FINANCING SMALL-SCALE URBAN

REDEVELOPMENT PROJECTS

A Sourcebook for Borrowers Reusing

Environmentally Suspect Sites
July, 1997
The E. P. Systems Group, Inc.
P.O. Box 2736
Louisville, KY 40201
502/458-4988 FAX 502/852-4558

Preface and Acknowledgments

For the past several years, we have studied the issue of redevelopment of previously used
properties, conducting interviews with developers, lenders, environmental engineers and lawyers,
environmental agency representatives, staff from economic development organizations and
others. Many of the small developers with whom we talked have expressed a desire for better
information and guidance in their efforts to obtain financial backing. We combined findings from
our previous work and our reviews of a variety of writings on potentially contaminated sites with
information from interviews conducted specifically for this sourcebook. These included additional
discussions with small developers, appraisers, and insurers. In particular, we spent many hours
interviewing over thirty loan officers, vice presidents, and environmental risk managers from
lending institutions.

This sourcebook would not have been possible without the willingness of these parties to talk with
us, explaining their concerns and policies and even sharing proprietary information. We have
taken great care not to identify specific information from any individuals or organizations, but owe
our interviewees a major debt of gratitude. They gave freely of their time and knowledge and
many provided useful comments on an earlier sourcebook draft. We especially thank some of the
organizations whose staff gave extensive time to providing input to, and making suggestions for
improvements in, this sourcebook:

Republic Bank and Trust Company; Bank One, Louisville; PNC Bank; Fifth-Third Bank, Louisville;
Rudnick & Wolfe, Attorneys at Law; Stockyards Bank & Trust Co.; National City Bank, Louisville;
Louisville Community Development Bank; Bank of America; Bank of New York; TIAA-CREF; Ray
& Associates, Appraisers; AIG (Commerce and Industry Insurance); ECS, Inc.; design-build
partners, llc, Louisville; Kentucky Bankers Association; Louisville-Jefferson County Office of
Economic Development; and the U.S. Small Business Administration, Louisville Branch.

We are also very much indebted to EPA personnel who spent many hours reviewing the draft. In
particular, we would like to acknowledge the substantial contributions of Ludmyrna Lopez of
UEDD, who guided the preparation of the sourcebook from beginning to end, and to thank Harriet
Tregoning, the Director of UEDD, for her support of the project. Others at EPA who provided
invaluable input include Elisabeth Freed and Bruce Pumphrey from the Office of Enforcement and
Compliance, Sven-Erik Kaiser from the Office of Solid Waste and Emergency Response, and
Suzanne Giannini-Spohn from UEDD.

Finally, we want to give special recognition to the work of our research assistant Kenneth M.
Chilton. His research skills, perceptiveness, hard work, and good nature were key to the
completion of this project.
While we extend our appreciation to interviewees, EPA reviewers, and Ken, we also must
absolve them of any blame for remaining errors; these are completely our responsibility.

Kristen R. Yount, Taylor Mill, KY

Peter B. Meyer, Louisville, KY

Table of Contents
Preface and Acknowledgments

Introductory Notes and Sourcebook Overview

1. Redeveloping Urban Properties: The Potential for Exceptional Profits

1.1 The Advantages of Urban Sites

1.11 Discounted Property Price
1.12 Preparation costs
1.13 Favorable Zoning/Land Use Provisions
1.2 Resources and Support for Brownfield Redevelopment
1.21 Special Programs and Priorities Associated with Your Site Location
1.22 Subsidized Property Prices
1.23 Voluntary Cleanup Programs and Support for Environmental Site Assessments and
Cleanups
1.24 Other Financing Tools

2. Minimizing the Risks of Brownfield Redevelopment

2.1 The Risks of Potential Contamination

2.11 Legal Liability Risks of Brownfield Property Owners
2.12 Concerns Lenders Have About Brownfields
2.2 Federal Policies Offering Liability Protection
2.3 State Policies and Programs Offering Liability Protection
2.31 Formal Agreements Dividing Responsibility for Contamination
2.32 Covenants Not To Sue
2.33 No Further Action Letters
2.34 Intervention in the Chain of Ownership
2.4 Structuring the Purchase to Lessen Risk Exposure
2.41 Indemnification
2.42 Purchase Options
2.43 Conditional Agreements to Lease
2.44 Subdividing
2.45 Joint Ventures
2.5 Compensating Risk to Lenders
2.51 Loan to Value Ratio
2.52 Sources of Collateral
2.53 Budgeting Cleanup Costs and Overruns
2.6 Possible Availability of Environmental Insurance
2.61 Cleanup Cost Overrun
2.62 Cleanup Liability and Past Pollution Liability

3. Environmental Site Assessments and Cleanup Alternatives

 3.1 Types of Environmental Site Assessments
3.2 Pollution Management Methods
3.3 The Impact of Environmental Regulators on Cleanup
3.31 Oversight
3.32 Intended Use and Institutional Controls

4. Selecting and Using Consultants

4.1 Environmental Consultants and Engineers

4.2 Environmental Lawyers

5. Selecting a Lender

5.1 Types of Lenders

5.11 Commercial Banks
5.12 Insurance Companies
5.13 Savings and Loans
5.14 Pension Funds and Bank Trust Departments
5.2 Bank Size and Ownership
5.3 Lender Policies: Loan Size and Environmental Assessments
5.4 A Cautionary Note
5.5 Other Factors Affecting Willingness to Offer Brownfield Loans
5.51 Institutional Attitudes Toward Risks
5.52 Home Office Location and Experience With Brownfield Lending
5.53 The Lender's Need for Loans
5.54 Commitment to Locality: Pursuit of Community Reinvestment Act (CRA) Credits
5.6 A Reminder

6. What To Do if Your Loan Proposal is Not Approved By the First Lender -- Your Approach

6.1 Try to Find Out Why

6.2 Try a Different Bank of the Same Type or Size
6.3 Try a Different Type of Bank
6.4 Take Another Look at Your Project and Redevelopment Plan
6.5 In Summary

Concluding Remarks: Future Prospects for Redevelopment Projects

Appendix: Resources

Tables and Figures

Table 1. Questions to Ask State (and Local) Environmental Agency Personnel

Table 2. Sample Environmental Checklist Items

Table 3. Questions to Ask Environmental Consultants and Engineers

Table 4. Questions to ask Real Estate and Environmental Lawyers

Table 5. Factors to Consider in Selecting Lender Size

Table 6. Questions to Ask Potential Lenders

Figure 1. Action Choices When a Loan is Not Approved

Table 7. Things to Consider If a Loan is Not Approved the First Time

Introductory Notes and Sourcebook Overview

As the title implies, this volume is intended to provide information to those seeking financing in
order to redevelop small residential, commercial, or industrial projects on previously used
properties. We have in mind the company wanting to invest perhaps fifty thousand to two or three
million dollars in order to expand into neighboring properties, reclaim properties for clients
needing central city locations, or regenerate a site "on spec" for an unknown future buyer or
lessee. In particular, we are concerned with the issue of dealing with actual or suspected
contamination when doing urban "infill" or development of underutilized or vacant properties
within central cities.

A term that we use throughout the sourcebook is "brownfields." We follow the U.S. Environmental
Protection Agency's (EPA) definition of brownfields as "abandoned, idled or underutilized
industrial and commercial facilities where expansion or redevelopment is complicated by real or
perceived contamination." These properties differ from "greenfields" or sites with no development
history such as farm land.

We must insert a cautionary note at the outset, however. You should know that, while we use the
word brownfields to refer to used properties that may or may not be contaminated, others
(including some lenders) have different meanings; some apply it only to cases of known and
severe contamination, others think it only applies to sites that have been rejected for
redevelopment, abandoned, or used solely for industrial purposes. The point is, because the term
has no agreed-upon meaning, we advise that you not begin a discussion with a lender by
referring to your site as a brownfield.

Over the past several years, the authors have spoken with a number of developers of smaller
urban projects and many have expressed a desire to learn more about the opportunities and
potential problems involved with redeveloping possibly contaminated properties. This book is for
those of you who fall into that group.

Note that, while alternative financing (such as venture capital) may be available to some
developers, we concentrate on financing sources (such as commercial banks) that are most
commonly approached by small-scale investors. Also, it is not our intention to address issues
common to financing all development projects (such as conducting market research, preparing a
pro forma, etc.). Rather, we focus on those aspects of redevelopment projects that arise with
used properties where the suspicion of contamination might arise. The unique aspects of these
projects include the following:

• While brownfields entail certain risks, they may also yield exceptional profits because
others lack the knowledge to deal with these risks;
• Lenders have special concerns about possible pollution problems and often require
additional assurances before they loan on the properties;
 • It may be necessary to use the services of consultants including environmental engineers
and lawyers.
• There may be special programs or funds available to you for your redevelopment project
if it involves urban infill or a brownfield site.

We have included basic information on all these issues and also provide several tables to help
you form questions to ask the parties with whom you will most likely work. In the Appendix:
Resources, you will find information for contacting key people who can assist your project and
other references you may find useful. Here are some of the key questions we address in the main
body of the sourcebook - and where you can find the answers.

Scanning the Sourcebook for Answers

QUESTION TURN TO
Why should I redevelop a previously used
Chapter 1
property? What are the advantages?
What special sources of support do I have
Chapter 1
available to me as a brownfield redeveloper?
What contamination-related risks are
involved with used Chapter 2, Table
1
properties? How do I minimize these risks?
What types of security will a lender want
before loaning on environmentally suspect Chapter 2
property?
How do I determine if a site has
Chapter 3
contamination problems?
How do I deal with contamination if any is
Table 2
found?
Do I need special environmental consultants? Chapter 4
How do I choose them? Tables 3 and 4
How do I find the lender most likely to fund Chapter 5,
my project? Tables 5 and 6
What special procedures do lenders use for
Chapter 5
loans involving possible contamination?
Chapter 6,
What do I do if my loan application is not
Figure 1, Table
approved?
7
 Chapter 1

Redeveloping Urban Properties:

The Potential for Exceptional Profits

In the 1990s, a great deal of attention in the United States has turned to the redevelopment of
used urban properties. Officials at all levels of government have taken action to facilitate reuse
projects; putting sites that were idle or underutilized to productive use generates taxes and
employment opportunities that cities desperately need.

As public officials have accelerated their efforts to promote reuse projects, developers
increasingly have come to appreciate the opportunities for profits that exist in redeveloping
central city properties. A number of firms are intentionally seeking out brownfields for investment;
they recognize that high returns are often available for those who have specialized knowledge of
ways to minimize the expenses of brownfield projects. This sourcebook will help you to
understand basic elements of that knowledge. Our overall theme is that an investor who can
manage risks better than others may be able to acquire exceptional profits.

