financing small business

8/14/2019 Financing Small Business

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FINANCING SMALL-SCALE URBAN REDEVELOPMENT PROJECTS

A Sourcebook for Borrowers ReusingEnvironmentally Suspect Sites

July, 1997The E. P. Systems Group, Inc.

P.O. Box 2736Louisville, 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 usedproperties, conducting interviews with developers, lenders, environmental engineers and lawyers,

environmental agency representatives, staff from economic development organizations andothers. 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 fromour previous work and our reviews of a variety of writings on potentially contaminated sites withinformation from interviews conducted specifically for this sourcebook. These included additionaldiscussions with small developers, appraisers, and insurers. In particular, we spent many hoursinterviewing over thirty loan officers, vice presidents, and environmental risk managers fromlending institutions.

This sourcebook would not have been possible without the willingness of these parties to talk withus, explaining their concerns and policies and even sharing proprietary information. We havetaken great care not to identify specific information from any individuals or organizations, but oweour 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 theorganizations 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-buildpartners, 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. Inparticular, 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 HarrietTregoning, the Director of UEDD, for her support of the project. Others at EPA who providedinvaluable input include Elisabeth Freed and Bruce Pumphrey from the Office of Enforcement andCompliance, Sven-Erik Kaiser from the Office of Solid Waste and Emergency Response, andSuzanne 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 thecompletion of this project.


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While we extend our appreciation to interviewees, EPA reviewers, and Ken, we also mustabsolve 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 Sites1.11 Discounted Property Price1.12 Preparation costs1.13 Favorable Zoning/Land Use Provisions1.2 Resources and Support for Brownfield Redevelopment1.21 Special Programs and Priorities Associated with Your Site Location1.22 Subsidized Property Prices1.23 Voluntary Cleanup Programs and Support for Environmental Site Assessments andCleanups1.24 Other Financing Tools

2. Minimizing the Risks of Brownfield Redevelopment

2.1 The Risks of Potential Contamination2.11 Legal Liability Risks of Brownfield Property Owners2.12 Concerns Lenders Have About Brownfields2.2 Federal Policies Offering Liability Protection2.3 State Policies and Programs Offering Liability Protection2.31 Formal Agreements Dividing Responsibility for Contamination2.32 Covenants Not To Sue2.33 No Further Action Letters2.34 Intervention in the Chain of Ownership2.4 Structuring the Purchase to Lessen Risk Exposure2.41 Indemnification2.42 Purchase Options2.43 Conditional Agreements to Lease2.44 Subdividing2.45 Joint Ventures

2.5 Compensating Risk to Lenders2.51 Loan to Value Ratio2.52 Sources of Collateral2.53 Budgeting Cleanup Costs and Overruns2.6 Possible Availability of Environmental Insurance2.61 Cleanup Cost Overrun2.62 Cleanup Liability and Past Pollution Liability

3. Environmental Site Assessments and Cleanup Alternatives


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3.1 Types of Environmental Site Assessments3.2 Pollution Management Methods3.3 The Impact of Environmental Regulators on Cleanup3.31 Oversight3.32 Intended Use and Institutional Controls

4. Selecting and Using Consultants

4.1 Environmental Consultants and Engineers4.2 Environmental Lawyers

5. Selecting a Lender

5.1 Types of Lenders5.11 Commercial Banks5.12 Insurance Companies5.13 Savings and Loans5.14 Pension Funds and Bank Trust Departments5.2 Bank Size and Ownership5.3 Lender Policies: Loan Size and Environmental Assessments5.4 A Cautionary Note5.5 Other Factors Affecting Willingness to Offer Brownfield Loans5.51 Institutional Attitudes Toward Risks5.52 Home Office Location and Experience With Brownfield Lending5.53 The Lender's Need for Loans5.54 Commitment to Locality: Pursuit of Community Reinvestment Act (CRA) Credits5.6 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 Why6.2 Try a Different Bank of the Same Type or Size6.3 Try a Different Type of Bank6.4 Take Another Look at Your Project and Redevelopment Plan6.5 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


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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 inorder to redevelop small residential, commercial, or industrial projects on previously usedproperties. We have in mind the company wanting to invest perhaps fifty thousand to two or threemillion dollars in order to expand into neighboring properties, reclaim properties for clientsneeding 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 suspectedcontamination when doing urban "infill" or development of underutilized or vacant propertieswithin central cities.

