Partners (Summer 1996)

Brownfields Offer New Opportunities
by Hank Helton

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In many urban areas, old, vacant, and dilapidated light manufacturing or industrial sites dot the landscape, particularly in low- and moderate- income neighborhoods. Commonly called brownfields, these areas have recently become a popular cause for clean-up and redevelopment efforts as both the public and private sectors work to encourage neighborhood revitalization initiatives, recycle existing infrastructure, increase tax revenue, and create inner-city jobs.
Chattanooga restaurant
This former meat packing facility in Chattanooga was converted to a restaurant as part of the South Central Business District revitalization efforts.
A brownfield is usually an urban property that has been used for manufacturing or light industrial operations and is affected, or thought to be affected, by environmental contamination because of previous uses. The U.S. General Accounting Office estimates there could be as many as 450,000 of these sites nationwide with an estimated cleanup cost of $650 billion.

Historically, the environmental condition of these properties has been a deterrent to development activity. Developers instead usually looked to vacant land in outlying areas, thus contributing to urban sprawl and removing job opportunities from the inner-city. In addition, many of these sites are abandoned and have no responsible or identifiable owner. This poses problems for developers looking to negotiate a deal. Instead, the burden falls on local governments to gain legal control of the property. This process can take months or even years. As a result, private developers often lose interest in redevelopment efforts.

However, the clean-up and redevelopment of a brownfield can offer many advantages to the developer, property owner, potential purchaser, local municipality, and neighborhood by reducing the economic, environmental, and health problems that the site poses for the community while providing business and community investment options for lenders and insurers.

Issues for Lenders

Lending for brownfield redevelopment activity presents financial institutions with unique opportunities and challenges. One of the biggest barriers surrounding brownfields redevelopment is the liability associated with developing these sites. Strict joint, several, and retroactive liability (where more than one party is involved), rigid cleanup standards, and potential lender liability that make financing high risk all contribute to the lack of development. If a lender decides to finance a brownfield project, protection from a potential lawsuit may be provided by new insurance products being developed, such as the Pollution and Remediation Legal Liability (PRLL) policy offered by market niche insurers. Specifically, PRLL provides the financial institution or property owner a stop-loss provision that limits on-site cleanup costs and protects the policyholder against third party bodily injury and property damage claims. These products, combined with other federal, state, and local initiatives, offer the lender and purchaser an effective means of protection.

In addition to a lender's normal loan documentation procedures, when engaging in this type of activity, financial institutions will want to ensure that an adequate investigation of the extent and type of contamination has been performed, and that the property has been "bracketed." Bracketing means that the owner or prospective owner, by performing a series of soil borings, has determined how far the contamination has spread. In most cases, due to liability issues, lenders may not provide financing on projects that have produced a series of "dirty" borings; contamination is bracketed when the borings show clean soil is evident.

Lenders may also require a cleanup plan approved by a state or federal environmental regulatory agency. State environmental agency approval of the plan provides a comfort level for lenders that the cleanup will produce "agency-quality" results. The cost of cleanup and its effect on the property's value must be economically feasible, as well. The property must be improved to the extent that the loan is adequately secured and projected cash flow is sufficient to cover the repayment of the loan. The skills and experience of the developer to manage cleanup and post cleanup requirements in brownfield redevelopment activity should also be taken into consideration.

Lending for assessment, cleanup, or redevelopment in designated brownfield sites is also an eligible investment activity under the recently revised Community Reinvest-ment Act (CRA). As published in the May 4, 1995, Federal Register, the new CRA regulations contain a footnote allowing lenders to receive credit for "... 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."

Federal, State, and Local Activity

Federal and state governments are taking a pro-active stance in their efforts to reclaim these properties. The U.S. Environmental Protection Agency (EPA) is actively seeking partners under its Brownfields Action Agenda started in 1995. Under this program, the EPA has committed to fund 50 brownfield sites by the end of 1996 with grants of up to $200,000 each for site testing, marketing, and other activities. This funding cannot be used for cleanup. To date, Knoxville, Birmingham, and New Orleans have been awarded grants in the Sixth District.

The EPA is also working with the U.S. Department of Commerce's Economic Development Administration (EDA) to fund assessment and cleanup activities; the Department of Labor for job training activities; and the Department of Housing and Urban Development to leverage Empowerment Zone/Enterprise Community funding. According to Matt Robbins, EPA's Brownfields Coordinator for the Southeastern Region, "By working with the other agencies, we have developed a four tiered approach that utilizes outreach and grants programs to promote development, while addressing the liability and jobs creation issues."

The brownfields initiative has presented the EPA with an opportunity to form partnerships with other organizations in developing long term plans for workforce development in pilot city communities. For example, in New Orleans, the National Institute of Environmental Health and Safety and the EPA are jointly developing a minority job training program for inner-city youth in neighborhoods surrounding the brownfield redevelopment site.

The EPA has committed to fund 50 brownfield sites by the end of 1996 with grants of up to $200,000 each.
State governments are offering development incentives, such as those currently proposed in Alabama and Tennessee, in the form of voluntary cleanup and industrial reuse programs. Voluntary cleanup programs establish detailed removal guidelines that parallel the EPA's and, through state government environmental agency oversight, provide review and clearance to parties that voluntarily cleanup targeted brownfields. This guarantees there will not be any environmental recourse against the developer or owner. Industrial reuse programs provide release from any past or potential environmental liability, allow for exemptions from liability on property secured by municipalities, streamline existing state cleanup requirements, and offer municipal immunity to the purchaser of the site.

A number of communities are already engaged in brownfield redevelopment activity. According to Rob Taylor at River Valley Partners (RVP), "We have declared brownfields redevelopment as part of our long term planning process." RVP, a non-profit development corporation, has developed a comprehensive revitalization strategy for the South Central Business District that includes a brownfield reclamation site, a business incubator development, and a residential/entertainment district.

In Birmingham, city officials established the Division of Community Enterprises to co-administer the EPA's Brownfield and HUD's Enterprise Community grants the City was awarded. The office is currently working with the North Birmingham Merchants Association to develop a marketing plan to attract industry into the designated area. An information clearinghouse is also being established that will serve as a repository for environmental data on the targeted area. John Gemmill, the Division's Director, comments, "The environmental piece is only part of the issue. We have to get the word out to redefine the image of the community, both inside and out."

Local governments are also involved in development efforts. As Charlie Barker, Economic Development Division Manager in Knoxville, states, "We are identifying potential businesses that could locate in the designated area with minimal cleanup activity. Once identified, these businesses are recruited for relocation into the area. Our view is that this is more of an economic development issue than an environmental one."

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