In Chapter 1, we discuss factors that could increase the payoff to a brownfield infill investment
relative to a greenfield development, including discounted property prices, reduced preparation
costs, and favorable zoning. We then turn to a discussion of sources of support that may be
available to you.

1.1 The Advantages of Urban Sites

1.11 Discounted Property Price

One central reason for the profit potential in brownfield redevelopment is that developers are able
to purchase the sites at a below-market price. Redevelopment on abandoned sites may be
especially promising since the property may be obtained for minimal cost. Many times, suspicion
of contamination on the part of sellers causes them to lower their asking price for properties even
though they do not have a good estimate of cleanup costs. In some cases, it turns out that the
property suspected of contamination requires no cleanup at all.

If many players in the real estate market dismiss urban infill and brownfield redevelopment efforts
as poor investments without checking into them, your competition is down. The lower the
competition, the easier it is to make profits. Even when more developers see the income
prospects in urban real estate and the competition increases, you will still have an advantage -
the knowledge based on experience the newcomers will lack.

1.12 Preparation costs

In some cases, a brownfield redevelopment may be more costly and time-consuming to complete
than new construction on a greenfield, especially if property contamination is a factor. There are,
however, several factors that may compensate for the costs of site assessments and cleanups.

Used urban properties benefit from established infrastructure that can greatly reduce site
preparation costs: streets, sidewalks, lighting, and utility hookups already in place. Moreover, it is
the off-site infrastructure that may make the most difference in the land costs associated with a
project: the storm sewers and drainage available. Depending on zoning restrictions, it is not
uncommon for regulations to require that 50 percent or more of site acreage be left undeveloped
in order to handle runoff from areas with buildings or pavement. This limit on land usage,
however, is not as likely to affect established urban sites. You may need only half the acreage for
a given project in the city compared to a suburb, so you can afford to pay more per acre for land
and site preparation costs.

Another factor to consider in decisions to invest in used property is the buildings on the site. It is
true that demolition of the structures, if needed, may represent a substantial cost. In many cases,
however, they can be rehabilitated. Reclamation of buildings permits the completion of a facility
for a small fraction of the costs of a new building, even if some ground contamination has to be
addressed in the redevelopment process.

1.13 Favorable Zoning/Land Use Provisions

One important advantage of a used urban property is that you generally can find a site with
precisely the zoning you want, so you will not face delays and uncertainty about zoning
commission hearings and their decisions. City land use requirements and building codes
generally have set-back requirements and other standards, leaving little to negotiation. In
suburban areas, local governments generally impose requirements about percentages of a site
that must remain planted and green, and demand prior approvals (sometimes from both private
and public regulators) for landscaping and other aspects of a site developer's plans. As in the
case of zoning, the need for detailed approval of site use and construction plans can generate
uncertainty about timing and final requirements for suburban projects that may be more
troublesome than those at a well-understood inner city site, even one that is contaminated.

On balance, then, the time and money costs associated with the negotiations that accompany
many greenfield developments may, in large part, be avoided on infill projects. The higher costs
associated with actual or feared contamination on a brownfield may be offset by the avoidance of
these and other costs associated with construction on sites with incomplete infrastructure
support.

1.2 Resources and Support for Brownfield Redevelopment

In the last few years, the federal government has been engaged in a concerted effort to facilitate
brownfields reuse. Most notably, EPA launched its "Brownfields Economic Redevelopment
Initiative," a program based on the premise that cleaning up contaminated property must go
hand-in-hand with bringing economic vitality back to communities. The Initiative involves a
number of measures to encourage revitalization efforts. For example, EPA has funded
brownfields pilot projects throughout the country and built partnerships with other government
bodies and private sector associations to find ways to facilitate redevelopment. As we discuss in
the next chapter, the Agency has also clarified many liability issues surrounding possible pollution
on brownfields.

In addition, EPA has established a Brownfields Internet Homepage you can access that
distributes information useful to redevelopers and has assigned designated "Brownfields
Coordinators" in each EPA region to assist with brownfield projects. (Information for accessing
the Homepage and contacting the Coordinator in your region is provided in the Appendix.)

These federal efforts have corresponded with and encouraged state and local attention on
innovative ways to assist brownfield redevelopment. Thus, you may have support available to
you, not only from environmental agencies, but also from state and local economic development
organizations that want to promote more urban redevelopment. Most state and local governments
have traditionally used various financial assistance and incentive programs to promote economic
development. In some locations, the existing sources of support are now targeted to brownfields.
In addition, a growing number of states and municipalities have launched financing initiatives to
focus specifically on infill development.
It is up to you to learn about special programs that may assist you and to obtain the backing of
the organizations; keep in mind that there are other (often much larger) projects competing for
their attention and resources. In this section, we examine the types of assistance that might move
your project toward completion.

1.21 Special Programs and Priorities Associated with Your Site Location

"Location, location, location" applies not only to the sale or rental value of properties. In many
cases, a certain location means access to assistance with a redevelopment effort. You may be
able to find sites that are close to commercial or industrial centers that also allow you to benefit
from special programs established for selected areas of a city.

Both federal and state economic development and urban revitalization programs have designated
priority areas in cities. The Empowerment Zones/Enterprise Communities (EZ/EC) program of the
Clinton Administration was created to channel resources and attention to some of the poorest and
most needy areas of cities. In addition, many municipalities have designated their own
"redevelopment areas" or "special economic development districts."

A site within these targeted zones will tend to move to the head of the line for proposal and site
development review by planning and oversight agencies. More importantly, being in one of these
areas may give your project priority access to any funds or subsidized access to capital in state or
local programs to support site assessment or cleanup costs.

Another factor that may act in your favor concerns "environmental justice." This term refers to
efforts to address the fact that the poor and, especially, minorities tend to be exposed to
contamination more than others. The growing concern for environmental justice may mean that,
for certain sites, you will be able to get exceptional cooperation and assistance.

If your project involves cleanup of contamination in an area that has suffered from exceptional
environmental problems, it is important to recognize that, in redeveloping the site, you are
providing a public service at the same time you are pursuing a profit. The public good you are
doing (especially with community support) may well make it easier to deal with regulators and
obtain timely reviews of cleanup and site development progress.

1.22 Subsidized Property Prices

Most cities have stockpiles of land and available sites. These are usually gathered in two ways.
First, land may be taken for tax delinquency - most frequently for failure to pay real estate taxes.
Second, economic development organizations may accumulate sites specifically for economic
regeneration, often gathering small parcels together to form larger sites that would attract new
businesses.

Both sources typically make sites available at some subsidized price, at times as little as $1.00.
These properties offer an exceptional return to investors who are willing to risk the capital needed
to determine if a cleanup is needed, and are able to obtain the necessary expertise to manage
contamination if it exists.

1.23 Voluntary Cleanup Programs and Support for Environmental Site Assessments and
Cleanups

As of 1996, 37 states had established brownfields initiatives or Voluntary Cleanup Programs

(VCPs). VCPs involve a cooperative arrangement between an owner or prospective owner and a
state environmental agency to prepare a site for redevelopment. While the majority of these
programs provide only oversight for environmental cleanup, technical guidance, and/or
verification of cleanup, some of the programs also offer low-interest loans or grants for funding
environmental site assessments, cleanups, or both. (Some states, counties, and municipalities
also offer the support to those who are not participating in a VCP.)

Obviously, any such funds have the potential to significantly reduce project costs. You need to
know about the availability of such support before running the financials on a possible project,
since the funds involved could make or break a deal. They certainly will increase the
attractiveness of any project for a lender while potentially adding to your profits.

1.24 Other Financing Tools

If your project is in an area served by a Community Development Bank (CDB) or other special
community-based lender, you should investigate to see what support they can offer. A CDB is a
financial institution, typically a full-service commercial bank, that is chartered especially to provide
retail banking services in a specified geographic community. They are established to promote
investment in the area and thus provide advice as well as make loans. Because they lend with a
sharp geographic focus, you will not compete for funds with out-of-town investment alternatives.
Moreover, many CDBs act as "agents" for other banks, bringing them in on deals they structure.
The CDB may serve, in effect, as your agent in attracting money from commercial banks. If you
can find such an ally, work with it.

In addition, a variety of other financing tools may be available. These include:

• tax incentives such as rehabilitation tax credits and tax abatements that reduce tax
liabilities for a specified time period.
• low-interest loans and revolving loan programs targeted specifically to infill development.
• loan guarantees and secondary loans offered to lenders by governments in order to
minimize lender risks.
• Community Development Block Grants, distributed by the Department of Housing and
Urban Development, that can be used for redevelopment projects that meet certain
requirements.

These sources of support are not available everywhere and meeting the eligibility requirements
can be difficult and time-consuming. And, as we noted, there is a great deal of competition for the
funds. Keep in mind, however, that even if government programs do not have a great deal of
money behind them, they often can help to streamline regulatory processes and provide useful
information. You can determine what assistance is available by contacting local economic
development and environmental agency offices.

Chapter 2

Minimizing the Risks of Brownfield Redevelopment

We begin this chapter by examining the possible risks of having to deal with contamination,
including your own liability risks under laws that govern polluted sites and the risks that your
lender faces in offering loans on the properties. We then outline a number of steps you can take
to protect yourself including taking advantage of government programs and policies and
structuring deals to reduce liability exposure. This is followed by a discussion of ways to
compensate risk to lenders. We end with an overview of environmental insurance policies that
might be available. One underlying message in the chapter is that environmental lawyers and
engineering consultants can be most useful. Suggestions for selecting these consultants are
provided in Chapter 4.

2.1 The Risks of Potential Contamination

With respect to pollution, the first thing to keep in mind is that most urban sites are not
contaminated. The major suspicion lies on sites that housed dry cleaners, gas stations, metal
plating shops, and the like. They all could be heavily contaminated, but many are found to be
fairly clean when they are tested. In addition, most cases of pollution can be cleaned with minimal
expenditure; many times, the cleanup costs can be borne by the current or past owners and need
not be paid by the redeveloper.

The federal law that is most relevant to brownfield redevelopment is the 1980 Comprehensive
Environmental Response, Compensation and Liability Act (CERCLA), which is also known as
"Superfund." We describe here how basic aspects of this law affect developers and their lenders.
Keep in mind when you read the material, however, that the US EPA, which administers
CERCLA, does not become involved with the majority of small-scale brownfield projects. You are
much more likely to deal with state environmental agencies and laws. We cannot address all of
these laws in this short book because of the variation among states. We do, however, provide
information about the types of state and local laws, programs, and policies that may be available
to you.

