Where There’s A Mill

There’s A Way –

Recycling History:

Why Reusing Old, Contaminated

Properties Makes Economic Sense

(and what resources can help)

Charlie Bartsch

Senior Program Advisor for Economic Development

US Environmental Protection Agency

May 8, 2015

Bartsch.charlie@EPA.gov

• Legal and practical context for mill site reuse

• “Big picture” trends in redevelopment

• Current strategies to encourage mill site reuse, along

with “head issues”

• Federal family of sources of funding –

• Traditional, innovative/unconventional

– HUD, EDA, DOT,

USDA, EPA

– Tax incentives

• National examples along the way…

What this discussion will cover …

LEGAL, PRACTICAL

CONTEXT FOR MILL SITE

REUSE

• Promoting mill site/any site reuse is consistent with goals

related to sustainability, community development, smart

growth

– Makes the most sense to promote new economic activity

in areas that have hosted it before

– Infrastructure, workforce, core community

amenities/advantages adjacent – and paid for!

• Reusing sites and facilities almost always triggers an

assessment to determine what residue from past uses might

remain, how it can be minimized to address future

liabilities

Environmental overlay on the economic development process….

• Developers, investors, lenders will not consider previously

used properties unless they are comfortable that any risk

can be defined and managed – and this includes

environmental risk

• Federal/state/local financial tools, regulatory procedures,

technical assistance, and revitalization strategies can

enhance the local economic advantage

• Addressing this overlay is “Step 1”

in the economic redevelopment

process – for mill sites,

for all previously

used sites

Environmental overlay on the economic development process….

New re-development reuse of formerly used

properties may be influenced by several federal

environmental statutes:

• RCRA – Resource Conservation and Recovery Act

– Governs disposal of solid waste and hazardous

materials

– “Cradle to grave” regulatory, tracking

requirements

• LUST/UST – Leaking Underground Storage Tanks

– Practical reuse options brought under

brownfields umbrella in 2002

Legal stuff you should know up front…

• CERCLA – Comprehensive Environmental

Response, Compensation, and Liability Act

– Strict/joint/several liability

– Absent action: everyone in chain of title liable

for full amount of cleanup, forever

– Sites on National Priorities List (NPL), in

practice applies to any site with real or perceived

contamination

• Brownfields – Defined in law 2002, as a distinct

part of CERCLA

– BF-specific assessment/cleanup funding authorized

Legal stuff (continued)

• No commercial real estate transactions without

environmental due diligence

– Site assessments/investigations (Phase 1, Phase 2

ESAs), legal opinions

• “Buyer beware” – uncertainties over closure

• Investor/lender nervousness – unwillingness to finance

cleanup

– Private lenders risk concerns, “fear of the unknown”

– federal partner agencies conservative in approach to

participation in housing, economic development,

supportive projects

And the practical redevelopment impact of all this legal stuff …

TRENDS IN

REDEVELOPMENT

Reasons for pessimism and optimism – the big picture of site reuse

• Funding constraints – federal, state, and local

• Limited availability of private investment capital in key situations

• Need for more, diverse new job opportunities

• Need for more, diverse new business opportunities

• Evolving incentives • Creative application, packaging

of incentives • Emergence of new technologies • Emergence of urban entrepreneurs

and new markets

• More properties now “upside down”…values dipped and/or

stagnant – while cleanup, site prep costs rise

• Revenue, income declines undermine tax incentive value

– Impacts key tools of sophisticated deal-makers – TIF, tax

credits/tax credit syndication

• State/local deficits, spending pressures limit investment in smart

growth/sustainable reuse projects; reduced federal e.d. support

– 30+ states, with cumulative deficits topping $50 billion in ‘14

– As of January 2015, 30 states had raised taxes, 45 cut services

– 2/3 of cities project difficulty meeting financial needs in ’15

• Federal tax code uncertainties, CDBG cut average 10-20%

Current real estate, market, economic development issues:

What impact on financing, reusing any contaminated property?

