THE EFFECTS OF ENVIRONMENTAL HAZARDS AND REGULATION ON URBAN REDEVELOPMENT

Submitted by Researchers From:
Urban Institute
Northeast-Midwest Institute
University of Louisville
University of Northern Kentucky

Submitted to:
U.S. Department of Urban Development
Office of Policy Development and Research
U.S. Environmental Protection Agency
Office of Policy

UI Project No.; 06542-003-00

THE EFFECTS OF ENVIRONMENTAL HAZARDS
AND REGULATION ON URBAN REDEVELOPMENT

August 1997

The Department is now actively participating in the Administration's initiative to help communities clean up and sustainably redevelop brownfields. The Department is taking a series of programmatic steps to be responsive to this high priority of concern of State and local elected officials. This includes new Economic Development Initiative funds to specifically address brownfields redevelopment needs, provide technical assistance to State and local governments, and streamline community development regulations to make them more friendly to brownfields redevelopment.

A key part of the Department's efforts is an active brownfields research program. The Office of Policy Development and Research is implementing an aggressive research agenda in support of the Department's programmatic efforts. The purpose of our brownfields research and development program is to better understand how brownfields are impediments to revitalization of America's distressed communities, and to develop ways to overcome and eliminate those impediments.

Our ongoing research is examining a range of issues: how the intertwined issues of environmental risk and neighborhood economic distress affect the redevelopment process; how the Community Development Block Grant program supports local brownfields revitalization efforts; the feasibility of using environmental insurance as a tool to spur economic redevelopment; and innovative approaches for financing brownfields clean up and development activities.

This report, jointly sponsored by HUD and EPA, provides insight into some of the most basic issues confronting brownfields policy: the relative importance of environmental risk versus neighborhood economic distress as deterrents to the neighborhood development. The report addresses the significance of: 1) site contamination as a deterrent to brownfield redevelopment, as compared to other factors retarding reuse; 2) which environmental development cost or uncertainty most deters investments in redevelopment; and 3) which types of State brownfield clean up policies and programs are likely to be conducive to investments and redevelopment. This report sharpens the focus on what the real policy issues are and what are appropriate policy options for addressing these issues.

Paul A. Leonard

Deputy Assistant Secretary for
Policy Development

This report was drafted by Christopher Walker and Patrick Boxall of the Urban Institute, Charles Bartsch and Elizabeth Collaton of the Northeast-Midwest Institute, Peter Meyer of the University of Louisville, and Kristen Yount of Northern Kentucky University. We thank Ken Chilton, Jason Greenberg of the U. of Louisville, Maris Mikelsons of the Urban Institute, Brandon Roberts, and Robert Schneider of Public Policy Associates for their help in data collection. We acknowledge the patient guidance of Edwin Stromberg of the Department of Housing and Urban Development and the advice and assistance of Ludmyrna Lopez, Linda Garczynsky and Ben Hamm of the U.S. Environmental Protection Agency. We also thank the numerous developers, lenders, State and local officials, and others who took their valuable time to speak with us. Mistakes and conclusions are those of the authors, and not their respective institutions.

Executive Summary

The Effects of Environmental Hazards and Regulation on Urban Redevelopment

In the Fall of 1995, the U.S. Department of Housing and Urban Development, and the U.S. Environmental Protection Agency jointly funded the Urban Institute and its subcontractors -- Northeast-Midwest Institute, University of Louisville, and Northern Kentucky University -- to conduct research on the effect of environmental hazards and regulations on urban redevelopment. At issue are the thousands of previously developed parcels that are now vacant or underutilized relative to their economic potential. These so-called "brownfields" (as opposed to undeveloped "greenfields") often are suspected of being contaminated by toxic waste. Federal law holds past, current, and prospective property owners liable for cleanup of this waste, but many observers fear that the cost of clean-up, added to other urban development costs, simply makes these properties uneconomic to redevelop. Others believe that the fear of clean-up liability, alone, keeps potential investors away from all brownfields properties, thereby chilling urban renewal prospects.

To help inform policymaking in this area, HUD and EPA sought answers to three major questions: (a) how important a development deterrent are environmental contamination and regulation compared to other, "non-environmental" barriers to investment, (b) which among environmental barriers are most troublesome, (c) what kinds of State and local economic and environmental policies offer most promise to encourage redevelopment on contaminated or potentially contaminated sites?