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

We must insert a cautionary note at the outset, however. You should know that, while we use theword 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 andsevere 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 termhas 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 andpotential 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 somedevelopers, we concentrate on financing sources (such as commercial banks) that are mostcommonly approached by small-scale investors. Also, it is not our intention to address issuescommon 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 withused properties where the suspicion of contamination might arise. The unique aspects of theseprojects include the following:

While brownfields entail certain risks, they may also yield exceptional profits becauseothers lack the knowledge to deal with these risks;

Lenders have special concerns about possible pollution problems and often requireadditional assurances before they loan on the properties;


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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 reuseprojects; putting sites that were idle or underutilized to productive use generates taxes andemployment opportunities that cities desperately need.

As public officials have accelerated their efforts to promote reuse projects, developersincreasingly have come to appreciate the opportunities for profits that exist in redevelopingcentral 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 tounderstand basic elements of that knowledge. Our overall theme is that an investor who canmanage 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 investmentrelative to a greenfield development, including discounted property prices, reduced preparationcosts, and favorable zoning. We then turn to a discussion of sources of support that may beavailable 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 ableto purchase the sites at a below-market price. Redevelopment on abandoned sites may beespecially promising since the property may be obtained for minimal cost. Many times, suspicionof contamination on the part of sellers causes them to lower their asking price for properties eventhough they do not have a good estimate of cleanup costs. In some cases, it turns out that theproperty suspected of contamination requires no cleanup at all.

If many players in the real estate market dismiss urban infill and brownfield redevelopment effortsas poor investments without checking into them, your competition is down. The lower thecompetition, the easier it is to make profits. Even when more developers see the incomeprospects 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 completethan 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 sitepreparation costs: streets, sidewalks, lighting, and utility hookups already in place. Moreover, it isthe off-site infrastructure that may make the most difference in the land costs associated with aproject: the storm sewers and drainage available. Depending on zoning restrictions, it is notuncommon for regulations to require that 50 percent or more of site acreage be left undevelopedin order to handle runoff from areas with buildings or pavement. This limit on land usage,


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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 istrue 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 facilityfor a small fraction of the costs of a new building, even if some ground contamination has to beaddressed 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 withprecisely the zoning you want , so you will not face delays and uncertainty about zoningcommission hearings and their decisions. City land use requirements and building codesgenerally have set-back requirements and other standards, leaving little to negotiation. Insuburban areas, local governments generally impose requirements about percentages of a sitethat must remain planted and green, and demand prior approvals (sometimes from both privateand 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 generateuncertainty about timing and final requirements for suburban projects that may be moretroublesome 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 accompanymany greenfield developments may, in large part, be avoided on infill projects. The higher costsassociated 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 infrastructuresupport.

1.2 Resources and Support for Brownfield Redevelopment

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

In addition, EPA has established a Brownfields Internet Homepage you can access thatdistributes information useful to redevelopers and has assigned designated "BrownfieldsCoordinators" in each EPA region to assist with brownfield projects. (Information for accessingthe 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 oninnovative ways to assist brownfield redevelopment. Thus, you may have support available toyou, not only from environmental agencies, but also from state and local economic developmentorganizations that want to promote more urban redevelopment. Most state and local governmentshave traditionally used various financial assistance and incentive programs to promote economicdevelopment. 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 tofocus specifically on infill development.


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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 moveyour 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 manycases, a certain location means access to assistance with a redevelopment effort. You may beable to find sites that are close to commercial or industrial centers that also allow you to benefitfrom special programs established for selected areas of a city.

Both federal and state economic development and urban revitalization programs have designatedpriority areas in cities. The Empowerment Zones/Enterprise Communities (EZ/EC) program of theClinton Administration was created to channel resources and attention to some of the poorest andmost 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 sitedevelopment review by planning and oversight agencies. More importantly, being in one of theseareas 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 toefforts to address the fact that the poor and, especially, minorities tend to be exposed tocontamination 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 exceptionalenvironmental problems, it is important to recognize that, in redeveloping the site, you areproviding a public service at the same time you are pursuing a profit. The public good you aredoing (especially with community support) may well make it easier to deal with regulators andobtain 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 economicregeneration, often gathering small parcels together to form larger sites that would attract newbusinesses.