2.11 Legal Liability Risks of Brownfield Property Owners

One point that must be understood is that the courts have found that the federal CERCLA law
imposes "strict, joint and several liability" for past pollution on all parties in a property's "chain
of title." This chain includes all the previous and current owners and users of a property after the
pollution was created, unless you are deemed an innocent party.

• "Strict" liability means that property owners and business operators may be held liable for
environmental cleanup without regard for negligence or fault (that is, even if they did not
create the pollution or were abiding by the law at the time they did create it).
• "Joint and several" liability applies to situations where more than one Potentially
Responsible Party (PRP) exists. It may be difficult to determine each party's contribution
to the pollution. In these situations, the courts have held that an owner or operator may
be held liable for the entire cost of site cleanup, unless it can be shown that the harm is
"divisible" (for example, where there are two or more physically separate areas of
contamination). In short, any one party can be assigned the full responsibility for
environmental harm caused by several parties, even if the damage was done before the
party owned or occupied the site.

The "innocent landowner defense" offers protection from CERCLA liability. To successfully claim
this protection, owners must prove that they (a) bought the property after the pollution took place;
(b) did not know and had no reason to know that the site was contaminated when they bought it;
and © before they purchased the property, they exercised "due diligence." That is, they
conducted all appropriate inquiry into historical operations on the property that was consistent
with "good commercial and customary practice." See Chapter 3, section 3.1.

The lesson is simple: if you have a chance to buy land cheaply at a location you think has
high potential, take some of the money you would save on the purchase and use the funds
to get a thorough site assessment. You may still buy, but then you will be complying with due
diligence requirements. If you decide to back out because of the environmental problems, the
cost of the assessment will have provided cheap insurance against the losses possible under
CERCLA liability. (Think about the decision much as you might consider buying a used car: is it
worth having a mechanic check out the car, even though the inspection will cost you money?
Most always, it's worth the cost.)

2.12 Concerns Lenders Have About Brownfields

As originally enacted, CERCLA contained an exemption that protected lenders from owner
operator liability. This protection was undermined, however, by court decisions finding that
lenders could lose their liability exemption by foreclosing on a property (thus becoming an owner)
or by having the capacity to participate in the management of a facility. These court rulings
caused lenders to become reluctant about involvements with potentially contaminated properties.

In 1996, however, the Asset Conservation, Lender Liability, and Deposit Insurance Protection Act,
which amended CERCLA, was signed into law. This legislation provides lenders with detailed
guidance on ways in which they can be involved in a borrower's activities without participating in
management. (Essentially, they must displace the borrower in managing the business to lose
their liability protection.) The law also specifies actions lenders can take to avoid liability if they
foreclose; lenders can engage in a wide range of post-foreclosure activities and still be protected
from owner/operator liability provided they sell or otherwise divest themselves of the property at
the earliest practicable, commercially reasonable, time and terms.

This new legislation should greatly encourage willingness to offer brownfield loans because
lenders now have greater clarity about the steps they can take to protect themselves. Lenders,
however, will still require careful attention to environmental issues for several reasons:

• What lenders are concerned with most is the ability of borrowers to repay a loan and a
borrower's ability to do so may be jeopardized if unexpected and expensive cleanup
costs should occur;
• Lenders fear that if they do have to foreclose, environmental problems might lower the
value of their collateral;
• Financiers may still be liable if their own behavior extends beyond the actions covered by
the liability exemption.

In short, it is in the lender's interest as well as your own to conduct a thorough site assessment.
An overview of assessment procedures generally employed is provided in the next chapter. Here
we turn to a discussion of government-sponsored methods of protecting yourself from liabilities
associated with contamination.

2.2 Federal Policies Offering Liability Protection

An important component of EPA's brownfields effort entails taking steps to assure prospective
purchasers, lenders, and property owners that, under certain conditions, they do not need to be
concerned with federal enforcement actions under CERCLA. Over the last two years, the Agency
has announced a variety of policies that greatly reduce uncertainties associated with brownfield
properties. For example, EPA has issued policy statements that have:

• indicated the Agency will not pursue owners of otherwise uncontaminated property
situated above groundwater polluted by a neighboring property.
• announced increased consideration of anticipated future land uses (such as industrial,
residential, commercial) in selecting cleanup remedies. (Thus, the degree to which
people may be exposed to contamination is a consideration in determining the nature and
the expense of a cleanup.)
 • expanded the circumstances under which the Agency will enter into "Prospective
Purchaser Agreements," involving "Covenants Not to Sue" for contamination that existed
before a landowner purchased a property.
• clarified how the EPA will interpret CERCLA provisions, addressing lenders and
involuntary acquisitions by government entities.
• indicated willingness to issue Comfort/Status Letters that provide redevelopers with the
information EPA has about a specific site and indicate plans EPA has to take or not take
federal action at the site.
• provided soil screening guidance to help decision-makers quickly determine which
portions of a site require further study and which pose little risk to human health and
therefore may be ready for development without extensive cleanup.

Some of these policies are meant for sites where there is an active federal enforcement interest
For example, Prospective Purchaser Agreements are negotiated upon request. To be eligible, an
EPA action on the property must have been taken or be anticipated and the redevelopment must
have substantial benefits including cleanup and other community benefits such as job creation.
Likewise, Comfort/Status letters are considered only when there is a realistic perception or
probability of incurring CERCLA liability, which is not the case with typical brownfield sites.

A determined federal effort is underway to facilitate brownfields redevelopment although EPA's

policies are meant for the more complicated cases. Furthermore, the federal guidelines tend to
serve as models for state policies and programs, which are the most relevant to smaller and less
complicated reuse projects.

To accelerate the cleanup of sites, states have developed voluntary cleanup programs (VCPs).
Generally, EPA will not become involved with a site undergoing cleanup through a state voluntary
cleanup program where EPA has entered a "Memoranda of Agreement" (MOAs) with a state
environmental agency. These MOAs minimize the potential for duplication of effort. The MOA
also defines federal and state roles at sites being addressed in accordance with the agreement.
EPA's intention not to take action at sites that are undergoing cleanup under state VCPs except
under limited circumstances such as when the Agency determines that a site poses an imminent
and substantial danger to public health or the environment. Thus, most of the regulatory relief that
may be available to you arises from state policies and programs.

2.3 State Policies and Programs Offering Liability Protection

Liability assurances related to past or current pollution may well be available to you from the
state. In this section we provide an overview of typical forms of liability relief. Taking full
advantage of them makes good business sense; ignoring them may save you time, but cost you
money.

2.31 Formal Agreements Dividing Responsibility for Contamination

A number of states have special laws that can help a buyer to limit costs and liability for any on-
site contamination that took place prior to a purchase. The labels vary, but common terms include
"Prospective Purchaser Agreements" and "Buyer-Seller Agreements." While you can arrange
these contracts with the help of your lawyer, state personnel can offer expertise in framing the
agreements. States that have the programs administer them differently. For example, some
charge a fee for preparing and negotiating an agreement while others offer the service for free.

2.32 Covenants Not To Sue

Covenants Not to Sue provided by a state may be implemented as part of formal agreements
involving both buyers and sellers, or may be arranged between buyers and the state alone. They
offer state assurance that, in return for meeting specified standards for cleanup, the state will not
sue for further cleanup. (In some cases, the Covenant is subject to reexamination if new
information about contamination is found.) The requirements for demonstrating a completed
cleanup can vary significantly from state to state and can involve different costs: some states ask
only that the owner conduct the cleanup recommended by environmental engineering
professionals while others may demand full state agency oversight of cleanup actions.

2.33 No Further Action Letters

These documents may be offered by state environmental agencies for sites where a cleanup has
been conducted. A No Further Action (NFA) letter indicates that the state regulatory agency has
determined that no further environmental cleanup was deemed necessary at the time the letter
was issued. In terms of liability protection, a NFA letter is limited in that it always includes a
reopener clause. Its value is thus dependent on the language regarding reopeners; some states
have detailed descriptions of the specific conditions that could cause future re-examinations of
cleanup adequacy, while others simply leave this possibility vague. The letter, however, defines
the property as a very low priority and thus lessens the likelihood of future government actions at
the site. A NFA letter thus can make it far easier to get a lender to support your project. In fact, in
some states, many lenders insist on the letter for loan approval.

2.34 Intervention in the Chain of Ownership

Yet another possible form of protection for a buyer involves the role of the state or a sub-state
public agency (such as a county, municipality, landbank, or redevelopment authority) in the
cleanup process and chain of title. Some states have laws that permit a public entity to facilitate a
cleanup and protect future owners from liability. If a public organization takes title to the site,
arranges for cleanup (possibly at the seller's cost), the organization is generally protected from
liability. Once the site owned by some public entity is found to be clean by its regulating agency,
the state then certifies that it will protect future owners from any costs that might be imposed in
state courts as the result of joint and several liability. In effect, the short period of public
ownership is used to break the chain of title and limit the buyer's liability, just as in the buyer-
seller agreements.

As we have emphasized, available forms of state liability assurance vary and thus have different
utility to redevelopers. Table 1 offers questions to ask environmental agency personnel. The
questions will help you determine what the policies and programs in your area can offer. Keep in
mind that liability assurances may make it easier to obtain a loan and may affect the terms of the
loan you get.

TABLE 1
Questions to Ask State (and Local) Environmental Agency Personnel

1. Are there any special state (local), programs, or policies to deal with the redevelopment of
potentially contaminated properties?

(if yes)

• Please provide me with guidance information on how to apply for and work with the
program.
2. Is the state (local) program voluntary or mandatory?

(if it is voluntary)

• Are there conditions under which the program can become mandatory?
• What are these conditions? (types of development, extent of contamination, etc.?
• What are the benefits of participating? Do you offer a Covenant Not to Sue, a No Further
Action Letter, or other liability assurance?

3. Does the state recognize, certify or participate in Buyer-Seller or Prospective Purchaser

Agreements?

(if yes)

• What are the procedures?

• Does the state charge a fee for these services?
• What liability protections are provided to buyers under the Agreements?
• Is there any condition for which the state recommends or requires an Agreement to be
arranged and certified?
• On average, how long does it take to prepare an Agreement?

4. What inspections are required to assure cleanups?

• Do you inspect work throughout the cleanup process or only inspect the final condition of
the site?
• What is the average waiting time before an inspector checks a site if I sign up for the
state voluntary program? If I do not sign up for the program?
• What other factors affect the length of waiting time for inspections?

