Financing brownfield cleanup and redevelopment.

Lack of adequate and affordable financing is the most significant obstacle to brown field redevelopment. governments can catalyze private investment in these projects by leveraging available federal, state, and local resources.

With as many as 600,000 potential sites nationwide, brownfields continue to be an important issue for local governments of all sizes. Brownfields come in all shapes and sizes, including defunct or partially operating manufacturing plants, abandoned gas stations, dying or dead strip shopping and commercial centers, agricultural operations, and even residential areas. They are found in urban, suburban, and rural locations. The cleanup and reuse of these sites has become the subject of considerable government and political attention, with broad interagency and bipartisan support for such initiatives. More and more, the public and private sectors are forming partnerships to realize the economic and environmental benefits of brownfield redevelopment.

The realm of brownfield finance is rapidly evolving. To solve the brownfield financing puzzle, local leaders and agencies need to make imaginative use of the various public and private financing tools, identifying new funding combinations and approaches that make projects work. This article identifies the financing barriers to brownfield reuse, discusses public-sector approaches for facilitating brownfield redevelopment, and summarizes the litany of available brownfield financing resources.

Barriers to Brownfield Reuse

Lack of adequate and affordable financing is the most significant barrier to reusing contaminated sites. Lender liability concerns, investor expectations for return on investment, and the creditworthiness of borrowers must all be addressed within the context of the nature of the contamination, the costs of site preparation, the impact of contamination on collateral value, and marketable reuse of the site. Site remediation and related preparation costs make many sites economically uncompetitive, placing too much pressure on the bottom line--at least initially. Private parties often are not able or willing on their own to invest the resources needed to take a brownfield through its full redevelopment cycle.

Developers often have trouble putting together a complete financing package for brownfields. Specifically, developers have difficulty acquiring the capital to pay for three activities unique to brownfield redevelopment: the site assessment, the site remediation plan, and the actual site cleanup. The purpose of the site assessment is to determine the type and level of contamination by means of both primary (e.g., on-site sampling) and secondary (e.g., maps, historical records, etc.) research by technical experts. The site remediation plan is required for participation in a state voluntary cleanup program, which can streamline the cleanup process and help clarify the liability of prospective purchasers, lenders, property owners, and others with regard to the site.

Other factors make brownfield remediation a financial twilight zone for prospective developers. For starters, they will likely have to pledge a higher rate of return to their investors or lenders to persuade them to take on a project with greater perceived risk. This so-called "brownfield premium" may translate into an extra 10 to 20 percent return on investment, or one or two additional interest points on a loan rate. Project underwriting needs are inherently more extensive and, consequently, more expensive. Before assuming the risks of such a project, many lenders require environmental data collection and analysis, additional testing, and independent corroboration of collateral value. These requirements complicate loan processing and review procedures and increase transaction costs. Some banking analysts have estimated that these transaction costs have tripled since the emergence of the brownfield issue 10 years ago.