Article below is by Charles Bartch (read more about Charles here http://www.iedconline.org/index.php?p=Instructor_Bartsch) of the Northeast-Midwest Institute (www.nemw.org).

Policy staff at The Northeast-Midwest Institute have been exploring brownfield financing strategies/ideas, internally and at the Congressional Coalition Forums that they host and at strategy groups. Much of there work has been embraced by members of the 104th Congress, and will be profiled during the Coalition’s brownfields “summit,” scheduled for July 10 on Capitol Hill.

Tax Incentives

Capital Attraction Incentives

Initiatives to Support Financing

http://www.nemw.org/brownfin.htm

Financing Brownfield
Cleanup and Redevelopment
by Charles Bartsch

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Charles Bartsch is a senior policy analyst at the Northeast-Midwest Institute

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Acquiring, cleaning, and redeveloping older, often abandoned, industrial sites can be very expensive. In many situations, private developers and financiers are not able, or willing, to act on their own to ensure that the full economic potential of site reuse will be achieved.

Cleanup of contamination adds to the costs of any development project, often significantly. The mere suspicion of contamination has increased loan transaction costs more than three-fold since 1980, according to local development experts. Financial packages for brownfield sites require more time and staff work, and prospective borrowers must pay for environmental assessments and more detailed appraisals. These expenses are not easily recovered as part of the normal course of doing business, placing brownfield sites at a competitive disadvantage with “greenfield” locations in undeveloped areas.

Funding gaps are the primary deterrent to site and facility reuse. The public sector, however, can do much to help level the economic playing field between “greenfield” and “brownfield” sites. Creatively crafted and carefully targeted incentives and assistance can help advance cleanup and reuse activities and achieve significant economic, social, and aesthetic benefits. Moreover, these efforts need not be “giveaways.” The notion of the entrepreneurial public sector, increasingly prevalent in many types of development programs, can be extended to brownfield initiatives; public agencies and organizations that share in project risks also can recover some of their investment during subsequent site sale or development.

No single public-sector approach fits the financing needs of brownfield projects, which vary by project type, developer (i.e., non-profit development corporation or private investor), level and type of contamination, and financial position and desired return of the site owner or developer. Governments at all levels can find creative ways to help enterprises overcome reuse challenges with policies ranging from regulatory clarification for loan workouts to direct financial program assistance. However, the federal government€”whose programs, policies, and regulations form the foundation on which many state, local, and private development finance initiatives are built€”must play a stronger, more visible role if financing for brownfield reuse is to become available more widely.

Over the last two years, policy staff at the Northeast-Midwest Institute have explored a variety of financing and related strategies to advance the cleanup and redevelopment of brownfield sites. These options have been discussed€”and still other ideas have emerged€”during the Northeast-Midwest Congressional Coalition’s forums in Cleveland, Chicago, Pittsburgh, Kalamazoo, metropolitan Detroit, and northwestern Indiana. Other financing ideas have surfaced during the deliberations of strategy groups in Chicago, Baltimore, and Cleveland. Several of these proposals have been embraced by members of the 104th Congress, and many will be profiled during the Coalition’s brownfields “summit,” scheduled for July 10 on Capitol Hill. This article examines a few of the more promising brownfield financing options, including tax incentives, capital attraction incentives, and initiatives to support financing.

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Tax Incentives

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By attracting investment and providing a cash-flow cushion for companies, federal tax incentives could help promote brownfield redevelopment. Like historic rehabilitation tax credits, incentives focused on environmental cleanup and site reuse would help level the economic playing field between old brownfield sites and new greenfield locations. To limit their costs, tax incentives could be targeted in various ways€”to economically distressed areas with demonstrated potential for productive reuse, to orphan sites, or to publicly-owned sites. Lawmakers are developing draft legislation for two tax-incentive approaches.

