Brownfield Lending Perks Up
As Developers Eye Sites

Lenders normally would love Robert Hadley's plan to build 877 condominiums and houses on one of the last centrally located sites in Colorado Springs, Colo. -- a project blessed by state agencies and talked up by regulators at a conference.

But there was a rub: Because the land was contaminated by an old gold and silver mill, nearly 20 banks and private lenders turned him down.

"Banks won't touch brownfields projects, even though the voluntary cleanup was in place and the regulators were telling the lenders that they really needed to look at it," says Mr. Hadley, owner of Seattle-based development firm Gold Hill Mesa Partners.

Even as more land-hungry developers are attracted to so-called brownfield sites -- environmentally contaminated properties that often are abandoned or unused -- financing for those projects has lagged behind. Fear of liability for health or other problems that may crop up later has dissuaded many traditional lenders, even though federal and state governments eager to protect open space have offered grants and tax breaks to developers willing to clean up and convert polluted industrial sites into homes, shops and offices.

That reluctance forced early brownfield developers to rely on their own money, government grants and costly private capital, then try to refinance as soon as they finished the cleanup. Many developers threw up their hands and sold off their projects.

Now, as pension funds, insurance companies and hedge funds scramble to invest more money in real estate, they are lending more frequently to brownfield projects. Banks also are stepping up lending to experienced brownfield developers. The potential is huge: The Chicago-based National Brownfield Association estimates the U.S. has $2 trillion of contaminated real estate that investors could buy if it were cleaned up.

"When we first got into this business, no banks really wanted to do this product," says Mike O'Neill, chief executive of Preferred Real Estate Investments of Conshohocken, Pa., which has redeveloped about three dozen brownfield sites in the past 15 years. Banks that once lent him 40% of the cost of a project now offer to finance 80% of the cost, he says. "I did not think that there would come a time that people would bang down our doors."

To be sure, brownfield developers typically pay more for financing. Mr. Hadley is borrowing at about 16% rates to finance the debt and equity for his project. Lenders still have reservations as memories linger of high-profile brownfield blowups such as Love Canal, in Niagara Falls, N.Y., where later health problems for residents spurred Superfund legislation that held polluters responsible for paying for cleanup.

Denver-based Market Street Investors spent 25 years trying to cut costs for brownfield developments with techniques such as finding its own insurance and getting approval from regulators rather than paying an engineering firm to do the work. The firm now has formed close relationships with several regular lenders. "Most people in the real-estate world don't really understand these sites," says Joel Ross, managing director of Market Street Investors, who declines to identify the lenders his company uses. "The lender is not sure of whether he's on the hook or not."

The firm that ultimately financed Mr. Hadley's Colorado Springs project -- another Denver-based firm, Brownfields Capital LLC -- packages loans to brownfield developers as something like a bond to sell to institutional investors. Brownfields Capital Chief Executive Cheryl Hoffman says the financing structure releases investors from any liability, because they don't have any title or function as an owner or operator.

Brownfields Capital says it has more than $500 million pledged from pension funds, hedge funds and private-equity firms to finance brownfields projects in the next five years.

Growing access to capital is opening brownfields to a wider group of developers. No major lender in the area would finance a Lake Erie waterfront project by Cleveland-based Hemisphere Development until the developer completed cleanup of a 1,100-acre site of a former chemical company, says Todd David, the company's CEO. "Many, many lenders were afraid of getting involved in that chain of liability," says Mr. David, a former environmental lawyer who used to advise banks on the hazards of lending to brownfields. Now in the final stages of getting a loan from Brownfields Capital, Hemisphere Development is moving forward with building the 2,000-home Lakeview Bluffs development.

In Colorado Springs, Mr. Hadley recently landed a $12.7 million line of credit from Brownfields Capital to pay for the cleanup, construction and early development of the residential project. Last week, builders started to construct a community center. Newport Beach, Calif., builder John Laing Homes has offered to buy 40% of the available lots for homes.

"If this site were not environmentally affected," says Ms. Hoffman, Brownfields Capital's CEO, "it probably would be the best site in the city for development."

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