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 managecontamination if it exists.

1.23 Voluntary Cleanup Programs and Support for Environmental Site Assessments andCleanups

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 astate environmental agency to prepare a site for redevelopment. While the majority of these


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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 fundingenvironmental site assessments, cleanups, or both. (Some states, counties, and municipalitiesalso 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 theattractiveness 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 specialcommunity-based lender, you should investigate to see what support they can offer. A CDB is afinancial institution, typically a full-service commercial bank, that is chartered especially to provideretail banking services in a specified geographic community. They are established to promoteinvestment in the area and thus provide advice as well as make loans. Because they lend with asharp 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 youcan 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 taxliabilities 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 certainrequirements.

These sources of support are not available everywhere and meeting the eligibility requirementscan be difficult and time-consuming. And, as we noted, there is a great deal of competition for thefunds. 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 usefulinformation. You can determine what assistance is available by contacting local economicdevelopment 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 taketo protect yourself including taking advantage of government programs and policies andstructuring deals to reduce liability exposure. This is followed by a discussion of ways tocompensate risk to lenders. We end with an overview of environmental insurance policies that


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might be available. One underlying message in the chapter is that environmental lawyers andengineering consultants can be most useful. Suggestions for selecting these consultants areprovided 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, metalplating shops, and the like. They all could be heavily contaminated, but many are found to befairly clean when they are tested. In addition, most cases of pollution can be cleaned with minimalexpenditure; many times, the cleanup costs can be borne by the current or past owners and neednot be paid by the redeveloper.

The federal law that is most relevant to brownfield redevelopment is the 1980 ComprehensiveEnvironmental 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 administersCERCLA, does not become involved with the majority of small-scale brownfield projects. You aremuch 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, provideinformation about the types of state and local laws, programs, and policies that may be availableto 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 lawimposes "strict, joint and several liability" for past pollution on all parties in a property's "chainof title." This chain includes all the previous and current owners and users of a property after thepollution 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 notcreate 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 PotentiallyResponsible Party (PRP) exists. It may be difficult to determine each party's contributionto the pollution. In these situations, the courts have held that an owner or operator maybe 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 claimthis 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, theyconducted all appropriate inquiry into historical operations on the property that was consistentwith "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 hashigh potential, take some of the money you would save on the purchase and use the fundsto get a thorough site assessment . You may still buy, but then you will be complying with duediligence requirements. If you decide to back out because of the environmental problems, thecost of the assessment will have provided cheap insurance against the losses possible under


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CERCLA liability. (Think about the decision much as you might consider buying a used car: is itworth 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 thatlenders 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 rulingscaused 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 detailedguidance on ways in which they can be involved in a borrower's activities without participating inmanagement. (Essentially, they must displace the borrower in managing the business to losetheir liability protection.) The law also specifies actions lenders can take to avoid liability if theyforeclose; lenders can engage in a wide range of post-foreclosure activities and still be protectedfrom 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 becauselenders 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 aborrower's ability to do so may be jeopardized if unexpected and expensive cleanupcosts should occur;

Lenders fear that if they do have to foreclose, environmental problems might lower thevalue of their collateral;

Financiers may still be liable if their own behavior extends beyond the actions covered bythe 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. Herewe turn to a discussion of government-sponsored methods of protecting yourself from liabilitiesassociated with contamination.

2.2 Federal Policies Offering Liability Protection

An important component of EPA's brownfields effort entails taking steps to assure prospectivepurchasers, lenders, and property owners that, under certain conditions, they do not need to beconcerned with federal enforcement actions under CERCLA. Over the last two years, the Agencyhas 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 whichpeople may be exposed to contamination is a consideration in determining the nature andthe expense of a cleanup.)