2.4 Structuring the Purchase to Lessen Risk Exposure

Under the provisions of joint and several liability, parties that owned a property at the time the
pollution was created or afterwards potentially can be held responsible for environmental damage
and cleanup costs. This means that you may be able to make arrangements with these parties for
the costs of cleaning contamination.

If you have not yet found a site for your investment, one strategy is to look for a property with a
financially viable previous owner with whom you can negotiate responsibility for past
contamination. Having another party available to absorb cleanup costs will benefit you and
provide security to your lender as cleanups may entail unexpected costs that could reduce your
ability to repay the loan.

In this section, we provide an overview of approaches that have proven useful in terms of
minimizing a redeveloper's cleanup costs and liability exposure. Each involves working with the
seller to develop a mutually agreeable plan. A legal expert knowledgeable of both real estate and
environmental law can be invaluable in drafting the agreements.

2.41 Indemnification
A purchase of a polluted site can contain language stating that the buyer is indemnified by the
seller from responsibility for environmental cleanup. Many real estate transactions contain
language through which the parties can minimize their potential liability, and special provisions
can be developed to protect buyers (and subsequent owners of a site) from possible lawsuits
against them for problems due to past pollution. As we noted above, in some states Buyer-Seller
or Prospective Purchaser Agreements can be arranged under state environmental laws.

2.42 Purchase Options

Buying an option to purchase a property rather than buying it outright can motivate the seller to
conduct a cleanup. In these situations, you hold the right to purchase the property, but do not
take title until the problems are fixed. If the seller doesn't finish the cleanup by your deadline, you
can abandon the option at a minimal cost. Note also that one approach is to share the cleanup
costs with the seller and to take these costs into account in the purchase price.

2.43 Conditional Agreements to Lease

This related alternative is useful if you want to occupy a site, but do not care if you own it or not.
Under the arrangement, a landlord is required to clean the property before leasing it. The tenant,
however, must lease for a specified time period if the landlord has fulfilled cleanup obligations.
Note that you should be very cautious about leasing a site with known pollution that has not been
cleaned; as a lessee (operator) you may be held legally liable for cleanup costs, even after your
lease has expired.

2.44 Subdividing

A large site may be subdivided into two or more smaller parcels which allows you to separate a
contaminated section of the property. You can then stagger the closing dates so you only
purchase the portion of the site that was polluted after the seller completes the cleanup. In the
meantime, you can redevelop the rest of the land. Not only can you start your project; you can
provide the previous owner with the funds needed to clean up the pollution you avoided buying.
(You also could simply take an option on the contaminated parcel and wait to see how the
cleanup works out.) Do note the possibility, however, that contamination could "migrate" (for
example, through the groundwater) from the polluted area to the clean part of the site. In this
case, you could refer to EPA's Contaminated Aquifer Policy. See Chapter 2, section 2.2.

2.45 Joint Ventures

The owner of the property may be anxious enough to sell (and to obtain funds for a cleanup) to
be willing to join you in some sort of joint venture with both of you as stockholders. The seller may
agree to pay most of the estimated cleanup costs and to indemnify you against future liability.
These arrangements can be better than simple indemnity from prior owners because the
motivation of sellers to clean is strengthened by the fact that they share in the financial returns
from the redevelopment.

2.5 Compensating Risk to Lenders

It has been said that developers are risk takers, but banks are not. Whether this is true in general,
it certainly seems true when it comes to brownfields redevelopment. If you want to get support
from a lender, you need to think about how you can provide acceptable security for your loan.

As we discussed, the 1996 amendments to CERCLA provide relief to lenders with respect to
liability concerns. Financiers, however, still need information about the environmental condition of
your site. A loan application is evaluated against a number of different risks; two are central to
their decision on your brownfield project:

• Loan or credit risk, the likelihood that a borrower will not be able to make payments,
mandates looking at the financial viability of the project and the credit rating of the
borrower;
• Collateral risk, the possibility that the lender will not recoup the value of the loan from
sale of the collateral if foreclosure occurs, is controlled by reducing loan-to-value ratios if
the value of the collateral is uncertain.

2.51 Loan to Value Ratio

Whatever the project, the smaller the loan you request relative to the total project scale, the lower
will be the loan risk to the lender. This is simply because the profits you would earn on your
"equity participation," or the proportion of the project you own through the funds you personally
invested, could be sacrificed to make cash available to service the loan. Some minimum equity
participation by the owner/developer is normally expected on any project (perhaps 15% to 20%),
but the percentage can vary. The greater your participation, the easier it will be to get a loan. This
fact means that, if you have limited cash to commit, it is easier to get started on a small project
than a major effort.

Even in the unlikely case that you provide more than half the cost of a project, however, you may
not be able to get the funds you need, simply because the deal involves a loan-to-value ratio that
is too high for your lender. Lenders rarely will let you borrow on 100% of the value of your
collateral asset under any condition. Using a figure less than 100% protects the lender against
collateral risk by allowing for the costs of selling an asset and a possible drop in property value.
On a brownfield, especially one that has not yet been fully cleaned, the percentage of the value
that the lender will provide may fall well below the 70% sometimes used as a maximum for
support of purchases of existing commercial properties.

2.52 Sources of Collateral

The first element of collateral most redevelopers offer to a potential lender is the property they
want to redevelop. For reasons given above, however, the value of this collateral may not be
enough to cover the loan they need. If the property value is not sufficient, you have two choices if
you are an individual redeveloper:

• Reduce the level of the loan you request by scaling back the project or providing more
cash yourself or;
• Provide other collateral, including the built-up value of your holdings in other real estate
or other assets such as investments in stocks, bonds, or mutual funds.

You may be able to show your lender that you have enough working capital above and beyond
the amount you have indicated you will commit to the project. These funds may be seen as
covering some of the loan and collateral risk.

2.53 Budgeting Cleanup Costs and Overruns

In addition to the forms of risk compensation noted above, it is important to assure a lender of
your knowledge of brownfield redevelopment - the proposal you present needs to be realistic and
promising. If you do need to conduct a cleanup, the fine line you walk entails making adequate
estimates of the costs without exaggerating them. Good project management allows for cost
overruns. On brownfield projects that do have contamination, it is necessary to budget for
surprises. They do sometimes arise -- but, then again, so do problems of damaged water lines
and an array of other unforeseen accidents and problems occurring with any construction project.

The best way to prepare your estimates involves working closely with a good environmental
consultant. The specialist you hire can give you reasonable costs for alternative methods of
dealing with problems that might arise and provide information on the likelihood of problems
emerging. While consultants cannot give you precise costs and odds, they can make decent
estimates that help you to quantify your plans. Another option that might be available is an
environmental insurance policy.

2.6 Possible Availability of Environmental Insurance

The strongest evidence that brownfield redevelopment is becoming a mainstream activity is the
development of a series of environmental insurance products that help limit project risks.
Currently, most of these new policies involve fees that are so high that they are not useful for
small-scale redevelopments (with cleanups under about $500,000).

New area-wide policies, however, are being negotiated by insurers with some cities that could
substantially reduce the cost of this protection. If they are available in your price range, the
policies are valuable to you and your lender; they reduce estimates of the risks financiers face in
brownfield lending. Ask your city's local economic development office about this option. Here we
discuss types of coverage that could be useful.

2.61 Cleanup Cost Overrun

This coverage can have a big impact on both loan risk and collateral risk for projects that include
removing or containing past contamination. Obviously, cleanup cost overruns could jeopardize
the financial stability of a project, creating loan risk. But an incomplete cleanup, stopped because
a project had to be abandoned due to excess costs, would also damage the value of the site as
collateral, so controlling possible cost overruns reduces collateral risk as well. This sort of
coverage is generally purchased for the time period covering a planned cleanup activity; a
deductible percentage of projected cleanup cost is included, so some overrun costs will have to
be absorbed by a developer. After this, as much as 20 times the original cost estimate may be
provided by the insurer for unexpected cleanup expenses.

2.62 Cleanup Liability and Past Pollution Liability

Cleanup liability insurance covers you for any lawsuits associated with actions taken or damage
done by accidents during efforts to clean up a site. Past pollution insurance does not deal with
your actions, but helps cover you against claims under the joint and several liability scheme
applied under CERCLA. In both cases, the value of the policies lies more in protection from
lawsuits filed by "third parties" (neighbors, workers, and the like) than from environmental
regulators, under whose guidance you or the seller will have done a cleanup.

Since liability claims can arise long after actions are taken, these two policies need to be
examined carefully to determine their value to you. Issues to consider include:

• Duration of the initial policy. Policies are generally available for one to five years,
which is sufficient only if you are redeveloping a property for sale and/or expect to obtain
an assurance that protects you such as a state approval of cleanup.
• Renewal availability and terms. Any guarantees you can get on costs and renewal
availability are important if you will need coverage beyond five years - and you will need
some coverage if your lender wants policies in place for the entire term of a typical
mortgage.
 • Coverage provided for "successor" owners. Some policies provide coverage for
future owners of a property while other policies do not. Lenders prefer that subsequent
owners be included primarily because, if they do have to foreclose, the coverage will
facilitate selling the property.

Chapter 3

Environmental Site Assessments and Cleanup Alternatives

Nearly all lending institutions routinely require environmental assessments on previously used
sites. In this chapter, we provide an overview of the types of assessments that are commonly
used. We then briefly outline basic methods of dealing with contamination if it is found.

3.1 Types of Environmental Site Assessments

In the last two decades, environmental engineers have developed different types or phases of
assessments to determine if a site is contaminated, how serious the contamination is, and what it
will cost to clean it up. Each of these studies should be conducted by qualified professionals.

Phase I assessments are conducted to answer the question, "is it likely there is some
contamination on the site?" The assessments do not involve digging or testing. Rather, they entail
research on past uses of the property, permits acquired for environmentally sensitive activities
(storage tanks, ground or water disposal, waste incineration, and so on), and a site visit to see if
there are any visible problems (which might include distressed vegetation, 55-gallon drums on
site and the like). A professional association of engineers known as the American Society for
Testing and Materials (ASTM) has standardized procedures for a Phase I study. Depending on
the history of a site, a Phase I usually costs from $2,000 to $5,000 and takes one to three weeks
to conduct. The assessment will either give the site a clean bill of health or indicate that there is
some risk of past contamination. Establishing the existence and extent of the problem requires a
Phase II study.