Environmental remediation tax credits could offset a variety of costs, such as site characterization and cleanup. After the Northeast-Midwest Congressional Coalition’s December 1994 forum in Pittsburgh, Rep. William Coyne (D-PA) developed a draft proposal to authorize an environmental remediation credit equal to 75 percent of the costs for carrying out a cleanup plan that has been approved either by the U.S. Environmental Protection Agency (EPA) or another designated body (i.e., a state agency administering a voluntary cleanup program. Rep. Coyne, who intends to introduce legislation soon, would target this credit to sites with “a strong likelihood of redevelopment” and that would likely remain dormant without the financing assistance.

Site remediation activities could become eligible for some form of tax-exempt industrial development bond (IDB) financing. Such a tax incentive has the effective result of lowering the cost of capital needed to carry out a project. Environmental remediation activities€”site characterization, cleanup, and preparation activities€”form an integral part of many manufacturing projects, which are acceptable small-issue IDB activities. Rep. Coyne also is circulating a draft proposal to clarify the use of so-called “qualified redevelopment bonds” (one type of IDB issuance) to specifically permit their use for environmental remediation, including “the clearing and preparation for development of land” acquired by a unit of government. Once federal statutes recognize site remediation activities as eligible uses, states could make brownfield projects a priority within their own IDB volume allocation procedures.

Other tax-related approaches that merit consideration by federal policymakers include:

A business Industrial-site Remediation Account, a “brownfield IRA,” would permit companies to set aside monies on a tax-exempt basis to establish a cleanup fund for future use. Since securing resources to pay for site cleanup is the most difficult financing aspect of many brownfield projects, a brownfield IRA would encourage companies, especially smaller manufacturers, to earmark funds for cleanup. Like a personal retirement account, the tax-exempt status of a brownfield IRA would be limited, in this case to paying for activities associated with site characterization and cleanup. Such an incentive could prove especially valuable to small, so-called “mom-and-pop” manufacturing companies; currently, many such firms are stymied by their inability to raise cash to cope with environmental concerns, particularly when they seek to transfer the business to a new operator upon the retirement or death of a long-time owner.

A tax incentive exempting brownfield project-generated loan interest would make lending on brownfield projects more attractive, while reducing the lender’s interest costs. An interest exemption of this type, in practice, would extend the advantages of tax-exempt financing to very small or start-up companies that would not otherwise be able to afford the administrative and legal costs of a tax- exempt bond issue. Such an exemption could be capped to control the magnitude of foregone revenue. It also could be targeted in several different ways€”for example, to small-scale projects on publicly-owned or orphan sites, or to projects implementing the cleanup recommendations made in a detailed remediation plan.

A brownfield development tax credit could be structured similar to the existing (and successful) low-income housing tax credit. It would encourage investors to supply equity capital for brownfield projects, by using a type of syndication financing mechanism to secure cash from investors. Made by public offerings, syndications offer limited partnership interests to investors who can share in their profits or benefit tax-wise from their losses.

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Capital Attraction Incentives

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Tax incentives can help address many brownfield needs, but direct capital attraction strategies also are needed. Many small companies have little tax liability to offset with tax credits, and often they are strapped for the up-front cash needed to initiate the first phase of a reuse project. Key pending legislative proposals and regulatory actions are described below.

Offer loans to make financial resources directly available to the borrower. Reps. Ralph Regula (R-OH) and Peter Visclosky (D-IN) recently introduced H.R. 1620 to establish a “brownfield cleanup and redevelopment revolving loan fund” to provide capital to cover up-front cleanup costs. Under their proposal, the federal government would loan federal money to states with certified voluntary cleanup programs. States, in turn, would use these resources to capitalize revolving loan funds to support local cleanup and redevelopment projects. Assistance would be targeted to public and private industrial property owners who have firm plans to clean and reuse brownfield sites. Recognizing current budget realities, H.R. 1620 would have the states repay their federal capitalization loans, starting five years after their receipt. Rep. Carrie Meek (D-FL) has introduced H.R. 1381 to establish a separate U.S. Treasury account, known as the “cleanup loan fund,” to provide low-interest loans of up to $750,000 to develop and carry out cleanup plans at specific sites. This fund would be administered by the Environmental Protection Agency, and it would be capitalized in part with annual transfers from the Superfund Trust Fund.