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expanded the circumstances under which the Agency will enter into "ProspectivePurchaser Agreements," involving "Covenants Not to Sue" for contamination that existedbefore a landowner purchased a property.

clarified how the EPA will interpret CERCLA provisions, addressing lenders andinvoluntary 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 takefederal 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 andtherefore may be ready for development without extensive cleanup.

Some of these policies are meant for sites where there is an active federal enforcement interestFor example, Prospective Purchaser Agreements are negotiated upon request. To be eligible, anEPA action on the property must have been taken or be anticipated and the redevelopment musthave 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'spolicies are meant for the more complicated cases. Furthermore, the federal guidelines tend toserve as models for state policies and programs, which are the most relevant to smaller and lesscomplicated 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 voluntarycleanup program where EPA has entered a "Memoranda of Agreement" (MOAs) with a stateenvironmental agency. These MOAs minimize the potential for duplication of effort. The MOAalso 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 exceptunder limited circumstances such as when the Agency determines that a site poses an imminentand 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 thestate. In this section we provide an overview of typical forms of liability relief. Taking fulladvantage of them makes good business sense; ignoring them may save you time, but cost youmoney.

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 arrangethese contracts with the help of your lawyer, state personnel can offer expertise in framing theagreements. States that have the programs administer them differently. For example, somecharge 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 agreementsinvolving both buyers and sellers, or may be arranged between buyers and the state alone. They


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offer state assurance that, in return for meeting specified standards for cleanup, the state will notsue for further cleanup. (In some cases, the Covenant is subject to reexamination if newinformation about contamination is found.) The requirements for demonstrating a completedcleanup can vary significantly from state to state and can involve different costs: some states askonly that the owner conduct the cleanup recommended by environmental engineeringprofessionals 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 hasbeen conducted. A No Further Action (NFA) letter indicates that the state regulatory agency hasdetermined 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 areopener clause. Its value is thus dependent on the language regarding reopeners; some stateshave 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, definesthe property as a very low priority and thus lessens the likelihood of future government actions atthe site. A NFA letter thus can make it far easier to get a lender to support your project. In fact, insome 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-statepublic agency (such as a county, municipality, landbank, or redevelopment authority) in thecleanup process and chain of title. Some states have laws that permit a public entity to facilitate acleanup 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 fromliability. 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 instate courts as the result of joint and several liability. In effect, the short period of publicownership 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 differentutility to redevelopers. Table 1 offers questions to ask environmental agency personnel. Thequestions will help you determine what the policies and programs in your area can offer. Keep inmind that liability assurances may make it easier to obtain a loan and may affect the terms of theloan 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 theprogram.


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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 thestate 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 thepollution was created or afterwards potentially can be held responsible for environmental damageand 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 afinancially viable previous owner with whom you can negotiate responsibility for pastcontamination. Having another party available to absorb cleanup costs will benefit you andprovide 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 theseller to develop a mutually agreeable plan. A legal expert knowledgeable of both real estate andenvironmental law can be invaluable in drafting the agreements.

2.41 Indemnification


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A purchase of a polluted site can contain language stating that the buyer is indemnified by theseller from responsibility for environmental cleanup. Many real estate transactions containlanguage through which the parties can minimize their potential liability, and special provisionscan be developed to protect buyers (and subsequent owners of a site) from possible lawsuitsagainst 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 toconduct a cleanup. In these situations, you hold the right to purchase the property, but do nottake title until the problems are fixed. If the seller doesn't finish the cleanup by your deadline, youcan abandon the option at a minimal cost. Note also that one approach is to share the cleanupcosts 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 beencleaned; 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 acontaminated section of the property. You can then stagger the closing dates so you onlypurchase the portion of the site that was polluted after the seller completes the cleanup. In themeantime, you can redevelop the rest of the land. Not only can you start your project; you canprovide 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 thecleanup 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 thiscase, 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) tobe willing to join you in some sort of joint venture with both of you as stockholders. The seller mayagree 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 themotivation of sellers to clean is strengthened by the fact that they share in the financial returnsfrom 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 supportfrom 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 toliability concerns. Financiers, however, still need information about the environmental condition of


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your site. A loan application is evaluated against a number of different risks; two are central totheir 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 theborrower;

Collateral risk , the possibility that the lender will not recoup the value of the loan fromsale 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 personallyinvested, could be sacrificed to make cash available to service the loan. Some minimum equityparticipation 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. Thisfact means that, if you have limited cash to commit, it is easier to get started on a small projectthan a major effort.