Phase II assessments involve tests to verify the presence of contamination and to answer the
question, "how much contamination is there on the site?" The study entails water tests and soil
borings, followed by laboratory tests on the samples. (The Phase I study, in most cases, will
pinpoint a section of a property where a risk might exist, so the borings are concentrated in the
areas indicated by earlier research; this can save money on the Phase II.) Phase II assessments
take about two to eight weeks to complete. Because of the great variation among sites, making a
ballpark estimate of costs for the tests is difficult. They generally run from $5,000 to $15,000, but
can more expensive, especially if there are contaminants in the groundwater under the site. Note
that finding some contamination does not necessarily mean that you will need a cleanup; the level
of pollution may be so low that it can be left in place. If a cleanup is needed, in many cases it will
be obvious (for example, removing drums left on the property). In some cases, additional, Phase
III studies may be needed.

Phase III assessments are designed to answer the question, "what are the alternative ways of
cleaning up this site, and what will the options cost?" The studies may involve more on-site
testing to determine if the contaminants have spread and if there is a risk that they have polluted
other properties. The assessments take about three to ten weeks to conduct. The costs usually
exceed $7,000, and, again, the expense can be much higher depending on the condition of the
site.
The standard procedure among most lenders is to require a Phase I site assessment for loans
over a certain threshold, generally ranging from $200,000 to $1,000,000. On loans below the
cutoff, a Phase I may be required only for sites known to have been used for certain purposes
such as metal working businesses, dry cleaners, industries using other toxic chemicals, service
stations, and so on.

For small loans that do not fall into the high-risk category, lenders use an "environmental
transaction screen" recommended by ASTM. The process usually involves a visual site inspection
and a customer questionnaire about the property. Only if the screen produces a red flag does the
lender proceed to a Phase I assessment.

Table 2 offers examples of typical questions used in a transaction screen, most of which come
from the ASTM form; we have selected key items, combining some of them to make it easier to
use. To protect yourself, you should get answers to these questions about a site before you
spend large amounts of money on plans for redevelopment.

A Phase III will result in a report describing cleanup alternatives and their costs, both in time and
money. There are almost always options, and any qualified engineer will know the different
choices. Note that you are better off asking for information on more than the least expensive
option because the cheapest one may not be acceptable to your lender or to an environmental
agency inspector. You don't want to have to pay for additional engineering work if that happens,
especially since it could delay the project.

3.2 Pollution Management Methods

In the last twenty years, the technology for dealing with soil and groundwater contamination has
developed tremendously. Details of the many innovative methods for managing pollutants are
beyond the scope of this sourcebook. Here, however, we briefly outline the basic options.

TABLE 2

Sample Environmental Checklist Items

1. Has the site (or an adjacent one) ever been used in the past or is it currently used for industrial
or manufacturing purposes?

• Has the site (or an adjacent one) ever been used in the past or is it currently used as:
• a gas station, motor repair facility, vehicle sales facility?
• commercial printing facility, dry cleaners, photo developing laboratory?
• junkyard, landfill, or waste treatment, storage, disposal or recycling facility?

2. Were any of the following ever stored on site, or are they currently on site?

• discarded automotive or industrial batteries, paints, pesticides or other chemicals?

• industrial drums or sacks of chemicals?

3. Is there any evidence of:

• landfill materials brought from off-site?
• liquid waste facilities on site such as pits, ponds or lagoons?
• significantly stained soils or "distressed" vegetation at the property?

4. Are there presently or have there ever been any underground or above-ground storage
tanks at the property, or are there vent pipes, fill pipes, pavement repairs or other
evidence of underground storage tanks (USTs) at the property?

(After 55-gallon storage drums, the presence of USTs creates the most concern at
brownfield sites. They can be expensive to remove safely, even if they have not leaked
into the soil - but they can, at times, be removed at minimal cost.)

5. Are there stains in buildings on the property that emit foul odors?

6. Does the property have a private well? Was it ever contaminated?

7. Does the property have an on-site septic or sewage pre-treatment facility?

(Many lenders have special appraisal protocols to deal with such facilities.)

8. Does the owner or current occupant of the property know of, or have records of any:

o government action regarding violations of environmental laws or regulations on

the site?
o existence of petroleum products or hazardous substances on the site?
o prior site assessments that indicated contamination present or recommended
further assessment of the property?
o lawsuits or administrative actions involving actual or threatened releases of
hazardous substances on the site?

(The presumption is that such prior actions are indications of real problems that occurred
in the past; depending on when the problems arose and the actions that were taken, the
solution may or may not satisfy current standards for adequate cleanups. The more
recent the actions, the more likely they are to meet today's legal requirements.)

9. Is there any reason to suspect, or is there evidence of:

o hazardous or petroleum products, tires, automobile batteries or other waste

having been buried or burned on site?
o transformers, capacitors or hydraulic equipment on site showing signs of
leaking?
o transformers, capacitors or hydraulic equipment on site for which records indicate
they may contain PCBs?

(These substances may contaminate soil and groundwater at facilities whose production
processes themselves are generally "clean.")

10. Is there any evidence of asbestos present on the property - or any records of
asbestos removal or abatement in the past?
(The description in response to the question should distinguish between friable (crumbly)
asbestos, that poses cleanup problems, and non-friable asbestos, which can be left in
place.)

11. For residential structures, what is the condition of interior painted surfaces and what
is the extent of paint peeling?

(Some question along this line is essential for residential properties, since it relates to
lead contamination from old paint or pipes. A building that has been bulldozed can also
pose a health threat because the lead can get into the soil and groundwater.)

12. Is the property or an adjacent property on record in any of the automated government
data bases?

(As more government databases become available on the World Wide Web or other
accessible forms, more and more properties may be flagged in this manner. You can run
this check yourself or have an environmental consultant engineer or lawyer do it for you.)

13. Are any properties on the following government environmental action databases
within the specified distances from the site?

o NPL (National Priorities List or Superfund Sites) -- 1 mile

o CERCLIS List (EPA site investigation list) -- 0.25 mile
o RCRIS TSD Facilities (licensed hazardous waste facilities) -- 0.25 mile

(This type of question can reflect lender concern about property stigma and/or concern
that contamination from nearby properties will migrate onto your property.)

The techniques used to manage contamination depend, in large part, on the type of
pollution present (how dangerous it is and how difficult it is to treat) and whether or not
the pollution affects the groundwater. Essentially, however, there are four basic ways to
deal with contamination. One method is to remove the contaminated soil and/or
groundwater to a hazardous waste facility for storage or treatment. The cost depends on
the amount and type of pollution and the proximity of a facility approved to receive that
particular kind of contaminant.

A second approach is to treat the contamination at the site, using a variety of techniques.
Some examples include bioremediation (using microorganisms to degrade
contaminants), vitrification (heating contaminated soil to convert contaminated materials
to inert products), soil washing (excavating and washing contaminants from soil), and soil
vapor extraction (removing volatile organic pollutants by using vapor extraction wells). If
groundwater at a site is affected, a pumping and treatment system often must be installed
that requires regular testing and maintenance.

A third approach, used with increasing frequency, involves various "engineering controls"
to isolate and contain the pollution such as installing subsurface liners and paving over
contaminated areas. These techniques require monitoring to assure their effectiveness.
The fourth and least troublesome method is "passive remediation" which relies on natural
processes to clean the contaminants. This approach is applicable only at sites where the
contaminants (a) will biodegrade, (b) will not migrate, and © have relatively insignificant
impacts on human health and the environment. Again, the sites require continued
monitoring to assure that these conditions are being met.

3.3 The Impact of Environmental Regulators on Cleanup

Engineering controls and passive remediation are the least expensive methods of
contamination management. Using them, however, may not always be allowed because
of the hazards the contamination poses, especially if it is migrating or if people are likely
to come in contact with it (as might be the case in parks or housing areas). Polluted
groundwater is taken very seriously by regulatory agencies, especially if it poses an
immediate threat to drinking water.

Federal CERCLA regulations offer general guidance, but most states have developed
their own standards and principles for deciding when a redeveloper must clean a site and
how thorough the cleanup must be. Some cities have their own standards, especially
when they feel the state is not strict enough. Thus, you need to investigate your state and
local standards; this is one of the reasons you may want to spend money on
environmental consultants early in your project planning - they may lower your costs in
complying with the relevant regulations. While state laws, policies and programs vary a
great deal, there are two basic ways in which they can affect your cleanup requirements.

3.31 Oversight

As we noted, many states have Voluntary Cleanup Programs (VCPs) where oversight of
a cleanup may be voluntary, not required, under state law. VCPs (and other types of
brownfields programs) can be divided into three categories in terms of environmental
agency involvement with cleanups. In some states, agency personnel provide technical
guidance and oversight throughout the cleanup process. In other states, they rely on
environmental professionals who provide oversight and expertise throughout the
remediation and present evidence of the completed work to the state agency. In still other
states, environmental agency staff are involved only in the final review of a site to verify
completed work.

A decision to participate in a VCP involves consideration of certain tradeoffs. On the one

hand, you may have to wait for inspections. Also, you may have to pay agency personnel
by the hour for providing oversight (which means factoring in uncertain costs). On the
other hand, there may be major gains because, first, having a state cleanup review
makes lenders more comfortable, and thus more willing to support your project. Second,
you limit the risk that the state will order further cleanup in the future. Third, some
programs offer useful technical assistance. Finally, participation in the programs may
save you time waiting for a state certification of a cleanup such as a NFA letter; some
states have a very lengthy waiting period for inspections outside its VCP while signoffs
for those participating in the program are generally very prompt.

3.32 Intended Use and Institutional Controls

Some states allow a less conservative level of cleanup depending on the intended use of
a site. For example, if you plan to use a site for manufacturing, you will not necessarily be
held to the same standard as if you were building a shopping area or providing housing.

Where this is an option, the future consequences of your choice should be kept in mind.
Primarily, you may need to use "institutional controls," or legal/institutional mechanisms
used to ensure that the use to which the site is put is compatible with the level of cleanup
completed. The controls require deed restrictions that come in a variety of forms
designed to meet specific site needs. For example, they might specify that the property
only be used for industrial purposes, prevent excavating in contaminated areas, or
involve easements that allow inspectors to monitor the remaining contamination (which
could interfere with the use of your site). The controls trigger a review of the need for
cleanup if a user proposes to put the site to another use.

If you are in a state with such variable cleanup standards, the restrictions may affect your
choice between a lower-cost option of engineering and institutional controls and a more
thorough cleanup. An important element in your decisions is whether you plan to keep
the property or are redeveloping it for sale.

