Transcript Slide 1

Money Basics:
A “101” Overview Of Funding Sources For
Brownfield Projects
May 5, 2008
EPA Brownfields Conference
Charlie Bartsch
Vice President/Senior Fellow
ICF International
Laurence Eisenstein
Partner
Eisenstein Malanchuk
Michael Hill
Partner
Hill & Kehne
Melina Kennedy
Partner
Baker & Daniels
Colleen Kokas
Chief, Office of Brownfield Reuse
New Jersey DEP
Robert Naylor
CFO
CHEROKEE
Perspective
UN IPCC: Climate Change 4th Assessment Report: Sustainable Development & Mitigation:
“The choice of development policies can be as consequential to future climate stabilization
as the choice of climate-specific policies.”
Lester Brown: Plan B 3.0 – Mobilizing To Save Civilization
“Today, global demands on natural systems exceed their sustainable yield capacity by
an estimated 25 percent [having first exceeded it in 1980].”
R. 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.”
Gus Speth: Red Sky at Night—America and the Crisis of the Global Environment
“1/3 to ½ of the world’s forests are now gone.” “ Original primary forests in the
contiguous U.S. is 95% lost.” “Original wetlands are 50% lost.: “¼ of bird species
are extinct.” “We have entered the endgame … with the natural world.” “Weighed
against this, there are hopeful signs and encouraging developments.”
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?
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Provide resources directly
• grants; forgivable/performance-based loans
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Reduce lender’s risk
• loan guarantees; companion loans
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Reduce borrower’s costs
• interest-rate reductions or subsidies; underwriting/due diligence
assistance
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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 and
environmental programs to meet a range of
site 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
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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 grants
EDA public works/economic
adjustment grants
USDA rural development grants
DOT (various system construction
and rehabilitation programs)
 DOT’s transportation and
community system preservation
(TCSP) grants
 Army Corps of Engineers (costshared services)
Federal tax incentives that can be linked to
brownfield redevelopment – all at little or no
cost to the project….
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Rehabilitation tax credits
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Low income housing tax credits
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New Markets Tax Credits
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Energy Policy Act of 2005 tax credits
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Industrial development/revenue bonds
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Brownfield expensing
How Have these Programs Been Used to
Support Brownfield Redevelopment?
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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
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 rollovers
Tax 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 districts
Identifying 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 Eisenstein
Eisenstein Malanchuk LLP
1048 Potomac Street, NW
Washington, DC 2007
202.965.4700
www.em-law.cocm
[email protected]
Insurance Recovery for Environmental
Liabilities
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
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◦ 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
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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
What You Need for Insurance Recovery
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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
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Environmental cost data
◦ backup for past costs
◦ supportable projections of future cost
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Corporate history
◦ asset purchases may not include insurance rights
Lessons
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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
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◦ you pay nothing until money is recovered
Environmental Insurance:
What It Is, And
How To Obtain More For Less
Michael O. Hill, Esq.
2300 Wisconsin Avenue NW Ste 300
Washington, D.C. 20007
(202) 558-2100
www.hillkehne.com
Environmental Insurance (EI) Products
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Pollution Legal Liability
◦ Protects against unknown pre-existing conditions and new
contamination releases
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Cleanup Cost Cap
◦ Protects against cost overruns in the course of a planned cleanup
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Finite Risk Programs
◦ Pairs prefunded expected cleanup costs and EI
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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
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Other (tanks, contractors, etc.)
◦ For tanks, contractors, etc.
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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 wellcontained, offers substantial incentives to offer lower overall
price.
State & Tribe EI Programs
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CERCLA § 128(a) allows States and Indian Tribes to use EPA grants
to purchase insurance or develop a risk sharing pool, indemnity pool or
insurance mechanism.
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Policies (MA, WI) (Indiana authorized as of July, ‘07)
◦ Pre-negotiated terms (typically in PLL endorsements)
◦ Preselected insurer(s):
 WI: AIG
 MA: Ace, AIG, Chubb, XL
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◦ 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%); plus, lower overall?
State VPLE (WI): “Master policy” - Groundwater only; VCP sites.
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Tax Credits (NY): Up to the lesser of 50% of premiums or <$30K.
Tax Increment Financing:
A Major Tool for Brownfields
Redevelopment
Melina Kennedy
Partner
Baker & Daniels Law Firm
[email protected]
(317) 237-8288
What is Tax Increment Financing?
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A way to capture new property tax revenue generated by new
capital investment and use those dollars towards improvements
in the same geographic area.
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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.
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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
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It is typically a local incentive, so approaching the local agency,
such as mayor’s office, is the best place to start.
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Many cities have separate economic development organizations
that take on city economic development functions.
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If you don’t ask, you won’t get!
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Key Considerations for TIF
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Confirm flexibility of use of funds (typically statutory).
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Understand legal obligations (i.e., who backs bonds, what
happens if revenue projections are not met, etc.).
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Likely teammates in TIF deals: city, bond counsel, financial
adviser, developer.
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Example
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Keystone Industrial Park, Indianapolis
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Former site of tire dump; some dilapidated
housing
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City used HUD loan to acquire parcels; demo and
remediation costs
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City created a TIF to pay off HUD loan; used TIF
revenues and Community Development Block
Grants (“CDBG”)
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Now it is a viable industrial park with new
buildings, new jobs, and a benefit to the area
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Brownfield
Tax Credit Programs
Colleen Kokas
NJDEP-Office of Brownfield Reuse
PO Box 028
Trenton, NJ 08625
609-633-1499
www.state.nj.us/dep/srp/brownfields
BF Tax Credits-Federal
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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
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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”
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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
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BF Tax Credits-Common Themes
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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 Naylor
Chief Financial Officer
CHEROKEE
[email protected]
(919) 743-2543
What is private equity capital?
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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)
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Private equity capital typically comes from large institutional
investors (government pension funds, university endowments,
corporate pension funds, insurance companies)
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Many of the large institutional investors, especially when investing
in real estate, tend to invest for longer periods of time
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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?
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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)
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Most private equity funds have a finite life, so investment opportunities
need to begin and end within a certain timeframe
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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?
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Commercial loans (national or local banks) are a common source of
project financing
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Terms are dependent on project-specific factors; key terms include:
◦ Size:
◦ Interest rate:
◦ Term:
◦ Repayment:
◦ Guarantee:
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Often determined by project needs, collateral, valuation
Fixed or floating (prime plus, LIBOR plus)
Duration of loan (“construction” typically 3 or 4 years)
Specified schedule or receipt of income or recapitalization
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
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Panelists
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Charlie Bartsch, ICF International, 202/862-1134, [email protected]
Larry Eisenstein, Eisenstein Malanchuk, LLP, 202/965-4700,
[email protected]
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Michael Hill, Hill & Kehne, LLC, 202/558-2100, [email protected]
Melina Kennedy, Baker & Daniels, LLP, 317/237-8288,
[email protected]
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Colleen Kokas, New Jersey Department of Environmental Protection,
609/633-1499, [email protected]
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Robert Naylor, CHEROKEE, 919/743-2500, [email protected]