Even in the unlikely case that you provide more than half the cost of a project, however, you maynot be able to get the funds you need, simply because the deal involves a loan-to-value ratio thatis 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 againstcollateral 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 valuethat 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 theywant to redevelop. For reasons given above, however, the value of this collateral may not beenough 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 morecash yourself or;

Provide other collateral, including the built-up value of your holdings in other real estateor 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 beyondthe 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 andpromising. If you do need to conduct a cleanup, the fine line you walk entails making adequateestimates of the costs without exaggerating them. Good project management allows for costoverruns. On brownfield projects that do have contamination, it is necessary to budget for


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surprises. They do sometimes arise -- but, then again, so do problems of damaged water linesand 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 environmentalconsultant. 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 decentestimates that help you to quantify your plans. Another option that might be available is anenvironmental insurance policy.

2.6 Possible Availability of Environmental Insurance

The strongest evidence that brownfield redevelopment is becoming a mainstream activity is thedevelopment 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 couldsubstantially reduce the cost of this protection. If they are available in your price range, thepolicies are valuable to you and your lender; they reduce estimates of the risks financiers face inbrownfield lending. Ask your city's local economic development office about this option. Here wediscuss 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 includeremoving or containing past contamination. Obviously, cleanup cost overruns could jeopardizethe financial stability of a project, creating loan risk. But an incomplete cleanup, stopped becausea project had to be abandoned due to excess costs, would also damage the value of the site ascollateral, 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; adeductible percentage of projected cleanup cost is included, so some overrun costs will have tobe absorbed by a developer. After this, as much as 20 times the original cost estimate may beprovided 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 damagedone by accidents during efforts to clean up a site. Past pollution insurance does not deal withyour actions, but helps cover you against claims under the joint and several liability schemeapplied under CERCLA. In both cases, the value of the policies lies more in protection fromlawsuits filed by "third parties" (neighbors, workers, and the like) than from environmentalregulators, 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 beexamined 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 obtainan assurance that protects you such as a state approval of cleanup.

Renewal availability and terms . Any guarantees you can get on costs and renewalavailability are important if you will need coverage beyond five years - and you will needsome coverage if your lender wants policies in place for the entire term of a typicalmortgage.


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Coverage provided for "successor" owners . Some policies provide coverage for future owners of a property while other policies do not. Lenders prefer that subsequentowners be included primarily because, if they do have to foreclose, the coverage willfacilitate selling the property.

Chapter 3

Environmental Site Assessments and Cleanup Alternatives

Nearly all lending institutions routinely require environmental assessments on previously usedsites. In this chapter, we provide an overview of the types of assessments that are commonlyused. 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 itwill 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 somecontamination on the site? " The assessments do not involve digging or testing. Rather, they entailresearch 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 onsite 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 onthe history of a site, a Phase I usually costs from $2,000 to $5,000 and takes one to three weeksto conduct. The assessment will either give the site a clean bill of health or indicate that there issome risk of past contamination. Establishing the existence and extent of the problem requires aPhase II study.

Phase II assessments involve tests to verify the presence of contamination and to answer thequestion, " how much contamination is there on the site? " The study entails water tests and soilborings, followed by laboratory tests on the samples. (The Phase I study, in most cases, willpinpoint a section of a property where a risk might exist, so the borings are concentrated in theareas indicated by earlier research; this can save money on the Phase II.) Phase II assessmentstake about two to eight weeks to complete. Because of the great variation among sites, making aballpark estimate of costs for the tests is difficult. They generally run from $5,000 to $15,000, butcan more expensive, especially if there are contaminants in the groundwater under the site. Notethat finding some contamination does not necessarily mean that you will need a cleanup; the levelof pollution may be so low that it can be left in place. If a cleanup is needed, in many cases it willbe obvious (for example, removing drums left on the property). In some cases, additional, PhaseIII 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-sitetesting to determine if the contaminants have spread and if there is a risk that they have pollutedother properties. The assessments take about three to ten weeks to conduct. The costs usuallyexceed $7,000, and, again, the expense can be much higher depending on the condition of thesite.


