Teaming up for financial success

Last month, we talked about site assessments and how you can use them to add value to your products or services. Let's continue with the next step in brownfield revitalization. A site's environmental flaws are only part of the equation that defines its potential. Focusing on a site's problems can be as misleading as fixating on Shaquille O'Neal's free throws. Within the context of his overall game, this flaw is meaningless. Within the context of a well-located property, an environmental problem can be equally insignificant. Three million dollars is a lot to clean up a site whose post-remediation value is $4 million. It is not a lot of money to clean up a site whose post-remediation value is $17 million.

Environmental problems and the cost to cure them must be evaluated in relation to a site's economic upside.

Why brownfield teams?
A multidisciplinary team can identify the economic opportunities available at a brownfield site. Members of this team can also uncover the money needed to pay for remediation.

You need experts to identify a site's economic potential. These experts can be drawn from in-house talent. Or, the appropriate specialists can be secured through virtual partnerships - partnerships that are formed for specific projects and then disbanded.

For example, a land use expert can determine the highest and best use of a property. Different uses for the property can imply:

1. Different cleanup standards;
2. Different amounts of time to get the project completed; and
3. A different market value for the property once it has been revitalized. One type of reuse may be profitable, while another may not.

It is your responsibility to uncover the money needed to pay for your product or service. You can do this with the help of a team.

A firm should be brought on board to identify sources of financing, and to ensure that every effort is made to lower the developer's cost of money. Your services, and in fact the entire revitalization, should be funded through a process known as layered financing, meaning financing from different sources.

Many of these sources carry lower rates of interest than other sources. Some carry no interest. The lower the overall rate of interest, the more attractive remediation becomes. The more attractive remediation becomes, the more likely you are to be hired. It is much easier for a project to support interest payments on $2 million if the blended interest rate is 4 percent, than if it is 9 percent.

Developers leverage their projects: Acquisition and revitalization costs are primarily paid for with borrowed money. The lower the cost of carrying this debt, the more profitable the development. The gap between interest payments and revenue must be as wide as possible. This helps compensate brownfield developers for the complexity and risks inherent in these properties.

People and news
There are many sources of funding that can reduce the overall interest rate on a development. Revitalization becomes more likely as carrying costs fall.

For example, each casino in New Jersey is required to contribute 1 1/4 percent of gross revenue to the Casino Redevelopment Authority (CRA). The New Jersey Performing Arts Center (NJPAC) is a successful brownfield development that received a contribution of $5 million from N.J. casinos. According to Yvonne Doggett, the CRA's deputy director, the authority participated in the financing of NJPAC because Newark was in the midst of a revitalization, and this development was critical to the process. Every year, the CRA donates about $40 million to capital investment in urban areas across New Jersey.

Even if your project does not qualify for funds, contributions from this and other organizations might go toward revitalizing sites in the immediate vicinity of your project. This can provide the momentum needed to put the area on the road to recovery, and your site on the fast track.

Lessons learned
  • It isn't enough to identify the problems at a site. The financial upside must be examined.
  • The economic potential of a brownfield can be evaluated by a multidisciplinary team. The team must be assembled at the inception of a project.
  • The right team can make a revitalization possible by adding enormous value to the final project. This value comes in many shapes, including financing that lowers the cost of money to the developer. This reduces the cost of your services, without lowering the price.

This article originally appeared in the 04/01/1999 issue of Environmental Protection.

comments powered by Disqus