Money Basics: A 101 Overview Of Funding Sources For Brownfield Projects May 5, 2008 EPA Brownfields Conference Charlie Bartsch Laurence Eisenstein Michael.

Money Basics:A “101” Overview Of Funding Sources For Brownfield Projects

May 5, 2008EPA Brownfields Conference

Charlie Bartsch Laurence Eisenstein Michael HillVice President/Senior Fellow Partner PrincipalICF International Eisenstein Malanchuk Hill & Kehne

Melina Kennedy Colleen Kokas Robert NaylorPartner Chief, Office of Brownfield Reuse CFOBaker & Daniels New Jersey DEP CHEROKEE

Perspective

Gus Speth: Red Sky at Night—America and the Crisis of the Global Environment

“We’ve pushed the human enterprise and its effects to the planetary scale... resulting in the globalization of environmental impacts as well as economic activity.”

Richard Louv: Last Child in the Woods: Saving Our Children from Nature-Deficit Disorder

“Today kids are aware of the global threats to the environment—but their physical contact, their intimacy with nature, is fading.”

Lester Brown: Plan B 3.0 – Mobilizing To Save Civilization“As of 2008, more than half of us [humans worldwide] are living in cities – making us, for the first time, an urban species.”

“Today, global demands on natural systems exceed their sustainable yield capacity by an estimated 25 percent [having first exceeded it in 1980].”

UN IPCC: Climate Change Fourth Assessment Report, Mitigation Of Climate Change: Sustainable Development and Mitigation“The choice of development policies can be as consequential to future climate stabilization as the choice of climate-specific policies.”

Financing Brownfields: What Can the Public Sector – Especially the

Feds – Do to Help? An Overview

Charlie Bartsch

Senior Fellow, ICF International

[email protected]

2008 Brownfields 2008

Detroit, Michigan – May 5, 2008

The Brownfields “Red Zone”

How Can Public Programs Address Contamination’s Impacts on Financing?

Conceptualizing and Planning the Project

Economic Analysis for Marketing the Project

Dealing with Stigma

$ for Site Assessment

Additional Underwriting/Site Development/ROR Needs

$ for Preparing a Cleanup Plan and Taking It Through

VCP/State/Local Regulatory Agencies

$ for Cleanup

“Regular” Real Estate Construction/Development Costs When Site is “Shovel Ready”

How Can Grants/Public Financing Initiatives Help?

Provide resources directly• grants; forgivable/performance-based loans

Reduce lender’s risk• loan guarantees; companion loans

Reduce borrower’s costs • interest-rate reductions or subsidies; underwriting/due diligence

assistance

Improve the borrower’s financial situation • re-payment grace periods; tax incentives/abatements

Packaging brownfield project financing -- the Pink Floyd strategy

Money, it’s a crime...Share it fairly but don’t take a slice of my pie.

B’F Translation – It’s all about leveraging…

Creatively using development andenvironmental programs to meet a range ofsite redevelopment needs, set an investment

climate, attract private financing for – assessment, clean up, demolition, ICs, site

prep, renovation/upgrades, marketing, etc. while fitting grant/loan/tax program

eligibility and competing for resources Animals, 1977

Federal Grant and Loan Programs Used To Meet Brownfield Needs

Loans EDA’s Title IX (capital for local

revolving loan funds) HUD funds for locally determined

CDBG loans and “floats” HUD Section 108 loan guarantees EPA capitalized revolving loans SBA guarantees SBA Section 504 investments USDA business/industry loans

Grants HUD’s Brownfield Economic

Development Initiative (BEDI) HUD’s Community Development

Block Grants (for projects locally determined)

Grants (continued)

EPA assessment/cleanup grantsEDA public works/economic adjustment grantsUSDA rural development grants DOT (various system construction and rehabilitation programs) DOT’s transportation and community system preservation (TCSP) grants Army Corps of Engineers (cost-shared services)

Rehabilitation tax credits

Low income housing tax credits

New Markets Tax Credits

Energy Policy Act of 2005 tax credits

Industrial development/revenue bonds

Brownfield expensing

Federal tax incentives that can be linked to brownfield redevelopment – all at little or no

cost to the project….

brownfield redevelopment/revitalization planning site acquisition environmental site assessment site clearance, demolition, and removal of buildings rehabilitation of buildings removal or remediation of contamination construction of infrastructure and related improvements that

enhance brownfield site value

Activities often carried out in partnerships with the private sector, or to leverage private participation

How Have these Programs Been Used to Support Brownfield Redevelopment?