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The standard procedure among most lenders is to require a Phase I site assessment for loansover a certain threshold, generally ranging from $200,000 to $1,000,000. On loans below thecutoff, a Phase I may be required only for sites known to have been used for certain purposessuch as metal working businesses, dry cleaners, industries using other toxic chemicals, servicestations, 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 inspectionand a customer questionnaire about the property. Only if the screen produces a red flag does thelender proceed to a Phase I assessment.

Table 2 offers examples of typical questions used in a transaction screen, most of which comefrom the ASTM form; we have selected key items, combining some of them to make it easier touse. 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 andmoney. There are almost always options, and any qualified engineer will know the differentchoices. 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 environmentalagency 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 hasdeveloped tremendously. Details of the many innovative methods for managing pollutants arebeyond 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 industrialor 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:


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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 storagetanks 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 onthe 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, thesolution may or may not satisfy current standards for adequate cleanups. The morerecent 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 wastehaving 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 indicatethey 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?


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(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 whatis the extent of paint peeling?

(Some question along this line is essential for residential properties, since it relates tolead 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 governmentdata 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 runthis check yourself or have an environmental consultant engineer or lawyer do it for you.)

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

o NPL (National Priorities List or Superfund Sites) -- 1 mileo CERCLIS List (EPA site investigation list) -- 0.25 mileo RCRIS TSD Facilities (licensed hazardous waste facilities) -- 0.25 mile

(This type of question can reflect lender concern about property stigma and/or concernthat 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 notthe pollution affects the groundwater. Essentially, however, there are four basic ways todeal 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 onthe amount and type of pollution and the proximity of a facility approved to receive thatparticular 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 materialsto inert products), soil washing (excavating and washing contaminants from soil), and soilvapor 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 installedthat 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


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processes to clean the contaminants. This approach is applicable only at sites where thecontaminants (a) will biodegrade, (b) will not migrate, and have relatively insignificantimpacts on human health and the environment. Again, the sites require continuedmonitoring 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 becauseof the hazards the contamination poses, especially if it is migrating or if people are likelyto come in contact with it (as might be the case in parks or housing areas). Pollutedgroundwater is taken very seriously by regulatory agencies, especially if it poses animmediate threat to drinking water.

Federal CERCLA regulations offer general guidance, but most states have developedtheir own standards and principles for deciding when a redeveloper must clean a site andhow thorough the cleanup must be. Some cities have their own standards, especiallywhen they feel the state is not strict enough. Thus, you need to investigate your state andlocal 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 incomplying with the relevant regulations. While state laws, policies and programs vary agreat 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 environmentalagency involvement with cleanups. In some states, agency personnel provide technicalguidance and oversight throughout the cleanup process. In other states, they rely onenvironmental professionals who provide oversight and expertise throughout theremediation 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 verifycompleted work.

A decision to participate in a VCP involves consideration of certain tradeoffs. On the onehand, you may have to wait for inspections. Also, you may have to pay agency personnelby the hour for providing oversight (which means factoring in uncertain costs). On theother hand, there may be major gains because, first, having a state cleanup reviewmakes 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, someprograms offer useful technical assistance. Finally, participation in the programs maysave you time waiting for a state certification of a cleanup such as a NFA letter; somestates have a very lengthy waiting period for inspections outside its VCP while signoffsfor 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 beheld 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


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used to ensure that the use to which the site is put is compatible with the level of cleanupcompleted. The controls require deed restrictions that come in a variety of formsdesigned to meet specific site needs. For example, they might specify that the propertyonly be used for industrial purposes, prevent excavating in contaminated areas, or involve easements that allow inspectors to monitor the remaining contamination (whichcould 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 morethorough cleanup. An important element in your decisions is whether you plan to keepthe property or are redeveloping it for sale.

Chapter 4Selecting and Using Consultants

With a small project where there is no reason to expect contamination, you may not needto consider the expense of highly specialized consultants. When you operate onbrownfields, 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, inmany instances, lenders will require that you use specialists to assess the environmentalcondition of your site. Here we review key points to consider when selectingenvironmental engineers and lawyers.

