Brownfields: Lenders Considerations Georgia Brownfields Academy Jekyll Island September 24th and 25t

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Brownfields Lenders ConsiderationsGeorgia
Brownfields AcademyJekyll IslandSeptember 24th
and 25th, 2007Randy A. MullerBank of America
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Understanding Banks - Corporate Responsibilities

• Banks, as for-profit corporations, have a
  responsibility to their shareholders
• Banks make a profit by extending credit to
  credit-worthy borrowers
• Risk averse bank behavior is governed both by
  banking (monetary policy and appraisal) and
  environmental regulation
• Banks cannot create a demand for brownfields

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Credit worthy

• Loan to value ratio, debt coverage ratio and
  default risk are acceptable
• Sufficient financial assurances in the deal to
  make a lender comfortable that the loan will be
  repaid in the event of default

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Banks Lend to BorrowersNot Properties
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Understanding Bankers - Personal Responsibilities

• Corporations are made up of individuals
• Individuals are generally incentivized based on
  productivity (i.e., the number of loans closed)
• As with any cause, individuals within their
  respective corporations must rise to answer the
  call

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The Heart of the Problem - PPM to Dollars and
Cents

• Lenders require that all expressions of risk,
  including environmental risk, be quantified in
  terms of dollars and cents.

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The First Question

• D - E - M - A - N - D
• Is there sufficient, reliable, revenue producing
  demand for the property/project regardless of the
  environmental condition? (market studies, etc.)
• What will be the source and reliability of
  repayment cashflows?

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If There is Not Sufficient, Reliable, Revenue
Producing Demand..

• Unlikely the deal can be done (or should be done)
  without public subsidization
• What is the public/municipal level of support?
• If strongly supported, consider revenue or
  general obligation bonds.

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If There Is Sufficient, Reliable, Revenue
Producing Demand, Where Do I Go?...
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Real Estate Secured Loans

• Loan to Values limited typically to 75 (Cant do
  it)
• DCR target of 1.2 (Unlikely)
• Environmental due diligence costs must be
  expended prior to receiving a loan commitment
  (Wheres the money come from?)

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Alternative Underwriting Tools

• Cross collateralization
• Federal (i.e., SBA 504) and/or state loan
  guarantees
• Alternative loan products (graduated payments,
  interest only/balloon, equity participation,
  etc.)
• Creative approaches - value restoration
  schedules, remediation intermediaries, etc.

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Cash Flow and Reserve Considerations

• Short or long term remediation costs should be
  appropriately amortized and evaluated against
  relevant cash flows.
• Reserves should be specifically identified within
  the use of proceeds to address environmental
  concerns.

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Indemnification Considerations

• Financial strength of issuing entity
• Limitations in the scope of coverage
• Limitations in the length of coverage
• Assignability

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Recommended Legislative/Policy Changes -

• Establish consistent approaches to institutional
  and engineering controls (liability, maintenance,
  etc.)
• Resolve outstanding regulatory concerns (windfall
  lien provisions, vapor intrusion/inhalation
  standards. etc.)

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Additional Considerations

• Rural vs. Suburban vs. Urban competition
• All advantages (i.e., existing infrastructure and
  logistics) and disadvantages (i.e., property
  assembly, crime, school quality, and taxes) must
  be fully evaluated
• There has been no consideration of an integrated
  national brownfield solution - one citys gain
  continues to be another citys loss
• No appreciable gain within the U.S.
  industrial/manufacturing sector of the economy

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Conclusion

• Banks are for profit entities that must balance
  shareholder value and the interests of the
  communities that they serve.
• Understanding the risks are the key to mitigating
  them.