State Brownfield Financing Innovations

• 23 states offer tax incentives linked to site assessment and cleanup

– Ex: TX, MA, WI, MO, KY, CO

• 19 states target financial assistance programs to brownfields – Ex:

FL, OH, IL, IN

• 13 states offer direct financial assistance – Ex: MN, PA, NJ, DE

• 10 states have initiatives to enhance/support the brownfield

financing process – Ex: MI, MA, WI, CT

Local Financing Efforts – Traditional and Emerging

Tax increment financing/increment rolloversTax abatements/variations (e.g., sliding scale phase-ins)Revolving loan funds (RLFs)

capitalized by earmarking fees/fines, corporate/banking/ philanthropic contributions

General obligation bonds Special/targeted service areas/taxing districtsIdentifying new revenue streams

i.e., project kickers, repayments, impact fees, etc.Adopting advantageous process incentives

i.e., easier conveyance of tax delinquent properties, zoning benefits, expedited permitting

Insurance Recovery for Environmental Liabilities

Larry EisensteinEisenstein Malanchuk LLP1048 Potomac Street, NWWashington, DC [email protected]

General liability insurance, particularly prior to the mid-1980's, was written broadly, and usually covers environmental liabilities

Even if they have insufficient assets to pay for cleanup, companies who contributed to the pollution still have valuable insurance rights◦ essentially all companies bought liability insurance◦ so did many municipalities◦ but frequently no one has pursued insurance recovery, due to lack of

knowledge or expertise Even if the old company does not exist, insurance recovery can

often be pursued due to:◦ owners or officers with policy rights◦ insurance policy provisions dealing with company liquidation

Insurance Recovery for Environmental Liabilities

What You Need for Insurance Recovery

Insurance evidence◦ policies are great, but not necessary

◦ many sources of insurance evidence exist, but are not obvious -- e.g., premium payments on ledgers, old legal files

◦ access to financial records, and names of brokers, are key

◦ insurance archeology firms can assist in this process Environmental cost data

◦ backup for past costs

◦ supportable projections of future cost Corporate history

◦ asset purchases may not include insurance rights

Lessons

Insurers want to settle old policies, to obtain closure on their books◦ win-win situation can be created where you get money and they get

closure Legal issues and uninsured periods will exist, so recovery is never

100% But governments and small companies routinely undervalue this

"asset" Recovery can occur through a negotiated process, without litigation Many firms will now pursue recovery on a success fee basis, if that is

desired◦ you pay nothing until money is recovered

Michael O. Hill, Esq.

2300 Wisconsin Avenue NW Ste 300Washington, D.C. 20007

(202) 558-2100www.hillkehne.com

Environmental Insurance: What It Is, And

How To Obtain More For Less

Environmental Insurance (EI) Products Pollution Legal Liability

◦ Protects against unknown pre-existing conditions and new contamination releases

Cleanup Cost Cap◦ Protects against cost overruns in the course of a planned cleanup

Finite Risk Programs◦ Pairs prefunded expected cleanup costs and EI

Insurance Combined With Fixed-Price Contracting◦ Remediation contractors will assume risks and sometimes can obtain

lower-cost insurance and provide an overall lower cleanup price Other (tanks, contractors, etc.)

◦ For tanks, contractors, etc. Surplus Lines

◦ No Rate or Form regulation

Insurance Combined With Fixed-Price Contracting

Remediation contractors will sometimes assume risks, often With insurance available at lower premiums

Because insurers know who the Contractor is, and that it has strong incentives to contain costs; and

At an overall lower cleanup price Because the certainty of a long-term cleanup contract, combined

with the chance at a “windfall” in the event that costs are well-contained, offers substantial incentives to offer lower overall price.

State & Tribe EI ProgramsState & Tribe EI Programs CERCLA § 128(a) allows States and Indian Tribes to use grants to

purchase insurance or develop a risk sharing pool, indemnity pool or insurance mechanism.

Policies (MA, WI)◦ Pre-negotiated terms (typically in PLL endorsements)

◦ Preselected insurer(s): WI: AIG MA: Ace, AIG, XL

◦ Massachusetts subsidizes up to lesser of 50% or $150K for public and quasi-public entities, $50K for private. Over $5M in subsidies toward $143M in cleanup, $1B in coverage, at over 250 projects.

◦ Wisconsin: Volume discounted (10% discount) State VPLE (WI): “Master policy” - Groundwater only; VCP sites. Tax Credits (NY): Up to the lesser of 50% of premiums or <$30K.

Tax Increment Financing: A Major Tool for Brownfields

Redevelopment

Melina KennedyPartnerBaker & Daniels Law [email protected](317) 237-8288

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What is Tax Increment Financing?

A way to capture new property tax revenue generated by new capital investment and use those dollars towards improvements in the same geographic area.

Typically, property taxes are the source of revenue for a TIF; however, other sources may be used as well, such as sales and/or income tax.

Bonds can be issued to provide up-front dollars with increment pledged to pay off debt.

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Considerations in Approaching Request for TIF Assistance

It is typically a local incentive, so approaching the local agency, such as mayor’s office, is the best place to start.