Chapter 4

Selecting and Using Consultants

With a small project where there is no reason to expect contamination, you may not need
to consider the expense of highly specialized consultants. When you operate on
brownfields, however, you may find not only that the specialists are necessary for your
project to get started, but that they actually save you money in the process. Moreover, in
many instances, lenders will require that you use specialists to assess the environmental
condition of your site. Here we review key points to consider when selecting
environmental engineers and lawyers.

4.1 Environmental Consultants and Engineers

These are the people who do the site assessments, determine if you face environmental
risks based on prior uses of the site, help determine what it will cost to address the
problems if any exist, and conduct the cleanup. Most of the time, they work for you, not
the bank. Banks, however, have to approve construction plans, and this gives them
power over your selection of a consultant and the instructions they follow.

Before you decide on a deal you may need engineers to help estimate what it will cost
to clean a site. This is especially true if there is no other party to take responsibility for
paying for a cleanup. You need the consultant to help you decide if a property is worth
pursuing, or how you may structure the deal to make it possible.

Your main concern in selecting environmental consultants is making sure that you don't
waste money on advisors your lenders will not accept. Banks with formal procedures for
dealing with potential contamination usually have lists of approved environmental site
assessment firms. If you use a firm that is not on a lender's list, the lender may require
that you pay for an additional assessment or pay to have the lender's assessors review
the site assessment you commissioned. So, be sure to obtain these lists from
prospective lenders before you hire anyone to work at your site.
One good method is to ask all the banks you think you might approach to send you their
lists of approved environmental firms and pick two or three firms that appear on all the
lists. Ask each firm for a Phase I proposal. This will tell you what they will do and how
much it will cost and will help you to select the best among them.

In some cases, banks will insist on contracting with site assessors directly and then
charge you for the service. If a bank with this requirement is among your potential
lenders, use the bank's environmental firm, but agree to pay for the site assessment only
if it is done by engineers you know other banks will also accept. If the first bank turns
down your loan, the site assessment is still your property and you can then use it in your
application to your next prospective lender without paying for another assessment.

Table 3 is designed to help you decide which engineers on the lender's list of approved
firms you want to have do the work. When the assessments are done, make sure you get
copies of all the engineers' work, and attend any meetings at which your consultants brief
your potential lender. Remember, you paid for the work, so you own it.

TABLE 3

Questions to Ask Environmental Consultants and Engineers

1. [if you have not obtained lists of environmental firms from lenders] Which banks have
you on their list of approved site assessors for conducting Phase I studies?

2. Would you prepare a proposal indicating the protocols you use to conduct a Phase I
study and the cost estimate of the study?

(You want to be sure that the consultant/engineer uses the ASTM protocol.)

3. How much experience have you had in doing site cleanups? When and where were
your most recent cleanup jobs? Please give me references.

(This question is important if you expect to proceed with a project even if it has
contamination problems. First, you may save money by having the cleanup done by the
firm that does the assessment. Second, the firm has a stronger incentive to do an
accurate and complete assessment if it knows it will have to deal with undiscovered
contamination in the event you ask for a cleanup. Third, the more experience the firm
has, the more likely it is to be up-to-date on alternative cleanup technologies. This could
save you cleanup costs and make your lender feel more comfortable.)

4. Do you subcontract with other companies to conduct cleanup work? [if yes] Please
provide experience and qualifications documentation for the subcontractors.

(Documentation on all subcontractors will make both lenders and regulators more
comfortable.)
4.2 Environmental Lawyers

For brownfield redevelopments where contamination is fairly certain, a lawyer who

specializes in environmental law may be essential. A real estate lawyer with whom you
have worked in the past may not be as useful when you need assistance with
environmental law and liability issues. Environmental lawyers can help with several
important aspects of a redevelopment project that can affect your investment risk and
returns and the willingness of the bank to support you:

Structuring the purchase deal. A lawyer is valuable for preparing a purchasing

arrangement that will limit your liability exposures such as the arrangements we
discussed in Chapter 2. This can be costly, but so is losing the deal because the bank
won't support you (or the seller can't afford the cleanup) without some special structuring
arrangement.

Determining seller-buyer responsibilities for contamination. Legal counsel can help

to prepare documents stipulating the seller's liability for pollution on the site. As we
discussed, some state environment departments will help prepare these contracts. Even
after a cleanup has been conducted, you may want to specify protection from liability for
contamination that was not discovered or adequately dealt with during the cleanup.

Negotiating with other potentially responsible parties. In some instance, you may
find it necessary to locate and negotiate cleanup costs with a party other than the seller.
In a worst case scenario, it may be necessary to take court action to pursue parties who
are legally responsible for cleanup costs.

Structuring loan collateral. In some instances, structuring collateral may be somewhat

complicated. For example, you may want to form discrete legal entities to bear the risks
of a brownfield redevelopment. There are a number of organizational structures you can
use to assure lenders of access to other collateral or to limit your legal liability. The
options that are available vary from state to state, but all will probably require that you
use the expertise of a legal specialist. Possible legal arrangements you may want to
investigate include:

o offering one or more of your other assets as collateral for a brownfield loan when
a lender rejects the use of the site as collateral (where the problem is to protect
the rest of your assets from claims by the lender).
o creating a new corporate entity (or limited liability company, in the states that
permit their use) to conduct the redevelopment of a brownfield site (where the
legal problem is the right, under certain conditions, to "pierce the corporate veil"
and pursue the owner's other assets if a limited liability firm has more debts than
assets).
o taking advantage of any public sector loan guarantees, liability protection or other
special provisions that may have been developed to provide incentives to
brownfield redevelopment (since any such provisions will involve contracts that
go beyond the loan and real estate purchase agreements with which you are
familiar).

To help you select a lawyer who will be useful in making your deal possible, you might
want to refer to the questions in Table 4.
 TABLE 4

Questions to ask Real Estate and Environmental Lawyers

1. Can your firm provide both real estate and related environmental law services?

(Large firms cost more per hour, but you may need a firm that can be both helping
structure your real estate deal and serve as your guide to environmental laws as they
relate to the responsibilities of a purchaser of real estate.)

2. With which financial institutions in the area have you dealt regularly as a representative
of buyers in real estate purchases?

(Some lawyers specialize in representing buyers, while others have experience

representing sellers or financial institutions. You want one that has experience working
for buyers. You also want one that is used to working with the financiers you expect to
approach, for several reasons: (a) you are better off if your lawyer can help you to
anticipate the demands of your lender; (b) any trust that has built up between your lender
and your lawyer benefits you; © you want to be able to use the same lawyer throughout
your search for funds, since it will cost you money for another attorney to learn about
your project.)

3. Show me some examples of the types of deals that you might structure to limit future
environmental cost risks for myself and my lender.

(There are many ways of structuring deals to limit liability and unexpected costs. A good
lawyer should be able to show you examples of how these arrangements work.)

Chapter 5

Selecting a Lender
This chapter deals with ways to find a lender who is willing to support your project. One
important piece of advice to note at the outset is to go first to a lender who knows you.
Many bankers say that they "loan to borrowers, not projects." So, if you have a good
history with a lender, approach that institution first. It is also important to recognize,
however, that factors having nothing to do with your creditworthiness or your project may
influence a lender's decision about your loan.
Factors that affect lenders' loan decisions include their internal policies and the regulatory
constraints under which their particular type of institution operates. There are many
potential lenders for real estate development projects and no two are exactly alike;
understanding the differences will make it easier to focus on the institutions most likely to
support inner-city redevelopment.

We review the differences among financiers here. Two tables are included in the chapter.
Table 5 offers considerations related to appropriate lender size and Table 6 provides a
list of critical questions to ask financiers to help you choose the one most suited to your
project.

5.1 Types of Lenders

5.11 Commercial Banks

These institutions are the best source of capital for brownfield redevelopment. They are
required to maintain diverse portfolios of investments and to put money back into the
communities that make deposits in them. Under one federal law, the Community
Reinvestment Act (CRA), banks must disclose their 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.

5.12 Insurance Companies

These companies are some of the largest players in the real estate lending game, along
with pension funds. The very size of the major firms, however, and the fact that they do
not have any regulatory requirements for community reinvestment or for spreading their
capital across projects, means that they are unlikely to be particularly useful for small
scale redevelopment projects. Big insurers want to buy into big deals. You may be lucky
enough to have some relatively small insurers based in your area. If so, they are worth
checking out. Few companies advertise their willingness to lend directly, but it is worth
asking.

5.13 Savings and Loans

These firms have been under close regulatory scrutiny as the result of the savings and
loan crisis. They may be ready and willing to support single family home purchases and
other residential projects, but they are generally very risk-averse. Thus, they are not your
best bet for a brownfield redevelopment.

5.14 Pension Funds and Bank Trust Departments

Both of these types of organizations manage other peoples' money. (That is, unlike a
commercial bank that lends out its own money, they make investment decisions for their
clients, whether pension fund members, or owners of funds put in trust in the bank.) The
managers of these funds and trusts are held to what has been called the "prudent man
rule," meaning that they are personally liable for losses resulting from taking risks that a
theoretically prudent person would not take. Since brownfields, by definition, involve
some risks that other real estate investments could avoid, projects on brownfields may be
seen as automatically violating this "prudence" principle.

5.2 Bank Size and Ownership

Loan size and bank size may have to be matched properly for you to find a supportive
lender. Because of the variation among brownfield projects and among lenders, it is
difficult to say whether your best bet for obtaining a loan lies with a small, community
bank or with a large, multi-billion dollar lender that operates in several states (and
perhaps, several countries).

Community, regional, and multinational scope reflect the range of operations of

lending institutions. Some banks in your community may be linked to larger entities as
parts of bank holding companies that own banks in a number of states or regions. In this
case, the practices of your local bank may be affected by the holding company's policies
on previously used sites. Note that it is not always possible to link an institution's scope
with the size of its assets. (That is, some community banks in large cities may have
greater assets than a regional bank.)

Table 5 provides a rough outline of considerations that you, as a developer of a smaller

inner-city project, might take into account in deciding whether to approach a small, local
bank or a larger lender.

TABLE 5

Factors to Consider in Selecting Lender Size

Small Lender (With Assets Under $100 Million)

Relative Advantages

 Focuses on smaller loans.

 Tends to loan in the local area.

Relative Disadvantages

 Maximum loan amount may be too small for some redevelopments.

 May have a rigid policy of rejecting any loan where contamination is
suspected and has not been cleaned.

Large Lender (With Assets of $100 Million or More)

Relative Advantages

 Tend to be more flexible and open to loaning on environmentally suspect

properties.
 Have the expertise to help borrowers deal with environmental problems.

