Revitalizing Southeastern Communities , flftr -f Working with Private Sector Partners & Understanding Private Sector Concerns Most brownfields properties will be revitalized by the private sector, with the support of private finances. Thus, local communities must understand private sector needs, increase private sector certainty, help reduce private sector risk and costs, and facilitate private sector strategies and investment. Many brownfield projects have inherent risks stemming from lack of certainty and potentially higher costs. Lack of certainty at brownfields can often result from: the presence and extent of contamination may be unknown; undetermined costs of cleanup; the need for regulatory sign-off; unpredictable time frames for development approvals; and community and neighborhood reluctance to the brownfields project. In addition to higher uncertainty, the potentially higher costs of brownfields redevelopment add to private sector risk. These costs can include: site assessment and cleanup, transaction costs (permitting, regulatory compliance, attorneys, remediation consultants), and the costs of stigma associated with contaminated properties. In addition, developers often incur other start-up costs on brownfields projects. For example, they may need to pledge a higher rate of return to their investors or lenders to persuade them to take on a project with greater perceived risk. Sometimes, this "brownfield premium" translates into an extra 10 to 20 percent return on investments, or an additional interest point or two on a loan rate. Reuse projects on contaminated sites may also be more expensive in terms of planning, design, and community outreach activities. In the case of brownfields, basic project underwriting costs are more extensive. To achieve a necessary level of comfort with the risk of the project, lenders will likely require environmental data collection and analysis, additional testing, legal analysis, and additional independent corroboration on collateral value. All of these costs can add significantly to loan processing and review procedures. Many developers have been unwilling to take on brownfield projects, and many property owners have been unwilling to sell their properties for fear of the redevelopment difficulties. Likewise, many financial institutions have been unwilling to invest in brownfields or lend money for these projects. All of these factors of cost and uncertainty can raise private sector risks at brownfields and impact brownfields deals. But the public sector can help reduce these risks through the following: ------- Understand the time pressure of development, and the need to streamline the local approval process and integrate it with brownfields regulatory and finance processes. Approaches like interagency local teams and strong working relationships with state and federal government counterparts are essential for making brownfields competitive for revitalization. Ideally, local development approval processes will be integrated with state brownfields regulatory programs, so that private sector redevelopers can navigate these multiple approval processes with a minimum of delay and bureaucratic barriers. Understand private sector funding and lending practices in order to make brownfields attractive investments. In the final analysis, the private sector's approach to brownfield financing is influenced by the key factor of risk - the chances that problems are likely to arise with a project, relative to the potential payoff. Likewise, risk is the number one concern of lenders, who seek to quantify, avoid, and manage this risk. To the lender, brownfields are first and foremost real estate deals complicated by environmental risks. Understanding these risks will help local governments to educate the private sector on how to overcome them. Congress addressed lender liability in late 1996, and created additional liability clarifications for the private sector in the Brownfields Law. Many lenders, however, are still uncomfortable with these projects. Financing institutions like to limit their lending to low-risk propositions. This means that lenders are most comfortable financing things that they know. In practice this means that local government must take extra steps to respond to the concerns of financial institutions. Websites: Environmental Bankers Association: www.envirobank.org Brownfields Redevelopers Association: www.brownfieldslaw.com National Brownfields Association: www.brownfieldsassociation.org Insurance and Brownfields Redevelopment: www.epa.gov/brownfields/insurebf.htm Urban Land Institute: www.uli.org/ ------- Revitalizing Southeastern Communities , flftr -f Environmental Insurance Approaches Community should understand and promote the use of environmental insurance as a strategy for reducing the risk at brownfields for private sector parties. There is a whole new wave of insurance mechanisms that aim to bring certainty to brownfield financing risks. Environmental insurance can facilitate brownfields acquisition or sales; help satisfy regulatory responsibilities; minimize liability for past, present or future operations; and the cap site remediation costs. Insurance can help deals close more easily, because (I) unexpected cleanup costs encountered during the development process will not add to the developer's anticipated costs; and (2) insurance can cover the possibility that the costs of additional contamination will not affect the site reuser's ability to pay off mortgages or other notes. The four most common types of insurance tools used to facilitate brownfield projects are: 1. environmental remediation insurance, for releases that occurred before the policy was written but discovered after the policy was in place. More and more lenders are requiring environmental remediation insurance to give them some comfort and cover; 2. stop-loss or cleanup cost-cap coverage, which protects against cost over-runs once a cleanup plan is defined, or against additional costs resulting from changes in regulatory standards; 3. pollution legal liability insurance, which offers protection against problems stemming from the migration of contamination to other sites, or for third-party and property injury claims; and 4. secured creditor insurance, which insures the balance of loans when the borrower defaults and there is an environmental condition on the property. A few states have started to explore ways to enhance the availability of brownfield insurance at sites within their borders. Some cities and states are linking small developers or site owners with insurers, or helping to form a portfolio of sites to spread risk and costs. For example, in 1999, Massachusetts adopted a new state program that set up a $15 million fund to subsidize site reuser's environmental insurance costs, up to 25 percent. The Massachusetts program has been used at more than 160 sites, leveraged $75 million for cleanup, helped create $1 billion in new brownfields investment, and contributed to the creation of I 1,500 new jobs. California and Wisconsin are also exploring environmental insurance strategies. Moreover, localities can now use EPA brownfields assessment and cleanup grants to pay for environmental insurance premiums. ------- Websites: www.envirobank.org - Environmental Bankers Association www.brownfieldslaw.com - Brownfields Redevelopers Association www.brownfieldsassociation.org - National Brownfields Association www.epa.gov/brownfields/insurebf.htm - Urban Brownfields Redevelopment www.uli.org/ - Land Institute ------- Revitalizing Southeastern Communities , flftr -f Public Incentives Can Encourage Private Investment Localities can help reduce lender risk and boost lender confidence at brownfield sites by leveraging public funding in strategic ways. Often just a few thousand dollars is needed to jump-start a brownfield reuse project and reduce its risk to a level that the private sector will accept. These efforts work best and most cost effectively when they: Reduce the lender's risk to make more capital available. Incentives such as loan guarantees or companion loans can ensure a minimum return, or limit the borrower's exposure due to unforeseen problems that affect the value of collateral or the borrower's ability to pay. Reduce the borrower's cost of financing to make capital more affordable. Local officials have used approaches such as subsidizing project loan interest costs (for example, with tax-exempt financing or low-interest loans), or by reducing loan underwriting and documentation costs (perhaps with loan packaging assistance or technical support often available through community development corporations and other local institutions). Offer terms or incentives to ease the borrower's redevelopment situation. Tools such as tax abatements, tax credits, or grace periods can help improve the project's cash flow. Similarly, training and technical assistance services can offset a user's start-up costs and allow available cash to be devoted to meeting brownfield needs. Provide direct financing help. When contamination is suspected, money for site assessment and cleanup is the hardest piece of the financing puzzle to solve. Therefore, more and more cities are fronting money for this purpose, as grants or forgivable loans. Communities can help convene private sector and business stakeholders for the support of brownfields projects. Often these peer-to-peer forums can inform the business community about new approaches on brownfields, the use and benefits of state voluntary cleanup programs, and the availability of financial resources. These activities work best when the community recruits top business-people to endorse and lead these stakeholder education efforts. ------- |