Cleanup costs and lender worries can slow the redevelopment of contaminated waste sites, but commercial projects have played a key role in returning thousands of acres of once-polluted property to productive use.
We’ve all driven through towns where properties, once bustling with activity, now sit vacant or underutilized because they are contaminated with pollutants. These properties — many once community centerpieces — are glaring examples of blight and disinvestment known as brownfields. Significant hurdles stand in the way of individuals willing to risk breathing life back into these sites, including those who provide the dollars to make the dream a reality.
A brownfield site is defined as any property where the expansion, redevelopment or reuse is hindered by the real or perceived threat of environmental contamination. These sites can be former manufacturing facilities, industrial locations, gas stations, dry cleaners, etc. Even with all the risks involved, however, these brownfield sites can represent a great business opportunity for mortgage originators who are willing to work the system to overcome the roadblocks and pursue a new vision for these properties.
NAVIGATING POTHOLES IN THE WAY
Although a variety of tax credits, incentives, grants and loans are available to projects approved for takeoff, many brownfield projects never leave the launching pad. The real or perceived threat of contamination often creates a formidable barrier to progress. Many buyers avoid brownfield projects due, in part, to worries about lost due-diligence costs if a deal does not go through. Even if it does go through, potential buyers and lenders worry that a new owner will be held liable for the contamination moving forward.
If you’re assisting commercial mortgage clients in financing such a purchase, you face the added challenge of dealing with banks concerned with the collateral value of the real estate, the impact on the liquidity of their lending portfolio and the liability for cleanup, among other things. These worries are particularly troublesome for brownfield projects in rural communities or those outside of the healthiest development markets. The good news is that there are state and federal programs in place that, when used correctly, can help address these challenges and attract investors and lenders to move these neglected sites toward a productive reuse.
The Environmental Protection Agency (EPA) estimates that there are more than 450,000 brownfield sites nationwide. Redevelopment of these properties offers significant upside potential: Brownfield cleanup and repurposing utilizes existing infrastructure, increases the local tax base, provides job opportunities, and improves and protects the environment. EPA studies also have found that crime is reduced and residential property values increase by 5.1 to 12.8 percent once a nearby brownfield site is addressed or cleaned up.
REGULATORY ASSISTANCE IS AVAILABLE
In 1995, the EPA launched its brownfields program to help communities clean up heavily polluted sites. Shortly thereafter, many states launched their own brownfields programs. Unlike some other government environmental efforts, the EPA and many state brownfields projects focus on economic development by helping to remove some of the barriers to the development of contaminated property.
State programs vary, but most require the same general approach for those interested in beginning a commercial project. A prospective borrower completes an application to enter the program and, once accepted, the state then determines the level of additional assessment needed to quantify the degree and extent of site contamination. Then, the state sets the level of environmental cleanup necessary to make the property safe for the proposed reuse. This level of cleanup is typically less than what would be required of the parties that actually caused the contamination.
This information then becomes part of an agreement between the applicant and the state that includes post-agreement obligations and some form of liability protection. This liability waiver can include exemptions from any state-imposed rules requiring cleanup of the remaining contamination and, in some instances, protection from third-party claims. Other benefits of many of these programs include tax exclusions or other incentives.
Many lending institutions are comfortable moving forward once a state has accepted a site into its brownfields program. In other instances, the entire process needs to be completed for the financing to move forward. These decisions can depend on the nuances of the state program and the degree and extent of contamination on the site. Nonetheless, using these programs can remove one challenge in the process, which is getting lenders on board with the redevelopment plan.
Although the state programs provide a great way to mitigate the liability concerns of both buyers and lenders, there is a cost to the process. Typically, the prospective borrower has to pay for environmental due-diligence expenses, as well as any other ancillary costs associated with entering the programs. Depending on the structure of the deal and the project’s pro-forma, a property buyer may find the magnitude and risk of these upfront costs unacceptable. Many communities have looked to the EPA to assist them in bridging this gap.
In the 1990s, the EPA began providing two-year brownfield pilot grants to municipalities. These grants were used to assess and plan the cleanup of brownfield sites. During these pilot projects, the EPA also was able to develop guidance and other tools to assist communities in the cleanup and redevelopment of their brownfield sites.
FINANCIAL RESOURCES ARE ALSO AVAILABLE
Eligible parties (typically municipalities and nonprofits) can apply for EPA grants to inventory, assess and conduct cleanup planning for brownfield sites — work that potentially makes the sites more attractive to lenders. Communities have been successful in using these grant funds, which can range between $200,000 and $1 million, to help finance many of the due-diligence costs that prospective property buyers may not otherwise have been willing to risk. These funds can be used for environmental testing, conceptual work, planning and other costs associated with entering a state brownfields program. In many instances, using grant funds has resulted in zero environmental due-diligence costs for the prospective buyers.
The EPA also provides additional follow-up funding opportunities for communities, including cleanup grants, revolving-loan funds, job-training grants and area-wide planning grants. Many communities have used multiple grants and state programs to position themselves to accept brownfield sites as donations. Since many of these sites are located in highly visible areas of the community, this strategy allows the municipality to control the future use of the sites. It also makes the properties more marketable and many times serve as an incentive package for attracting developers and lenders.
The positive impacts of using EPA grant funds go well beyond those that accrue to prospective property buyers. The EPA says, on average, nearly $18 is leveraged for each grant dollar invested, and some seven jobs are created per $100,000 of EPA grant funds expended. Since its inception, the EPA’s brownfields program has leveraged an estimated $24 billion in cleanup and redevelopment funds, created more than 116,000 jobs, and helped to reclaim and make ready for reuse some 56,000 acres of brownfields.
In today’s environment, there are tools available that make investing in and redeveloping brownfield properties feasible and attractive. Liability concerns can be addressed through state brownfield programs, allaying the concerns of lenders and mortgage originators’ clients alike. Communities also can apply for federal brownfield grant funds that can help to take a property buyer’s “at risk” money off the table. Don’t drive by your brownfields thinking they are a lost cause!