Revise the Community Reinvestment Act (CRA) to specifically allow lenders to demonstrate compliance by lending on brownfield projects in distressed areas, or by contributing capital to a loan pool or revolving fund that operates in such areas. In fact, new CRA regulations issued on May 4 move in this direction. In a brief footnote, the rules cite “loans to finance environmental cleanup or redevelopment of an industrial site as part of an effort to revitalize the low- or moderate-income community in which the property is located.” To qualify for CRA credit, bank-assisted projects not only must remove contamination, they also must lead to redevelopment activities. Northeast-Midwest Institute staff and local development practitioners are urging further CRA refinements that would make it acceptable for banks also to meet their obligations with contributions to brownfield project financing pools administered by local development companies and similar groups.

Modify long-time federal economic development programs€”such as Community Development Block Grants (CDBG), Section 108 loan guarantees, and various Small Business Administration programs€”to give them a brownfields “spin.” Economic development programs administered by the Department of Housing and Urban Development (HUD) could mesh well with brownfield project activities, but historically HUD officials have not considered the nature of environmental concerns or the development constraints posed by environmental assessments and site cleanups. To have these programs be of maximum benefit in meeting the economic development challenges of the next decade, members of the Northeast-Midwest Congressional Coalition have urged HUD officials, including Secretary Henry Cisneros, to allow localities the flexibility to use block grant resources to address the financing problems that brownfield reuse pose. Proposed rules issued by HUD in late1994 moved in that direction, although CDBG program managers have raised important administrative and regulatory concerns that still must be addressed. For instance, they ask, how can annual performance be demonstrated when a brownfield project may take years to carry out, or how can brownfield projects best be justified against the backdrop of other CDBG requirements, such as job creation and low- and moderate-income benefit stipulations?

In July 1994, Coalition members added language to the pending HUD reauthorization to clarify that CDBG-funded activities could include the removal of contaminants from property. In practice, this change likely would have extended as well to HUD’s $2-billion Section 108 program, which assists larger-scale economic development projects. Unfortunately, Congress adjourned for the year before taking final action on HUD’s reauthorization. However, the agency’s “Blueprint for Reinventing HUD,” issued on December 19, 1994, suggests that “environmental cleanup of brownfield sites to prepare for economic or housing development” is a key activity that the agency envisions being funded through its consolidated Community Opportunity Fund. The House Banking Committee, with jurisdiction over HUD programs, has indicated that this blueprint will serve as a starting point for its own consideration of the 1995 HUD reauthorization legislation.

The Superfund Trust Fund is central to other financing options not yet written into legislative language. Options include:

Pledge a small percentage of the Superfund Trust Fund revenue stream to cover a bond issue that capitalizes a national brownfield remediation revolving loan fund. Since Superfund rules and judicial rulings govern cleanup and reuse of brownfield sites, it makes sense that trust fund resources be available to a wider range of cleanup and reuse activities than just the approximately 1,300 designated National Priority List (NPL) sites. One option would be to create a revolving loan fund, capitalized using the proceeds of bonds issued based on the pledge of trust fund revenues to cover their repayment and interest. To make the bonds viable, a long-term commitment€”at least ten years€”would be required to attract the necessary investor/bond buyer interest. One key issue needs to be resolved, namely, the extension of the Superfund tax that generates the trust fund’s revenue stream. The current tax is paid by chemical and petroleum companies, which presumably would not have a problem with extending the tax’s eligibility to brownfield sites, but might be concerned about authorizing the tax for ten years. The amount of Superfund trust revenues designated for redeeming the bonds could be capped. A key advantage of this approach is that a good-sized loan pool could be assembled now, and paid back over ten years. In addition, as funds are paid back, a revolving loan fund could be established on a permanent basis.

