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Brownfields: What Do Developers Want?

There are numerous success stories of public actions that appear to have attracted private investment in brownfield properties. However, we have little systematic evidence of what really works best to stimulate investment. By Kris Wernstedt and Peter B. Meyer

What is the relative value to private developers of third party liability protection versus protection from additional cleanup requirements after state approval of a response? How significant are incentives to a project's bottom line? Do developers care when and in what form public subsidies come?
With a research grant from the U.S. EPA, we recently surveyed more than 300 private developers who are members of the Urban Land Institute about their preferences regarding the redevelopment of contaminated properties.

We presented our respondents with a hypothetical $25 million residential redevelopment project that included $1 million of environmental costs for assessment and cleanup and an expected 20% return on investment. We asked each respondent to select a preferred hypothetical incentive bundle from a list of options.

The bundles included reimbursement for environmental assessment, public hearing considerations, full protection from any reopener costs after regulatory approval of the cleanup, full protection from any third party liability for environmental damage claims, and construction subsidies. Based on the responses, we statistically estimated the relative attractiveness of each individual action and translated these into dollar terms.

Our analysis suggests full relief from third party liability offers the biggest bang, representing nearly 20% of the project's profit. Protection from additional cleanup costs in the event of a change in standards or the discovery of additional contaminants is worth nearly 15% of the profit.

Introducing an additional public hearing requirement, in contrast, imposed the equivalent of a cost representing almost 5% of the profit. This likely reflects the possible deterioration in cash flows associated with requirements arising from the hearing or time from an extended project horizon.

Prior to the analysis, we expected that reimbursement for the costs of the environmental assessment would look better than a construction subsidy on a dollar-for-dollar basis because the latter is not paid if the project fails to go forward. But looking at all of our responses, we cannot detect a significant difference in the relative value of these subsidies, likely because of the small size of the reimbursement relative to the expected profit (about 2%).

However, the one-quarter of respondents who indicated that they preferred cash subsidies to fee waivers of equivalent value (for water hookups, for example) indicate a higher value for an assessment reimbursement than for an equivalent construction subsidy.

What Does It Mean?

What do these results suggest for the development of brownfield programs? The high value placed on third party liability relief reflects demand for certainty about and protection from lawsuits that more states may be able to address, either through legislative and regulatory changes or state-facilitated insurance. The states also could gainfully support cleanup protection, given the difficulty in obtaining privately-provided insurance policies for sites such as our hypothetical project that have cleanup costs under $1-$2 million.

In addition, while requirements for public hearings on brownfield projects appear to impose costs on developers, these costs are significantly less than those associated with liability risks. To the degree that public hearings help reduce future cleanup or environmental liability claims, such hearings could increase expected returns even absent state-sponsored liability relief.

Finally, the risk-based cleanups that are common at brownfield projects may leave residual contamination as well as residual financial risks. Our findings suggest that a risk-based cleanup could leave the equivalent of over $1 million worth of profits on a site when compared to a cleanup that eliminates all future liabilities. This result suggests that private developers and public officials both need to weigh the savings associated with lower upfront remediation costs against the costs of controlling the residual risks.

Kris Wernstedt is a fellow at Resources for the Future. Peter B. Meyer is director of the Center for Environmental Policy & Management at the University of Louisville.

This article has been reprinted courtesy of Brownfield News. It first appeared in the June 2005 issue of that publication.

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