Note: The site acquisition phase generally runs concurrent with the cleanup/redevelopment phase.
Complications from environmental concerns involving a Brownfield property must be resolved between the buyer and seller. During the contract negotiation, a term sheet is often used to sort out what responsibilities the buyer and seller will each take in the property transfer. For example, if the property has existing buildings that will be reused, this may include normal property and building costs like repairing roofs or HVAC systems. Negotiations also include determining where the responsibility for remediation lies and who will manage the liability once the redevelopment is completed. Other issues requiring negotiation may include establishing liability for various aspects of the cleanup including onsite vs. off-site concerns and agreeing on long-term responsibility for the maintenance of the remediation and institutional controls. The Remedial Action Plan must be approved prior to site acquisition.
One of the developer’s roles is to provide financing to develop the property. To ensure that cleanup and redevelopment are not hindered by a lack of funding, all public and private funding sources (e.g., grants, loans) identified in the pre-development step should be secured. If necessary, a nonprofit, trust, or other fund may be established to receive and distribute this funding. In many instances, debt financing is utilized, where loans are secured through a financial institution for the redevelopment. Private investors may also back developers through equity financing. Public financing may be utilized for many components of the redevelopment, including building demolition, infrastructure development, and cleanup activities.
Various factors affect any given lender’s basic view about financing brownfield projects. Therefore, to the extent they can, site users should try to determine the following:
- the lender’s MARKET POLICY-MAKING STRUCTURE -- are they a local bank with purely local interests, are they a national bank with policies set in a distant home office, etc. This will influence the lender’s flexibility and approach to specific local situations.
- the lender’s SPHERE OF ACTIVITY OR MARKET NICHE -- is the lender’s focus primarily on new commercial projects in the far suburbs, multi-family housing in growing areas, structural rehabilitations in central city areas, or new or retrofitted industrial projects; determining this will offer some sense of the lender’s receptivity to brownfield projects – the lender not accustomed to risk or reuse, whose focus is only new construction in greenfield areas, may not work for you.
- the lender’s LEVEL OF SOPHISTICATION AND KNOWLEDGE base -- the more the lender knows about and understands risks linked to contamination, and tools such as insurance that can address them, the more willing they are likely to be to finance such projects.
- the lender’s PAST EXPERIENCE in financing similar modernization and energy efficiency projects -- financiers who have undertaken such projects are less likely to be swayed by horror stories and more likely to be open to this type of loan. The worst thing you can do is try a lender who has just been burned on a brownfield project – they will be perpetually shy.
- number of lender “TRIGGER” ISSUES -- the types of red flags that will dissuade them from lending, such as past problems with collateral disposition or adequacy of value, and similar things.
- lender’s COMFORT LEVEL WITH NEW REMEDIATION TECHNOLOGIES, such as phytoremediation, and their internal capacity to understand how new technologies can work and how likely they are to achieve the benefits they project
- lender’s comfort with state VCPs and the liability relief and finality they bring.
All of these factors may be brought to bear in a brownfield financing situation. Within these parameters, the decision-making process is a fluid one within any given bank, in the context of loan officer interpretations, the reputation of the loan officer (within the bank) who may be handling your loan request, the nature of the bank loan committee and their comfort with basic data presented, and so forth.
In the final analysis, the key factor is risk -- the chances that problems are likely to arise with a project, relative to the potential payoff for the lender. Risk -- ways to quantify it, avoid it, and manage it -- is the number one concern of lenders. As they consider risk for any given project, many bankers follow the credo of the so-called “Key Cs of credit,” namely:
- Capacity to repay the loan;
- Collateral value offered to secure the loan
- Capital on hand – and the borrower’s extenuating circumstances that could impact the borrower during the life of the loan; and
- Character of the borrower -- their reputation for integrity and forthrightness (in presenting information to underwriters, their position in the community, and similar types of intangibles)
Especially in the tight financial climate brought about by the economic crises over the past year, as banks consider underwriting projects with brownfield ramifications, they will look and this additional level of risk; the financial risk created by contamination falls into three broad categories:
- remediation-based risks – the costs of identifying and characterizing site contamination, cleaning it up, complying with federal and state regulations governing contamination along the way, and the potential cost of defending lawsuits brought by regulators or other parties.