Allow communities to apply directly to the Superfund Trust Fund for loans to carry out site characterization assessments on locations with reuse potential. Although workable limits and caps would have to be defined, this option eliminates the concern about a long-term reauthorization of Superfund’s revenue mechanism. Loans could be paid back directly to the trust fund, with the fund absorbing any losses. Of course, the annual level of trust fund monies available for such loans could be limited or capped. Another point to consider: the type of eligible borrowers could be expanded to include non-profit development organizations or states (on behalf of small communities). This loan fund, like the one mentioned above, needs to be flexible enough to permit longer-term payback periods or grace periods €”provisions that recognize the difficulties of brownfield projects.

Northeast-Midwest Institute staff, in discussions with state and local leaders in Chicago and elsewhere, have posed other capital attraction alternatives that could be established and administered by state agencies and municipalities. These include:

Establish financing pools or revolving loan funds earmarked for brownfield projects (and perhaps further targeted to orphan sites, publicly-owned sites, projects carried out by non-profit or community development organizations, or innocent landowner surprise discoveries); such pools or funds could be capitalized by transaction fees, fines, one-time appropriations, or revenue bond issues;
Launch a seed fund, capitalized from similar sources, earmarked for site characterization at sites with reuse potential;
Dedicate the proceeds from certain types of development fees, fines, or taxes to brownfield cleanup and reuse;
Encourage private shared-risk loan funds, in which a number of banks could pool money (a pooled arrangement would allow them to get involved on a non-real estate, unsecured basis to minimize their liability exposure) and share in the risks of lending; such a pool might be linked to a local or state loan guarantee initiative to make private lender participation more attractive;
Dedicate to brownfields reuse the revenue stream from a CDBG float or loan repayment;
Adopt special incentives for state-chartered capital companies that invest in brownfields;
Modify property tax incentives or tax increment finance (TIF) policies to target them toward brownfield site improvements or reuse;
Encourage investment of a prudent amount of public pension funds in brownfield projects;
Identify new sources of revenue or services, such as utilities. Since gas and electric utilities will profit from increased sales as brownfield sites are redeveloped, they should contribute some portion of their anticipated gains to site characterization and reuse activities. States could offset these contributions with either tax credits or advantageous cost-recovery mechanisms; and
Permit special zoning variances on brownfield sites, since increasing the allowable development may offset the additional costs of cleanup and make financing more viable.
Obviously, these ideas need further refinement and analysis, and critical issues remain to be addressed. For instance, how can loans or tax incentives offered for site characterization or remediation be recovered if the site proves to be too dirty or too costly to clean in spite of initial favorable indications? (In fact, Rep. Coyne’s bond proposal includes an escape hatch in case of “extraordinary cost increases.”) Or, what complications must be addressed when lending takes place through municipal governments, thereby placing them in the title chain and pinning them to project performance? Such concerns, nevertheless, can be met, and the breadth of ideas suggests that many approaches can be adopted that meet brownfield financing needs.

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Initiatives to Support Financing

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Other public policies, while not providing direct funding or tax breaks, can play a critical role in determining whether prospective site reusers can attain the money needed for brownfield redevelopment or complement state and private financing efforts. To enhance the development climate for brownfields cleanup and reuse, federal policies could bring clarity to the often-murky site characterization and cleanup processes, as well as remove the inequities in current liability provisions that inhibit prospective developers, lenders, or site purchasers having no link to existing contamination. Several proposals already introduced into Congress deal with such matters, and other ideas are surfacing to bring a greater sense of finality and fairness to brownfields concerns.

Process Certainty. Reps. Ralph Regula and Peter Visclosky, in addition to the loan program described above, have introduced H.R. 1621 to bring more certainty to the site characterization and cleanup process through EPA-certified state “partner” voluntary cleanup programs. Their proposal essentially would establish a process in which states would be authorized to make final decisions on cleanup and future liabilities for low- and medium-priority contaminated sites, eliminating the prospect of federal EPA intervention. EPA, in certifying that state programs achieve the goals of federal laws, would remove itself from the site-specific review process.