4.1 Environmental Consultants and Engineers

These are the people who do the site assessments, determine if you face environmentalrisks based on prior uses of the site, help determine what it will cost to address theproblems if any exist, and conduct the cleanup. Most of the time, they work for you, notthe bank. Banks, however, have to approve construction plans, and this gives thempower 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 costto 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 worthpursuing, or how you may structure the deal to make it possible.

Your main concern in selecting environmental consultants is making sure that you don'twaste money on advisors your lenders will not accept. Banks with formal procedures for dealing with potential contamination usually have lists of approved environmental siteassessment firms. If you use a firm that is not on a lender's list, the lender may requirethat you pay for an additional assessment or pay to have the lender's assessors reviewthe site assessment you commissioned. So, be sure to obtain these lists from

prospective lenders before you hire anyone to work at your site.


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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 thelists. Ask each firm for a Phase I proposal. This will tell you what they will do and howmuch 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 potentiallenders, use the bank's environmental firm, but agree to pay for the site assessment onlyif it is done by engineers you know other banks will also accept. If the first bank turnsdown 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 approvedfirms you want to have do the work. When the assessments are done, make sure you getcopies 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 haveyou 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 wereyour most recent cleanup jobs? Please give me references.

(This question is important if you expect to proceed with a project even if it hascontamination problems. First, you may save money by having the cleanup done by thefirm that does the assessment. Second, the firm has a stronger incentive to do anaccurate 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 firmhas, 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] Pleaseprovide experience and qualifications documentation for the subcontractors.

(Documentation on all subcontractors will make both lenders and regulators morecomfortable.)


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4.2 Environmental Lawyers

For brownfield redevelopments where contamination is fairly certain, a lawyer whospecializes in environmental law may be essential. A real estate lawyer with whom youhave worked in the past may not be as useful when you need assistance withenvironmental law and liability issues. Environmental lawyers can help with severalimportant aspects of a redevelopment project that can affect your investment risk andreturns and the willingness of the bank to support you:

Structuring the purchase deal . A lawyer is valuable for preparing a purchasingarrangement that will limit your liability exposures such as the arrangements wediscussed in Chapter 2. This can be costly, but so is losing the deal because the bankwon't support you (or the seller can't afford the cleanup) without some special structuringarrangement.

Determining seller-buyer responsibilities for contamination. Legal counsel can helpto prepare documents stipulating the seller's liability for pollution on the site. As wediscussed, some state environment departments will help prepare these contracts. Evenafter 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 mayfind 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 whoare legally responsible for cleanup costs.

Structuring loan collateral . In some instances, structuring collateral may be somewhatcomplicated. 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 canuse to assure lenders of access to other collateral or to limit your legal liability. Theoptions that are available vary from state to state, but all will probably require that youuse the expertise of a legal specialist. Possible legal arrangements you may want toinvestigate include:

o offering one or more of your other assets as collateral for a brownfield loan whena lender rejects the use of the site as collateral (where the problem is to protectthe rest of your assets from claims by the lender).

o creating a new corporate entity (or limited liability company, in the states thatpermit their use) to conduct the redevelopment of a brownfield site (where thelegal 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 tobrownfield redevelopment (since any such provisions will involve contracts thatgo beyond the loan and real estate purchase agreements with which you arefamiliar).

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


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TABLE 4Questions 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 representativeof buyers in real estate purchases?

(Some lawyers specialize in representing buyers, while others have experiencerepresenting 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 toapproach, for several reasons: (a) you are better off if your lawyer can help you toanticipate 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 futureenvironmental 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. Oneimportant 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 goodhistory 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 mayinfluence a lender's decision about your loan.