Relative Disadvantages
  Minimum threshold for a loan may be too large for small redevelopment
projects.
 May be less willing to invest in local commercial real estate projects
because they have more ways to earn money.
 Transaction costs (or costs to process a loan) may be higher due to
multiple oversight levels.

The advantages of smaller institutions include the facts that they are more likely to focus
their lending activity in the local area. In addition, they generally solicit very small loans,
which may be what you are seeking.

On the negative side, the size of loan you need may exceed the institution's maximum
loan amount. Many small banks do participate in consortiums or partnerships with other
banks that allow them to increase the size of the loans they offer. You usually will be
charged, however, for setting up this arrangement. In addition, smaller lenders are more
likely to avoid offering brownfield loans, largely because they lack the expertise
necessary to make educated estimates of the impact of contamination on particular
projects. Consequently, many of the smaller institutions adopt a firm policy of denying
loan applications for environmentally suspect properties unless they receive a document
testifying cleanliness from either a state environmental agency or a reputable
environmental consulting firm.

One important advantage of larger lenders is that many of the firms are more willing to
loan on brownfields because they have specialized environmental risk managers who
assess the viability of brownfield investments. This means that approaching a larger
lender may have two benefits: it can increase the odds of an approval and it offers you a
"free" second opinion on your contamination risks - the judgement of the lender's
specialists. Thus, if you know or are fairly certain that you have contamination on your
site, it may be advisable to deal with a large commercial bank.

On the negative side, some larger institutions may be ruled out entirely because they
have no small business division and do not offer small loans (which means, according to
one lender, less than $10 million). Other disadvantages include less willingness to offer
loans for local projects because the large institutions earn money in ways other than
lending (such as currency exchanges, fees for transferring funds internationally, and so
on.) Also, the larger the institution, the more it costs to process any loan because of the
many layers of oversight. (As they grow, it becomes more difficult for the banks to earn
money on small loans.)

As you can see, your decision as to what size of lender to approach largely depends on:
(a) the size of loan you are seeking and (b) how certain you are that the property is
contaminated. These two factors also are critical in determining the exact amount of the
loan you request. Most important from your point of view may be the threshold the lender
uses for expedited review of environmental conditions at a site: if your loan is below the
threshold, you may be able to avoid spending money on documenting that your site is
clean. We discuss this further in the following section.

5.3 Lender Policies: Loan Size and Environmental Assessments

As we noted in Chapter 3, most lenders require some type of environmental site

assessment for previously used property. The thoroughness of the assessments,
however, depends on the size of the loan and whether or not information disclosed about
a property sends up a "red flag" about possible contamination. The standard procedure is
to require a Phase I site assessment only for loans over a certain threshold, ranging from
$200,000 to $1,000,000. On loans below the cutoff, a Phase I may be required only for
sites known to have been used for purposes such as metal working businesses, dry
cleaners, industries using other toxic chemicals, or service stations. For small loans that
do not fall into the high-risk category, lenders use an environmental transaction screen.
Only if the screen produces a red flag does the lender move on to a Phase I assessment.

An important point here is, if you are certain your site is clean, it pays to know the
lender's cutoff level; you can arrange to borrow, say, $249,000 instead of $250,000 if the
lender has a $250,000 threshold for requiring a Phase I study.

5.4 A Cautionary Note

We want to point out here that, in both small lending institutions and in small business
divisions of large lenders, it is quite possible for small brownfield loans to be approved
with little attention paid to possible environmental problems. The transaction screen
process used for small, low-risk loans relies heavily on a visual site inspection (usually
conducted by a loan officer) and a customer questionnaire about the property. We have
heard of some banks (most very small) that, for a variety of reasons, will lend on almost
any project in their service area without environmental checks.

While you could use their money, remember that, as an owner, you are liable for
environmental cleanups and damage. Cutting corners on site assessments or cleanups
just because your lender allows it is not advisable. Because of your own liability
exposure, it is in your best interest to know if a property you own or are acquiring
has environmental problems. Also, keep in mind that there are possible legal
consequences to not telling the truth about all you know about a property during an
environmental transaction screen. Finally, be sure to keep copies of any documents you
submit to a lender including your statements about the environmental condition of the
site.

5.5 Other Factors Affecting Willingness to Offer Brownfield Loans

In addition to lender type and size, there are other factors that may affect a lender's
decision on your loan. For the most part, these factors will be invisible to you. One
primary reason why we include them here is to encourage you to try alternate lenders if
one should turn you down. Just because a bank - perhaps the one that knows you best -
does not accept your proposal does not mean there isn't another bank that will finance
your project.

5.51 Institutional Attitudes Toward Risks

Lenders vary in terms of the extent to which they are adverse or open to involvement with
the risks associated with used properties. This is essentially a matter of internal policy
established by those at the top of the corporation. Moreover, not all decisions are
rational. We know of one bank that lost considerable funds on a project involving a dry
cleaner. Now, even a clean bill of health from a Phase II assessment may not be enough
to get the bank to lend on land that once held such a business.

5.52 Home Office Location and Experience With Brownfield Lending

We all learn by doing. Those lending institutions that have experience in managing
potentially contaminated sites are most often more confident and willing to offer
brownfield loans. In Pittsburgh, for example, with a long industrial history, spills of
petroleum products (oils, solvents and so on) are not viewed by lenders as especially
problematic. In other cities without a 150 year history of heavy manufacturing, those
same spills could kill a deal.

An important point here is that a lender's home office location (often in a distant city) can
influence the attitudes of bankers in your local branch. The bank's senior environmental
risk specialists are generally located near that home office and they are the ones with the
knowledge the rest of the institution relies on for guidance on brownfield investments;
their perspectives shape your local loan committee's decision on your application. So, it is
worth finding out where the bank's headquarters are, and what experience it has had with
successful cleanups of brownfields.

5.53 The Lender's Need for Loans

The likelihood that a lender will approve your project may change over time. When the
institution is fully loaned out, and not "hungry" for new real estate investments, it will hold
all new projects to a higher standard than it will when it has uncommitted idle funds. If all
the institution's funds are in use, the lender must find cash or credit to lend to you - and
that costs the bank money. This is important, since a project no lender would back in
good times may have lenders competing to support in bad times. (Sometimes a tight real
estate market can hurt, not help, since you then have more competition for the funds
available for lending.)

5.54 Commitment to Locality: Pursuit of Community Reinvestment Act (CRA) Credits

The Community Reinvestment Act (CRA) provides banks with incentives for meeting the
credit needs of their entire communities. A strong emphasis of the CRA is to encourage
investment in low-to-moderate income neighborhoods (a prime location of brownfields).
Banks are rated according to their performance in offering loans in these communities.
Recent amendments to CRA have increased pressure on banks to make more loans in
lower income neighborhoods, and the criteria now award CRA credits specifically for
brownfields redevelopment.

A bank's poor CRA ratings can be embarrassing and expensive when it comes to local
campaigns to attract deposits (and deposits are what enables the bank to make loans
and profits on them). More important, the CRA ratings can affect bank profitability, since
regulators use those scores in decisions on approving bank actions such as new branch
openings. Since poor CRA ratings can have negative impacts on a bank, the competition
for financially sound projects in low-income neighborhoods has increased. This may act
in your favor; some banks may be more eager than others for investments in
neighborhoods that will give them CRA credits.

5.6 A Reminder

We would like to repeat here advice given in the introduction. That is, be cautious of
using the term "brownfield" when talking with a lender. Some bankers who do most of
their lending within large cities have told us they "never lend on brownfields." Of course,
they do lend on previously developed sites, but they were defining brownfields as
severely contaminated properties on which they would not lend. We end this chapter by
encouraging you to examine Table 6 for questions that will help you to select a lender.
 TABLE 6

Questions to Ask Potential Lenders

1. Do you have a minimum loan size for a project on previously used land that requires a:

o construction Loan?
o mortgage?
o small business loan for:
 a startup?
 an expansion?

(There is no sense wasting your time on a loan application if the institution does not
consider your type of project, given the lender's loan size priorities.)

2. Who should I talk with about a this type of loan?

(You want to deal with the right party at the bank for the type of loan you need. Also, right
loan officer may be aware of support available locally for small businesses.)

3. Have you offered other business loans for projects in or around (location of proposed
project)?

o (if no) Why not?

(This will help you determine if the property area is stigmatized in the eyes of the bank for
a variety of reasons - environmental, access to roads, crime and so on.)

4. Tell me about your procedures for processing loans on previously used properties.

o Where is the home office?

 (if they are far away) How actively is the home office or the holding
company involved in financing previously used properties in urban
areas?
o Do you have an environmental risk manager or specialist that makes decisions
about previously used properties?

5. Would you give me a list of your approved environmental consultants for site
assessments?

6. What is your loan amount cutoff for requiring a Phase I site assessment?

7. Can you give me a copy of the environmental transaction screen, buyer's affidavit or
whatever other forms you use for an expedited environmental review? What
environmental condition documentation is included in your Closing Requirements list?

8. At what stage of an application review would you involve any of the following
specialists and what will they cost me?
 o A property appraiser
o A Member of the Appraisal Institute (MAI) or a non-MAI appraiser
o A Phase I site assessor or engineer
 Am I to hire them, or will you hire them?
o Your own internal review of Phase I findings
 Will you share that review with me?
o A Phase II assessor/engineer
 Am I to hire them, or will you hire them?

(Your objective is to understand your loan application costs and the processes the lender
will use in reviewing the information you provide. If you have a choice of lenders, you
may as well start with the one who is likely to cost you the least, other things being
equal.)

9. My project has some numbers that may fall outside your normal project
reasonableness or bankability screens. How flexible are you in dealing with ... (pick the
ones that apply)?

o High site preparation costs, but below market acquisition cost?

o High site preparation costs, but lower total land requirements than suburban
standards?
o Other? [you can raise other exceptional characteristics]

(Lenders often reject projects that fall outside acceptable limits for land or site
preparation costs as a proportion of total project costs, or costs per acre for purchase
and site preparation, and so on. These criteria are based on the success patterns of past
bank investments; since a great deal of recent investment has been outside central city
areas and has avoided brownfields, your projects may not fit these standards. The more
rigid the bank is in assuring all projects fit these standards, the more likely it may be that
your loan will not be approved.)

Chapter 6

What To Do if Your Loan Proposal is Not Approved

By the First Lender YOU Approach

Our own research and other studies of small business access to capital have identified
an important problem. That is, owners of many small businesses give up looking for
traditional funding if their loan is rejected by the first lending firm they approach. The
evidence suggests that most of them could have found a willing lender if they had kept
looking.