• New opportunities for small, infill projects

• Growing demand for sustainable end-uses

– “Green” = reduced O&M = market appeal; fits well with smart growth, infill, redevelopment strategies

• Decline in traditional infill/reuse = search for new uses

– i.e., health centers, public facilities, renewable energy

• Public sector policies, incentives poised to play an even more important role as catalyst, gap funder, partnership foundation

– Traditional programs can be better adapted, alternatively deployed for brownfield situations

– Alternative packaging strategies now more important

Long term forecast – re-development finance will

return, more often in a greener market context

• A safe environment is (practically) everyone’s

goal; the means to reach it differ

• Cleanup is not planned – and is not carried out – in a vacuum; a range of

“forces” influence it

– Regulatory, technological, perceptual, market

• Cleanups need to be paid for – no $$ = no cleanup; thus there is value in:

– Leveraging other/non-EPA agency funding by linking cleanup

activities to their missions

– Leveraging incentives for cleanup as part of redevelopment

– Attracting private interest/private capital

– Evaluating the cost of cleanup against a broad range of benefits, so

spending is worth while

• Increasing awareness of the value of cleanup, and the role of cleanup in

sustainability, leads to opportunities to push greener cleanups – to build

on that interest

Premises, givens, and assumptions related to…”

CURRENT KEY ADMINISTRATION THEMES

• Encourage manufacturing in-sourcing – IMCP

• Encourage infill and site reuse

• Promoting place-based community revitalization – SC2, Promise Zones

• Facilitate energy efficiency and renewable energy

• Strengthen skills training and job development

• Promote community betterment/stronger communities

Local mill site reuse efforts could connect to all of these –

“An America Built to Last” – Key Themes: What Links to Mill Site

Reuse Activities?

STRATEGIES

New “3 Rs” for old mill sites Reuse/Redevelop/Reposition • Most interesting and (in most areas) most common strategy involves

creative reuse of former mill sites – renovations or mill footprints

• Advantages – unique architecture,

signage, prime location to take advantage

of new land use patterns

• Common types of reuses –

– Restaurants

– Offices

– Major retail/small retail

– Health/other services needing

transportation access

– Technology incubators

– Private residences

– Community centers

Carrying out these

strategies in practice –

what is being done?

Defining a context for mill site reuse

• Approach mill site reuse as an economic development

issue with an environmental twist, rather than as only a

pollution problem

• View mill projects as real estate deals that further

community development goals

• Transform environmental issues at mill sites into an

approach that creates value, attracts investment,

generates jobs, and gathers support

Carrying out these

strategies in practice –

what is being done?

Promoting private sector interest at mill

sites – what can communities do?

• form good working relationships with, and provide

outreach/education to potential re-users

• form good working relationships with, and provide

outreach/education to potential financiers and insurers of mill site

site projects

• enlighten private parties about VCPs and liability relief

• build working relationships with major real estate developers,

rehab tax credit syndicators, other sophisticates with $$

Carrying out these

strategies in practice –

what is being done?

Taking the next step – making mill sites

marketable and viable

• proactively identifying appropriate site re-users

• providing a responsive regulatory process

• linking potential new users to various financial

incentives – and creative ways to blend, leverage them

• offering marketing support and outreach

• supporting community involvement

HEAD ISSUES

Why do lenders,

developers, other

private sector

players think the way

they do when you

say “potentially

contaminated mill

site”?

Getting inside the lender’s/

developer’s brain: Why do they act the way they do when you say “contamination”

PROCESS CONSIDERATIONS:

Does the project make good credit sense?

Are regulators comfortable with the proposed approach?

Is the bank officer comfortable with:

Developer expertise in projects on contaminated sites?

Environmental/technical consultants?

Proposed end-use (in context of contamination) ?

Is the developer comfortable with/understand the

regulatory/VCP process and the certainty it can impose?

Getting inside the lender’s/

developer’s brain: Why do they act the way they do when you say “contamination”

TOOL CONSIDERATIONS:

What legal tools will be used?

NFA letter, indemnifications, deed restrictions,

institutional controls, covenants not to sue?

What private financial tools will be used?

Escrows, collateral discounts?

Will environmental insurance be used, and does it make

sense for the specific project?

What public financial tools will be used?

Grants, loans, tax credits, guarantees, other mechanisms ?