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Factors that affect lenders' loan decisions include their internal policies and the regulatoryconstraints under which their particular type of institution operates. There are manypotential 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 tosupport 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 alist 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 arerequired to maintain diverse portfolios of investments and to put money back into thecommunities that make deposits in them. Under one federal law, the CommunityReinvestment Act (CRA), banks must disclose their lending in the neighborhoods inwhich they have branches and from which they get deposits. Brownfield investmentsgenerally 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, alongwith pension funds. The very size of the major firms, however, and the fact that they donot have any regulatory requirements for community reinvestment or for spreading their capital across projects, means that they are unlikely to be particularly useful for smallscale redevelopment projects. Big insurers want to buy into big deals. You may be luckyenough to have some relatively small insurers based in your area. If so, they are worthchecking out. Few companies advertise their willingness to lend directly, but it is worthasking.

5.13 Savings and Loans

These firms have been under close regulatory scrutiny as the result of the savings andloan crisis. They may be ready and willing to support single family home purchases andother 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 acommercial 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.) Themanagers of these funds and trusts are held to what has been called the "prudent manrule," meaning that they are personally liable for losses resulting from taking risks that atheoretically prudent person would not take. Since brownfields, by definition, involvesome risks that other real estate investments could avoid, projects on brownfields may beseen as automatically violating this "prudence" principle.

5.2 Bank Size and Ownership


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Loan size and bank size may have to be matched properly for you to find a supportivelender. Because of the variation among brownfield projects and among lenders, it isdifficult to say whether your best bet for obtaining a loan lies with a small, communitybank or with a large, multi-billion dollar lender that operates in several states (andperhaps, 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 asparts of bank holding companies that own banks in a number of states or regions. In thiscase, the practices of your local bank may be affected by the holding company's policieson previously used sites. Note that it is not always possible to link an institution's scopewith the size of its assets. (That is, some community banks in large cities may havegreater 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, localbank 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 issuspected 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 suspectproperties.Have the expertise to help borrowers deal with environmental problems.

Relative Disadvantages


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Minimum threshold for a loan may be too large for small redevelopmentprojects.May be less willing to invest in local commercial real estate projectsbecause they have more ways to earn money.Transaction costs (or costs to process a loan) may be higher due tomultiple oversight levels.

The advantages of smaller institutions include the facts that they are more likely to focustheir 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 maximumloan 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 becharged, however, for setting up this arrangement. In addition, smaller lenders are morelikely to avoid offering brownfield loans, largely because they lack the expertisenecessary to make educated estimates of the impact of contamination on particular projects. Consequently, many of the smaller institutions adopt a firm policy of denyingloan applications for environmentally suspect properties unless they receive a document

testifying cleanliness from either a state environmental agency or a reputableenvironmental consulting firm.

One important advantage of larger lenders is that many of the firms are more willing toloan on brownfields because they have specialized environmental risk managers whoassess 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'sspecialists. 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 theyhave no small business division and do not offer small loans (which means, according toone 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 thanlending (such as currency exchanges, fees for transferring funds internationally, and soon.) Also, the larger the institution, the more it costs to process any loan because of themany layers of oversight. (As they grow, it becomes more difficult for the banks to earnmoney 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 iscontaminated. These two factors also are critical in determining the exact amount of theloan 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 thethreshold, 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 siteassessment for previously used property. The thoroughness of the assessments,however, depends on the size of the loan and whether or not information disclosed abouta property sends up a "red flag" about possible contamination. The standard procedure isto require a Phase I site assessment only for loans over a certain threshold, ranging from


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$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, drycleaners, industries using other toxic chemicals, or service stations. For small loans thatdo 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 thelender's cutoff level; you can arrange to borrow, say, $249,000 instead of $250,000 if thelender 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 businessdivisions of large lenders, it is quite possible for small brownfield loans to be approvedwith little attention paid to possible environmental problems. The transaction screenprocess used for small, low-risk loans relies heavily on a visual site inspection (usuallyconducted by a loan officer) and a customer questionnaire about the property. We haveheard of some banks (most very small) that, for a variety of reasons, will lend on almostany 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 liabilityexposure, 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 legalconsequences to not telling the truth about all you know about a property during anenvironmental transaction screen. Finally, be sure to keep copies of any documents you submit to a lender including your statements about the environmental condition of thesite.

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'sdecision on your loan. For the most part, these factors will be invisible to you. Oneprimary reason why we include them here is to encourage you to try alternate lenders if one should turn you down. Just because a

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