As we emphasized in the last chapter, a loan application may be rejected for a wide
variety of reasons (some of which have little to do with the quality of the proposal). We
start this chapter with steps you can take to understand why the lender chose not to fund
YOUR project and then discuss the alternatives you have at this point. These options
range from simply turning to another lender with no change in YOUR plans, to reviewing
and modifying YOUR plans, to recognizing that the rejection has pointed to a flaw in
YOUR redevelopment plan that requires major restructuring.

You may think of YOUR options in terms of a "decision-tree." Figure 1 may be useful in
determining YOUR responses depending on the problems you identify with the loan
application.

6.1 Try to Find Out Why

YOUR first step is to meet with YOUR loan officer to obtain as much information as you
can about the lender's decision. The bank has every right to use private criteria and not
explain itself fully, but you still may be able to determine the general nature of the
problem that caused them to not offer the loan. For example, you may discover one or
more of the following:

o You did not budget in YOUR redevelopment plan for contamination found or very
likely to be present (in which case, review any environmental assessments that
were done, talk with an environmental consultant, and modify YOUR plans);
o There were no environmental problems, but there were concerns about financial
aspects of YOUR project proposal (that is, its "bankability"), and YOUR ability to
service the loan out of the proceeds of the business you planned (in which case,
you may need to review YOUR business plans and projections and assumptions
about YOUR projected cost and revenue streams);
o There were no environmental problems or concerns about the bankability of the
project, but the lender is generally unwilling to become involved in a small loan
when any environmental considerations are present. The bank may not admit
this, but you may be able to figure it out if all the explanations for rejecting the
proposal seem difficult to accept (in which case, you simply may need to go to a
bank more willing to make loans on environmentally suspect properties);
o The financial institution rejected the loan because of feared contamination,
without any proof of its presence (in which case, you can be fairly confident that
another bank, more willing to take the risks, will be supportive); and/or
o The lender was concerned about YOUR personal, institutional or business
indebtedness, credit history or other such problem (in which case, you will have
to address the issue of YOUR reputation as a borrower before pursuing an
alternative source of financing).

6.2 Try a Different Bank of the Same Type or Size

This is the tactic to take if there seem to be few problems with YOUR project plans.

o If the project is rejected because it involves too much risk, you may be able to
approach a similar bank which, because of its current lending exposures, can
accept more risk and back YOUR project.
o If the issue is fear of contamination that you are convinced is not present, look for
a lender that does expedited review for loans the size of yours.

There is no reason to rethink YOUR approach or package until you have strong evidence
there is a problem that is independent of the lender you approached.

6.3 Try a Different Type of Bank

Move on to a different type of lender if there seems to be a mismatch between YOUR
project and the objectives or interests of the type of institution you approached at first.

o If the problem is that YOUR loan is too small to attract the bank, go to a smaller
or more local institution, more used to small scale lending or to large institution
with a special small business lending program.
o If the issue is fear of unproven contamination, it may be because the lending
institution has too small a portfolio to accept the risks, in which case it may pay to
look for a larger lender, since the bigger banks may have higher thresholds for
expedited reviews and may more readily make loans the size of yours even if the
collateral is a brownfield;
o In areas with a great deal of contamination, many local financial institutions may
have accumulated so many projects with environmental problems that they can
not take on any new ones. In this case, you may be better off looking to an out-
of-town lender.

Again, you have no reason to doubt YOUR plans under these conditions, but you need to
shop YOUR loan a bit differently and approach different types of potential backers.

6.4 Take Another Look at YOUR Project and Redevelopment Plan

If lenders' responses suggest that there are risks or cost factors you have overlooked or
that you are overly optimistic about YOUR revenue projections, review YOUR plans.

o If the lender has identified problems with the financial aspects of YOUR project or
points out that you did not allow for likely contamination problems, then you may
be able to restructure the project, either providing more capital yourself,
conducting the cleanup before borrowing, restructuring the purchase, or altering
other aspects of YOUR business plan.
o Alternatively, the bank's finding may be a warning that you had a basic flaw in
YOUR plans. In this case, you should be grateful the institution protected you
from possible loss of YOUR investment capital.

6.5 In Summary

It would be inaccurate to say that there are no bad redevelopment plans and proposals.
But it is also true that there are good projects that do not go forward because of bad
matches with lenders.

We come back full circle to some of our earlier observations about developers and
lenders. When a developer sees a possible deal, runs the numbers and decides to go
ahead, risk is part of the calculation, and it is accepted. But a developer's risk and reward
structure is not the same as that of a bank. And, lenders themselves maintain different
risk postures depending on their loan portfolios, local and non-local investment
opportunities and a range of other factors.

There is no reason to assume YOUR project is "bad" because one (or more) lenders do
not approve a loan. Finding out why it was turned down gives you more information and
information is an asset. Rejections can improve projects, even if they appear insulting to
the loan applicant. It is up to you to use the information to restructure the project.

Additional information on the lender with whom you were dealing, other possible sources
of funds, and the "reasonableness" of the explanations for the lender's rejection may also
be useful in deciding what to do next. Some questions to consider are listed in Table 7.
Answers to the questions may help you target YOUR next lender and may be useful in
redesigning YOUR proposal to increase the chances of winning financial backing.

TABLE 7

Things to Consider If a Loan is Not Approved the First Time

1. What financial institution holds the mortgage on the current owner?

( A lender holding a loan backed by the property may be more willing to lend on it. If an
institution is already involved with the property, it is not likely to face new environmental
risks associated with backing YOUR plans; another institution may have concerns.)

2. Can you identify a financially viable prior or current owner of the property? Can you
obtain that party's support in pursuing a cleanup and redevelopment?

(The potential loss to the owner if the site is not cleaned up and redeveloped may make
the party willing to provide financial backing to YOUR plans if the backing reduces the
likelihood of future enforcement actions or liability claims. Even if the party will not back
you financially, the bank may feel more comfortable about its risk, given the joint and
several liability provisions of CERCLA.)

3. Can you restructure YOUR purchase and redevelopment plans so as to control YOUR
own and YOUR lender's potential liabilities? Could you, perhaps, buy an option on a site
to get access for the needed environmental tests? Would a phased process, starting with
a construction loan and then a longer term mortgage be more appealing to YOUR
lender?

(These possibilities may be negotiated with the lender that rejected YOUR loan request,
or you may have to move on to another institution. The appropriate restructuring depends
a great deal on the details of YOUR project, so you will have be imaginative. Again, a
lawyer who specializes in these situations is useful.)

4. Could you use other collateral to cover cleanup expenses and the early redevelopment
stages of YOUR project, avoiding the issue of whether the property itself has a collateral
value high enough to satisfy potential lenders?

(This is really a different form of restructuring - avoiding reliance on collateral that has
uncertain value. An alternative to this approach would be to put up the cost of the
cleanup and initial redevelopment yourself, if you can, only borrowing to complete
redevelopment or to run YOUR own business on the site.

5. Is the problem off-site, rather than with the property you want to redevelop? If so, what
can you do to accelerate the off-site assessments for pollution or cleanups needed to
protect YOUR site?
(You may want to negotiate with the responsible off-site party. Also, ask YOUR
environmental consultants about available legal protections such as assurances that
environmental regulators will not pursue you for groundwater contamination caused by a
neighbor.)

6. Should you involve environmental engineers or lawyers prior to YOUR next approach
to a lender OR involve different consultants? Does it appear that lack of experts involved
in the loan application lowered the attractiveness of the proposal? Is the bank suspicious
of the people you did involve? Does the lender suspect that you (or those who did the site
assessments) are hiding possible contamination?

(Some financial institutions may judge YOUR professionalism and understanding of the
issues associated with possible contamination on the basis of specialists you have
involved. It may be necessary to tailor YOUR use of expertise to the preferences of the
lender you will approach next.)

7. Is YOUR area heavily contaminated? Is it possible that the banks active in YOUR
lending in the area are overloaded with environmentally problematic loans? Is it possible
that the banks have taken on too many inner city loans?

(This sort of problem, which might mean that most of YOUR local banks are
overcommitted to inner-city redevelopment loans in their portfolios, is most likely to arise
in areas with populations under 100,000. What you are trying to establish by checking
out this information is if you might be more successful going to the nearest big city with
major banking institutions, possibly even across state lines.)

Concluding Remarks:

Future Prospects for Redevelopment Projects

As we have noted in this sourcebook, considerable efforts are underway to facilitate the
reuse of previously used properties. We would like to close by emphasizing the need to
keep informed about the many policies and programs that are emerging - the changes
are happening rapidly. (For example, 33 of the 37 state voluntary cleanup and
brownfields initiative programs in existence in 1996 were created within the past five-
years.) Each year, federal, state and local governments are passing legislation and
funding programs to facilitate revitalization efforts. (In 1995/1996 alone, 22 legislative
proposals were introduced into the House and Senate that would promote brownfields
redevelopment.) The point is, a financial resource or legal facilitator that was not
available to you last year, may be available now.

At present, representatives of both the private and public sectors are discussing ways to
increase the funds available to redevelopers, limit their liability concerns, and decrease
project delays caused by contamination. Examples of proposals they are considering
include:
 o using the tax code to promote reuse projects, for example, by permitting owners
to expense cleanup costs and extending the use of environmental remediation
tax credits and tax abatements to offset cleanup costs.
o increasing the availability of low-interest loans by establishing revolving loan
funds, floating tax-exempt redevelopment bonds, and so on.
o offering grants for site assessments and cleanups.
o restructuring the eligibility requirements of traditional sources of economic
development funds (such as Community Development Block Grants) to target
brownfields.
o streamlining the regulatory process to reduce the costs and delays of
redevelopment by eliminating duplicate permit requirements and clarifying
confusions about applicable laws.
o permitting greater use of institutional controls to allow more leeway in the level of
cleanup that must be achieved at polluted sites.
o expanding the conditions under which states can issue various assurances such
as Prospective Purchaser Agreements and Covenants Not to Sue.
o increasing the availability of environmental insurance by providing public
subsidies for the policies.

Throughout the country, both small and large developers are finding that it pays to
redevelop brownfields. Changes such as these will make the investments even more
attractive. They may enable you to move forward on a project you previously had rejected
for financing. It may pay for you to stay on top of the changes - or to regularly consult with
YOUR financiers about changes in their lending standards and criteria.

Information about selected information resources currently available are provided in the
Appendix that follows. Be sure to contact the economic development and environmental
organizations that could affect YOUR project. Only then will you have a full picture of the
possible risks, returns, and the allies you have in reclaiming and reusing urban
properties.