Getting inside the lender’s/

developer’s brain: Why do they act the way they do when you say “contamination”

OVER-RIDING CONCERNS:

Certainty of collateral value over time

Soundness of redevelopment plan

Is the new use something somebody actually wants?

Ongoing compliance with institutional controls

Cleanup cost/financing and timing concerns

VCP process, other permitting/approvals

Red tape, unknowns of public programs

Availability as a project driver

Grant application, approval, and disbursement time; tax incentive reliability and constraints

Key Questions and Concerns that Lenders, Developers Consider

• What is the real risk, and how can it be framed or

managed?

• Will cash flow be adequate at the critical, early stages of

project implementation – for assessment and cleanup?

• Potential limits on intended or future use of the property

• Potential constraints on implementing a proposed

development plan – impact on bottom line/ROI

• What’s the exit strategy?

• How will community involvement be carried out, and

what will be the impact on timing, project costs?

Uncle Sam’s Tool

Box

Public Tools Can Be Leveraged in Various

Ways to Promote Site Redevelopment

To provide resources directly

Grants; forgivable/performance loans

But also to… Reduce lender’s risk

loan guarantees; companion loans

Reduce borrower’s costs

• interest-rate reductions/subsidies; due diligence assistance

Improve the borrower’s financial situation

• re-payment grace periods; tax abatements and incentives; technical assistance help

Provide comfort to lenders or investors

• performance data, risk management/corroboration

EPA/environmental programs

• EPA brownfields – grants for site assessment, cleanup, RLFs

HUD/community development programs

• CDBG – Grants, locally-determined loans for economic/community development, planning

• Section 108 – Loan guarantees for site prep/infrastructure

USDA/rural development, utility programs

• Business/industry development, rural utilities services

EDA/Public works, planning, economic adjustment

• Finances business-based, jonb promoting projects, support necessary redevelopment infrastructure

DOT/transportation

• Road/transit system enhancement, construction, improvement

Which Federal Financing Programs Are

Well Suited to Support Redevelopment on

Mill Sites/Contaminated Sites?

Eligible program activities can include:

• planning for redevelopment/reuse

• site acquisition

• environmental site assessment

• site clearance

• demolition and removal of buildings

• removal or remediation of contamination from sites or

structures

• construction of infrastructure/related improvements that

enhance site value

Making the “Fit” -- How Have Federal Programs Been Used to Support Site

Redevelopment Projects?

• site acquisition

• redevelopment/revitalization planning & assessment

• site clearance, demolition, and removal of buildings

• rehabilitation of buildings

• removal or remediation of contamination

• construction of infrastructure and related improvements

that enhance site value

Activities often carried out in partnerships with the

private sector, or to leverage private participation

Federal Programs Can Support Redevelopment/

Reuse of Mill Sites/ Buildings in Many Ways

CDBG

• Projects are locally determined; significant competition for local funds

• Brownfield activities must be incorporated into CDBG Consolidated Plan and annual action plan

• Low-mod benefit is primary HUD objective (minimum use of 70% of CDBG funds)

USDA

• Applications are made to state USDA state offices on a rolling basis; these offices have significant influence on project funding decisions

• Population a key determining factor

• Private entities eligible for B&I assistance

Federal programs – Funding wrinkles & reality check

SBA

• Limited funding, significant competition

• Applications accepted quarterly

– Pre-approval at regional office level

• Unemployment key eligibility/selection factor

• Projects driven by $/job requirements, job potential

• Often, a focus on small towns, rural areas

DOT

• State MPOs, transportation agencies key decision makers

• Historic preservation/rehabilitation/operation of historic transportation buildings or facilities eligible

• Long lead time for planning, project integration

Federal programs – Funding wrinkles & reality check

• Entitlement cities (50,000+ ) and urban counties (200,000+) get formula-based annual grants

• Direct formula-based grants to states for small city needs: Small communities (> 50,000) compete for funds distributed by states

• Projects must meet one of 3 HUD objectives:

– Benefit low- and moderate-income persons

– Prevent/eliminate slums and blight

– Meet an urgent community need

Brownfield-specific potential: Help finance all phases of brownfield redevelopment/ project implementation, consistent with HUD objectives

