria,
such as future land use, proximity of ground and drinking water sources, and other factors.
There is also the issue of double jeopardy that currently exists due to the overlap of federal
and state laws. EPA can second guess a cleanup conducted and approved by a state.
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Cleanup Standards - State of Pennsylvania
Under Pennsylvania legislation, developers have three sets of standards to choose from:
Statewide Health Standards are developed by the Department of Environmental
Resources in order to "protect ground water and prevent contaminated soil from
exposing the public to harm.
* 'Background Levels ate defined as the greater of "background as represented by the
results of analyses of representative samples; or the "lowest level that can be reliably
attained within specified limits of precision and accuracy under routine laboratory
conditions." If this method produces a standard that is less stringent than the
statewide health standard, then the statewide health standard applies.
* Site-Specific Standards can be chosen by developers on a case-by-case basis after a
detailed site investigation. These standards are directly linked to the future land use
of the sites and the actual health risks associated with exposure.. These standards may
also be linked to deed restrictions, limiting future use of the property to prevent
exposure and/or recontamination.
This flexibility allows developers to quickly estimate the cost of a cleanup, and to either
choose a more stringent standard, or negotiate for a standard that recognizes differences
in land uses and other site-specific characteristics.
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IV. FINDINGS AND CONCLUSIONS
Abandoned, idled, or under-used industrial and commercial sites where expansion
or redevelopment is complicated by real or perceived environmental contamination
represent major environmental and economic challenges to many communities. Financial
issues are a key component to the successful revitalization of these sites, which are better
known as "brownfields".
To provide a context within which to examine financing strategies used to revitalize
brownfields, this report presents a seven-stage process for brownfields redevelopment. The
seven stages are site identification, initial site assessment, economic assessment, detailed
site assessment (if needed), project development and financing, cleanup planning and
execution, and redevelopment of property. Selecting the appropriate financing strategies
to successfully complete the redevelopment process requires a knowledge of these seven
stages, the particular brownfields site, and the financing strategies that can overcome
barriers applicable to each stage and the site.
The report pictures the economic redevelopment potential of brownfields sites by
classifying them as viable, threshold, and non-viable. This valuable tool provides a way
to target both public and private resources to sites. For example, since viable sites are
ones where the private markets drive redevelopment, no public assistance is usually
needed. Threshold and non-viable sites, on the other hand, will not be redeveloped by the
private markets without public assistance. Increasingly limited public resources should
be targeted to threshold and non-viable sites with the intent of making them viable and
attracting private investment For environmental and/or health reasons, governments may
also want to target resources to selected non-viable sites that may not be redevelopable.
Finally, governments may want to target resources to viable sites where projects can
generate substantial public benefits.
All participants in brownfields revitalization ~ communities, developers, federal
and state governments, capital providers, community groups, and other interested parties
should be familiar with financing strategies for cleanup and redevelopment. This report
examines a wide variety of the financing strategies currently being used in brownfields
projects. Major financing categories presented include - equity participation, fees, taxes,
debt finance, grants, informational/advisory services, liability assurances, financial
assurances, and legislative reforms. The report matches, where possible, the strategies to
the stage(s) in the brownfields redevelopment process, and provides numerous real-life
examples of how the strategies have been applied. But, the report is only a first look at
this important topic. It is not all inclusive by any means.
Further study and analyses of brownfields financing strategies are needed. In
addition, because of the complexity and difficulty of brownfields redevelopment,
cooperative approaches that include and assist all parties involved in brownfields
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revitalization need to be examined and developed. Information on new approaches should
be widely shared and tested in communities throughout the country.
One approach that should be considered to promote and share information on
brownfields financing was suggested in one of EFAB's other reports entitled, Information
Needs of Capital Providers in Brownfields Redevelopment". That report proposed the
creation of a Brownfields Cleanup and Redevelopment Clearinghouse. Such a
clearinghouse could be designed as a partnership between local governments, federal and
State agencies, developers, capital providers, nonprofit associations, and community
groups, ft could provide newsletters, brochures, consultations, referrals, case studies, and
data retrievals on numerous brownfields topics, including financing strategies.
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V. ENDNOTES
1 Page, G. William, and Rabinowitz, Harvey Z., "Potential for Redevelopment of
Contaminated Brownfield Sites", Economic Development Quarterly: The Journal
of American Economic Revitattzation, Vol. 8, No. 4, November 1994.
2 Page, G. William, and Rabinowitz, Harvey Z., "Potential for Redevelopment of
Contaminated Brownfield Sites", Economic Development Quarterly: The Journal
of American Economic Revitalization, Vol. 8, No. 4, November 1994, p. 360.
3 Hawvermale, Greta J., "A Brownfields Success Story: Project History",
Remediation and Reuse, June 1995, Vol 1, Issue 7, Indiana Department of
Environmental Management, Office of Environmental Response.
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