Erika Morphy is co-editor of Debt and Equity Journal, from which this article is excerpted.

Milford, CT—During the past few years, Jon Walker, managing director of Environmental Data Resources Inc., a provider of environmental risk information, thought finding financing for brownfield redevelopment was getting easier. In the past few days, he has realized he is not alone in his assessment.

The firm surveyed attendees at a recent industry conference and the findings supported a trend that Walker says is rapidly gaining momentum--valuations of brownfield developments are increasing, so lenders are more willing to underwrite projects. In the survey, 76% of respondents attributed the heightened brownfield activity to an increased return on investments relating to the remediation of these sites.

"Not only have values of these properties reached all time highs, but there are significant efforts going on by the municipalities themselves to identify brownfield sites, such as in cases of historical contamination," Walker says. "Also, lenders are becoming more comfortable underwriting financing for brownfield investment." Taken together, he says, there are significant opportunities for developers nationwide.

Most states have taken a more active role in providing documentation that shows no further action is required for remediation. "That alone has given lenders a great deal of comfort," says Annemarie Uebbing, vice president and regional director of the Community Preservation Corp., a not-for-profit mortgage lender that finances brownfield projects in New York and New Jersey.

"No further action required" is the final step for a developer seeking to redevelop a brownfield site. First, it submits a remedial work action plan to the state for approval. "That way, the developer and bank know if the work is completed and the testing indicates it is O.K., then the site will receive certification," she says.

Valuations for brownfields are also changing, making them more attractive investments. The values of brownfields are now determined by their end use rather than present value. What that means is that sites in and around major cities can be particularly lucrative for developers, Uebbing says. "There is a lot of potential for sites in New Jersey because of its proximity to Manhattan, for instance," she says.Tax credits are another financial incentive--a major one--for developers, says Larry Schnapf, a partner with Schulte Roth & Zabel LLP, who routinely works on CMBS deals that involve distressed property and large brownfield developments. In fact, from his perspective, it is probably the most important incentive.

"I know of some people that actually hope to find contaminants on a potential site in order to qualify for tax credits," he says. New York State, in particular, has one of the most generous tax credit regimes in the country. "I have properties in Manhattan that are known containment sites and buyers are still bidding up the price," he notes.

Schnapf does some quick math to show the benefits: New York's tax credits for brownfields range from 12% to 22%. A developer receives an additional 2% if it does an unrestricted clean up for a residential property. If the site is in an economically depressed area, it receives an additional 8%. Furthermore, the tax credits are linked to the value of the improvements that are placed on the property, not the clean up costs.

"The average clean up cost for a site is between $1 million to $5 million," Schnapf says. "So you have this property in New York where the costs are running, let's say, 1% of the project value, yet the developer is getting back 12% of the project's value in tax credits."

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Attitudes, Credits Beautify Brownfields

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