HUD Community Development Block Grants

CDBG: Chevy Place – Rochester , NY

• 2.2 acre downtown auto dealership, gas station, and service garage site

• Key concern -- UST and other contamination deterred developers

• Role of CDBG – Critical gap financing; used for site assessment, partial 1st phase cleanup (including tank removal)

• Developer funded 2nd phase of cleanup

• City $2.35 million redevelopment loan from CDBG-capitalized pool

• Result -- 77 new residential units; coffee house with 20 jobs

CDBG: Chicago Cultural Center

A

f

t

e

r

• Chicago used $1.3 million in

CDBG funds to replace existing

roof of 1897 Chicago Cultural

Center (former main public

library) with a green roof

• Integrated new support system

into historic building

• Supplemented by 18 solar panels

• Irrigation system

recycles rainwater

• Innovative green historic

building retrofit

• Abandoned sewing machine factory, built in 1920s

• Developed by non-profit Better Homes of Seaford

• $600,000 USDA rural development loan, plus DE Housing Authority and private bank participation

• Fully occupied within 3 months of completion

• Reuse link – supported pre-development, site preparation needs

USDA: Charleston Place – Seaford, DE

USDA: Potosi Brewery, Potosi, WI • Brewery built 1852 in Potosi

(pop. 700), abandoned 1972

• EPA, state site assessment, cleanup grants

• $3.3 million B&I guaranteed loan key to securing additional $4.2 million in financing

• Transformed Potosi’s main street; community involvement key

• BF link: Refurbished site transformed into micro-brewery, brewing museum and library

• 50 new jobs, 4 new beers

DOT: Former Conoco

Tower – Shamrock, TX

• Opened in 1936 to serve the new Route 66 cutting

thru the city; combined gas station and “U-Drop

Inn Café”

• Closed in mid-1990s

• Purchased by First National Bank of Shamrock in

1997 and donated to city

• Restored by city of Shamrock for use as Chamber

of Commerce

• $1.7 million DOT enhancement grant paid for

most of the station restoration, supplemented by

local fundraising

• Café is being restored as a revenue-generating

enterprise to help cover maintenance costs

• Fun fact: inspired “Ramone’s Body Shop” in

Disney movie “Cars”

EDA: Bates Mill – Lewiston, ME • Textile mill, shut down in 1993,

redeveloped in stages as small business incubator

• EPA assessment $$

• Reuse link -- $1 million in EDA public works funding supported site cleanup and infrastructure upgrading activities, part of $41 million financing package

• Impact –

– Less than 100 employees in 1993; today, 1,000

– Mill generated $160,000 in taxes in 1993; today, $543,000 per year – even with tax incentives in place

EPA cleanup grant:-- Taunton MA • 6.5 acre, century-old former

Robertson yarn mill; vacant 10 years

• $52,000 EPA cleanup grant to non-profit Weir Corporation

– Key first steps in cleanup, to demonstrate viability of local interest in redevelopment

• Set the stage for preparation of site for LIHTC-supported development

– 64 housing units

– 18,000 sq. ft. commercial space

• Leverage -- $15 million local/state/private investment

• New Markets Tax Credits

• Rehabilitation tax credits

Two key federal tax incentives that can be linked to site reuse transactions – including those with contaminated properties – all at

little or no cost to the project…

• Gives investors federal tax credits (39% over 7 years) for equity investments in designated Community Development Entities (CDEs), for use in low-income communities

• CDEs use their allocations to make loans or investments in “qualified businesses” and development activities –

Historically, most common investments -- in for-profit, non-profit businesses and real estate

Other eligible activities include -- charter schools, homeownership projects, community facilities

All investments at preferential rates/terms

Community, state financing groups looking to expand NMTC role in brownfield-type projects

New Markets Tax Credits

$3.42 billion authorized to 87 CDEs in 32 states

Allocatees anticipate making investments in 44 states

Distribution by area type:

$2.01 billion (60%) in major urban areas

$680 million (20%) in minor urban areas

$742 million (20%) in rural areas

Planned loans to or equity investments in include:

$2.75 billion (75%) to finance/support business loans

$831 million (24%) to finance real estate projects

New Markets Tax Credits -- highlights of 2013 funding round (announced 6/5/14)

• Challenging CDE designation, application

process requires significant capacity,

technical expertise

– Time consuming and complex

• Cannot be combined with LIHTCs, tax-exempt bonds

• Costly – legal, other fees

• Matchmaking a good CBO strategy – find a CDE with

an allocation!