By bringing finality to EPA’s role in low- and medium-level contaminated sites, H.R. 1621 would enhance considerably the desirability and usefulness of the assurances, covenants not to sue, and comfort letters issued through the various state voluntary cleanup programs. According to one local brownfield development expert, this action “will do more to free up private capital and financing than any governmental funding program.”

To attract greater numbers of interested investors and site reusers, the Institute has begun to identify other strategies for bringing more certainty to brownfields activities. One approach with considerable potential involves establishing a state-level insurance pool to cover surprise costs or bona fide cost overruns stemming from cleanup activities. The pool also could be used to aid property owners when cleanup standards or requirements change. It would provide some level of assurance to lenders and owners, thereby encouraging the development of abandoned sites that would otherwise be economically viable. The structural mechanism for such a pool could be similar to that used for high-risk auto drivers.

Lender Liability. Rep. Fred Upton (R-MI) has introduced H.R. 200 to clarify liability concerns that deter brownfield project financing. His proposal would protect “innocent landowners”€”those who acquired property subsequently found to be contaminated€”from Superfund liability. Secondly, it would shelter lenders from Superfund liability unless they participated actively in the management of an organization subsequently found liable. H.R. 200 would bring a greater sense of lender comfort to the brownfield financing process; it would offer lenders a more acceptable path in terms of initiating loan workouts to salvage projects, as well as ensure that viable foreclosure and collateral protection procedures could be followed. Sen. Alfonse D’Amato (R-NY) has introduced the “Asset Conservation, Lender Liability, and Deposit Insurance Protection Act” (S. 394) to achieve similar objectives. Rep. John Dingell (D-MI) has proposed a bill to reauthorize the overall Superfund program, which builds on the “consensus version” reached last year. To promote brownfield cleanup and reuse, Rep. Dingell’s proposal explores ways in which prospective purchasers could be shielded from liability at sites they acquire to redevelop.

Other Supportive Measures. Many lenders assume that vacant or abandoned industrial sites are contaminated, too costly to develop, and laden with liability concerns. They often lack the technical expertise or basic information needed to reduce their own uncertainty and fear of environmental issues. As a result, many lenders and investors are overly cautious in their evaluation of a development proposal or loan application; many€”unconvinced that environmental concerns can be addressed at all€”avoid involvement with brownfield sites altogether. After numerous discussions with both public and private brownfield experts, Northeast-Midwest Institute staff suggest that measures be adopted that provide credible information to financiers, notably:

Work with federal and state financial regulators and associations to develop a recognized and accepted brownfields loan underwriting package and appropriate national guidelines; and
Create networks of reliable information and outreach concerning brownfield risks, current technological practices, and generic cleanup strategies.
Loan package requirements currently vary from lender to lender, and the decision-making criteria may be unnecessarily weighted against a loan that carries environmental concerns. The above-mentioned measures would help develop model documents to help guide the practice of underwriting of brownfield sites, as well as educate lenders and developers about the nuances and realities of the risks involved in brownfield lending. They, for instance, could provide information on the best-suited or most applicable warranties and representations, and explain the value of state voluntary cleanup programs. In crafting such guidelines, it will be important to seek the advice of regulatory institutions, such as the Office of the Comptroller of the Currency, and major interest groups, such as the American Bankers’ Association.

In short, site assessment and cleanup require financial resources that many firms lack and find difficult to secure. Without financing, private reuse projects cannot go forward, further undermining efforts to revitalize distressed areas. With their recent proposals, members of Congress and federal agency officials have begun to grapple with the complex financial and technical issues surrounding cleanup and reuse of contaminated sites and facilities. Although these proposals do not address all critical concerns and important details remain to be worked out, they suggest a willingness to consider varied and new approaches to the thorny question of brownfield finance.

This entry was posted on Wednesday, June 20th, 2007 at 10:41 am and is filed under ●Brownfields Developer's Corner, ●Brownfields Fed, State & Local Government, ●Brownfields Financing.

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