Many cities have separate economic development organizations that take on city economic development functions.

If you don’t ask, you won’t get!

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Key Considerations for TIF

Confirm flexibility of use of funds (typically statutory).

Understand legal obligations (i.e., who backs bonds, what happens if revenue projections are not met, etc.).

Likely teammates in TIF deals: city, bond counsel, financial adviser, developer.

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Example

Keystone Industrial Park, Indianapolis

Former site of tire dump; some dilapidated housing

City used HUD loan to acquire parcels; demo and remediation costs

City created a TIF to pay off HUD loan; used TIF revenues and Community Development Block Grants (“CDBG”)

Now it is a viable industrial park with new buildings, new jobs, and a benefit to the area

Brownfield Tax Credit Programs

Colleen KokasNJDEP-Office of Brownfield ReusePO Box 028Trenton, NJ 08625609-633-1499www.state.nj.us/dep/srp/brownfields

BF Tax Credits-Federal

Taxpayer can fully deduct the cleanup costs in the year incurred

Property must be help by taxpayer for use in a trade or business

Demonstrate release, threat or release or disposal of hazardous substance

For costs incurred through Dec 31, 2007 Requires state sign-off

BF Tax Credits-Michigan

Single Business Tax BF Redevelopment For “non-dischargers” 10% of development costs-capped at $1M Site is within a Brownfield Redevelopment Authority’s BF

plan Assignable

BF Tax Credits-New York

BF Redevelopment Credit-tiered from 12% to 22% on business or personal tax credits; credit tied to the increase in value of the property

Environmental Remediation Insurance Credit-for 50% of insurance premium capped at $30K

Current Program facing change due to Upstate/Downstate inequities and “need”

BF Tax Credits - New Jersey

Tax Credits & Reimbursements Reimbursements up to 75% of cleanup costs based on

specific new taxes generated from the redevelopment

◦ 107 projects eligible

◦ $139 M new taxes ($21 M reimbursed) Tax credits for costs through Jan 1, 2007 for 100% of cleanup

costs in specific areas of the state

◦ No participation

BF Tax Credits-Common Themes

Cap on Amount-widely variable Eligible Person-not a liable party Restricted Areas of State-distressed areas Specific Costs-remediation and associated costs Assignable Short Duration

Overview of Private Equity Capital and Commercial Loans

Robert NaylorChief Financial [email protected](919) 743-2543

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What is private equity capital?

Private equity capital is typically raised in “funds” for a specific purpose (e.g.: In 2005, Cherokee raised $1.24bn in Fund IV for investment in brownfield redevelopment projects)

Private equity capital typically comes from large institutional investors (government pension funds, university endowments, corporate pension funds, insurance companies)

Many of the large institutional investors, especially when investing in real estate, tend to invest for longer periods of time

While investors commit a certain amount of capital at the time a particular fund is being raised, capital is only drawn down by the fund as it is needed

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Is private equity capital right for your project?

Funds have various strategies, including risk profile (value added or opportunity), deal size (minimum equity investments), product types (retail, office, residential), developmental stage (land, horizontal, vertical), and other criteria (geography, brownfields)

Most private equity funds have a finite life, so investment opportunities need to begin and end within a certain timeframe

Private equity capital requires higher returns than many other types of capital because:

◦Equity is subordinate to debt and other types of financing in the capital structure

◦More complex deals require higher returns than traditional deals (e.g. Brownfield redevelopment including re-entitlement process vs. purchase and re-leasing an existing office building)

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What do you need to know about commercial loans?

Commercial loans (national or local banks) are a common source of project financing

Terms are dependent on project-specific factors; key terms include:◦Size: Often determined by project needs, collateral, valuation ◦Interest rate: Fixed or floating (prime plus, LIBOR plus)◦Term: Duration of loan (“construction” typically 3 or 4 years)◦Repayment: Specified schedule or receipt of income or recapitalization◦Guarantee: May require a guarantee (recourse) or not (non-recourse)

Commercial loans are available for many project types and stages: Pre-development loans (for horizontal infrastructure and other

ground work) Construction loans (for vertical construction of structural buildings) Land acquisition loans Mortgage loans for existing buildings and structures Project improvement loans for building upfit

PanelistsPanelists

Charlie Bartsch, ICF International, 202/862-1134, [email protected]

Larry Eisenstein, Eisenstein Malanchuk, LLC, 202/965-4700, [email protected]

Michael Hill, Hill & Kehne, LLP, 202/558-2100, [email protected]

Melina Kennedy, Baker & Daniels, LLP, 317/237-8288, [email protected]

Colleen Kokas, New Jersey Department of Environmental Protection, 609/633-1499, [email protected]

Robert Naylor, CHEROKEE, 919/743-2500, [email protected]