– Recipients must allocate credits within 5 years

• Historically, 50% + of all allocations have supported

for-profit and non-profit business development

– Significant capital investment in central city areas

New Markets Tax Credits – fine print and caveats

NMTCs : Tip Top apartments –

Omaha, NE • Abandoned Ford Motor factory

(1916-36), center of blighted area

• Key concern – financing gaps

stemming from rehab of brownfield

into affordable housing

• Role of NMTCs – $12 million

instrumental in attracting private

capital from US Bank needed to

close the $24.5 million deal

• Result – 96 moderately priced

apartments, ground floor

commercial space with 138 jobs

• Significant additional private

investment in surrounding area

Taken the year renovated, income-producing building is put into service

20% credit for work done on historic structures, with rehab work certified by state

10% credit for work on “non-historic” structures built before 1936; no certification required

In 2013 – 1,155 projects, $1.35 billion in credits

Leveraged $4.02 billion in private investment

25% of projects less than $250,000 in size; 39% less than $½ million

21% of projects for office, 20% for commercial

Created 55,458 jobs

Generated $5 billion in state tax revenues, $4.9 billion in local tax revenues

Rehabilitation Tax Credits

Rehabilitation costs must be “substantial” – i.e., exceed minimum of $5,000 or the building’s adjusted basis

Property must be “income-producing” – multi-family rental housing can claim the 20% credit, but not the 10% credit

Rehab work must conform to state historic preservation standards – deter integration of “green” technologies

Credit is recaptured on a sliding scale (20% annually) if owner disposes of the building within five years of completing renovation

Rehabilitation Tax Credits –

caveats and “fine print”

Thames Street Landing – Bristol, RI • $8.3 million mixed-use redevelopment,

including housing, hotel, and offices at

a vacant downtown site

• 200-year history – buildings included

original Bank of Bristol (1797), Taylor

Store (1798) and DeWolf Warehouse

(1818); industrial uses started in 1861

• Developed in phases; banks unwilling to

provide follow-on financing until 1st

phase generated a positive cash flow

• Rehab tax credits key to generating

positive cash flow, attracting

additional private capital

• Today, project is cornerstone for historic

revitalization of Bristol waterfront

Ford Motor Assembly Plant,-- Richmond CA

• Built in 1930, 520,000 sq.ft. ; closed 1953

• Original Albert Kahn “ daylight factory”

• Rehabilitation work began in 2004

– Included seismic retrofits, green

performance measures, including

solar panels on roof

• $11 million in rehab tax credits

• Today – houses several

manufacturers of sustainable

products, plus 45,000 sq ft meeting

and entertainment venue

Linking Rehab and NMTCs – Lafayette Hotel, San Diego CA

• Opened in 1946, hotel declined, closed

after I-8 opened

• Center of urban redevelopment plan,

stalled in real estate slump in 2008

• NMTCs linked with rehab tax credits

to raise $6 million in capital for

renovation

– IRS “double-dipping” rule does not

apply

– 10% or 20% credits can work

– Financing in place for 7 years

– Brownfield buildings qualify

Take away message on financing transactions on contaminated mill sites…from Warren

Zeevon” “…I took a little risk.

Send lawyers, guns, and money,

Get me out of this….”

Take away message on mill site property reuse…from me

• Creatively use a mix of development and environmental programs to meet the full range of site redevelopment needs, attract private financing for every aspect of a transaction involving contaminated property – including those focusing on renewable energy

• Blend cash, process incentives, and cash offsets to make a project work

• Focus on creative strategies, ideas, program applications

For additional information….

Contact Charlie Bartsch at

Bartsch.charlie@epa.gov

(202) 566-1054

Plan on attending Brownfields 2015 !!!