- property value impairment risks – payments for nuisances caused to adjoining properties, such as noise during remediation, payments for diminution of a neighboring property’s value because of the brownfield determination, and payments to neighboring property’s lenders because of the decreased security interest of the collateral party.
- personal injury risks – payments required because of injuries caused by migrating contaminants, or on-site injuries.
These risks can be eliminated in several ways. For example, some site owners have resorted to land leases to separate the property use from the underlying land and groundwater. In other cases, sellers may provide purchasers with indemnification agreements that spell out the ways in which undiscovered contamination will be addressed and paid for. Still other approaches involve the seller reducing the purchase price of the property based on the level of risk that the purchaser incurs.
Commercial banks may be the best source of conventional capital for brownfield transactions. They are required by federal regulation to maintain diverse portfolios of investments, and to put money back into the communities whose residents make deposits into them; the Community Reinvestment Act (CRA) requires banks to disclose their level of lending in the neighborhoods in which they have branches and from which they get deposits. Brownfield investments generally help them earn and maintain their CRA status.
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As an incentive to encourage non-responsible parties to purchase and redevelopment Brownfield sites, state Brownfield legislation has developed various mechanisms to provide liability protection to persons who own or propose to purchase Brownfield property, but did not contribute to the contamination. The liability relief or protection is incorporated into the Brownfield program enabling statutes and originates with the Voluntary Clean up Programs (VCP). In VCPs, purchasers of impacted property who are not responsible for causing the discharge get a limitation on environmental liability in exchange for the clean up. Usually, the prospective purchaser (any person contemplating purchasing contaminated property who is not responsible for creating the impact) must enter into a formal agreement with the state environmental protection agency through a Memorandum of Agreement (MOA) or some other type of Remediation Agreement. These documents are usually non binding and the responsibilities of both parties are clearly defined, particularly with regard to the site investigation and clean up performance. If the remediation is completed to the satisfaction of the regulators, the VCP entity can receive protection from future environmental actions.
Several liability protection mechanisms are available to the states to provide liability protection. They are briefly described below:
No Further Action (NFA) letter: a written determination by the state environmental protection agency that, based upon an evaluation of the historical use of the site and any other investigation or action the state environmental protection agency deems necessary, there are no discharged contaminants present at the site or that any discharged contaminants present at the site or that have migrated from the site have been remediated in accordance with applicable remediation regulations. This letter can be either issued after the completion of a PA or equivalent effort which establishes that there were no discharges at the site, or at the end of the remediation phase when the clean up is completed.
Covenant Not To Sue (CNTS): Certain states offer CNTS to provide liability protection for Brownfield projects not covered by the liability protection offered directly under the Brownfield statute. For example, CNTS can be offered to a causally responsible party, someone who is not eligible for liability protection under the statute. Protection through CNTA is also available to an eligible person who can reach only a temporary solution. These agreements protect an innocent property owner from additional remediation once the property has been remediated to appropriate standards. Entities directly responsible for causing the impacts are not eligible for CNTS.
Certificate of Completion (COC): These are agreements from the appropriate state environmental agency that the clean up has been completed in accordance with the approved clean up plan. The COC limits the property owner’s liability by eliminating the possibility of future enforcement actions by the state (with limited exceptions, such as fraud or releases which occur subsequent to the clean up). The limitations conferred by the COC are permanent and benefits include the following:
- The liability protection applies to the entire property
- The liability protection is transferable to successor owners
- The liability protection extends to cover future regulatory changes which may result in more stringent clean up standards or the designation or previously unregulated materials as hazardous
Securing Property and Formal Commitment
If the property is not owned by the entity performing cleanup and redevelopment, it may be obtained through a purchase or sale agreement, or involuntary acquisition methods such as foreclosure. During the formal commitment, contracts and documents are signed and exchanged. Once obtained, any zoning changes or variances that may be required for the planned reuse should be pursued (e.g., changing the property’s zoning from industrial to commercial).