We approached an answer to these questions with an explicit emphasis on the State and local economic, environmental and policy context. We canvassed the views of developers, property sellers, lenders, public agencies, environmental consultants, and other actors in the redevelopment process for a sample of 48 redevelopment projects in 12 cities in 4 States. These included both failed and successful efforts on sites suspected, but not necessarily known, to be contaminated. (In 22 cases, failure and subsequent success happened on the same site.) For the most part, this research relies on analysis of views expressed by developers -- those who weighed the pros and cons of development most carefully.

Based on evidence from our sample projects, cities, and States, we conclude that (a) environmental issues, while often important, were never the single critical obstacle on failed development deals --- other non-environmental factors (potential demand, extraordinary costs) mattered also, to a degree depending on local circumstances; (b) immediate environmental costs, rather than the fear of liability for future claims, were developers' predominate concern, and (c) State and local actions to promote brownfield redevelopment appear to have the highest payoff where explicitly linked to efforts to create viable markets and build system capacity to respond to environmental issues.

Policy Background

Industrial production produces waste materials, many of which are toxic. In an earlier era of disregard for the effects of these substances on public health, much of this waste was released into the air, poured into drains or waterways, dumped onto the ground, or buried. Federal and State governments now regulate these disposal methods as potentially injurious to the safety of human health and the environment. Unfortunately, many thousands of sites previously and currently used for industrial (and some commercial) purposes remain contaminated. An unknown portion of these sites continue to cause widening pollution of surrounding soil and water supplies, even long after production on those sites has ended.

Almost everyone agrees that the best way to clean up contaminated sites is to bring them back into productive, but non-polluting, uses. Although Federal and State laws require site cleanup or other measures to control contamination, owners of idle property often don't know if their sites are contaminated; even if they do, they have little financial incentive to simply clean up the property without some economic payoff. Redevelopment often involves property sale, mortgage placement, public subsidy provision and other actions that trigger efforts to bring contamination to light and give buyers or sellers an incentive to remove or control it.

Unfortunately, a large percentage of contaminated sites are located in inner city areas that are unattractive to industrial, commercial, and residential redevelopers. This is particularly true of traditionally industrial parts of the country -- the metropolitan Northeast and Midwest, although inner cities in other regions also are affected.) For example, modern industrial processes require large amounts of land, usually difficult to assemble in crowded central cities. But in addition, the cleanup requirements themselves pose an added cost burden on sites that are already uneconomic to begin with. In short, site contamination afflicts those areas of the country least able to spur the redevelopment needed to remove it.

As a result, public policymakers and private developers, bankers, and insurers have sought ways to reduce the deterrent effect of environmental contamination and clean-up requirements. The Federal government (through EPA) initiated a Brownfields Pilot program to encourage State and local economic development and environmental officials to work together with other development actors to get contaminated sites back into productive use. States have enacted their own environmental statutes, which can establish cleanup standards, specify remediation options, assign responsibility for clean-up costs, provide economic development and site cleanup financing, and certify sites as clean in ways that are different from Federal statutes. Environmental activists have expressed concern that State policies intended to make environmental clean-ups easier may not adequately protect public health and the environment, either now or in the future. Developers have argued that Federal and State laws are more strict than they need to be, thereby hampering urban redevelopment efforts.

Research Questions

In theory, vacant or underutilized urban lands are a development asset, able to support new investments in industry, commercial facilities, and housing. In practice, these properties often are unattractive compared to suburban, exurban, or rural sites. Many of these disadvantages are well known: outmoded, inefficient, buildings, small parcel sizes that require assembly, obsolescent or deteriorated infrastructure, zoning and other regulatory constraints, security concerns, and others. Many are contaminated, as well, adding further to the comparative unattractiveness of these properties. But by how much? Even if sites were clean, would developers find them attractive? We examine this question in Chapter 3 of this report.

Everyone agrees that clean-up can be expensive, but some developers, bankers, and economic development professionals have argued that cost may not be the biggest redevelopment barrier. The Federal Comprehensive Environmental Response Compensation and Liability Act (CERCLA) of 1980 and most related State legislation require that parties "potentially responsible" for land contamination be held "strictly, and jointly and severally liable" for cleanup. This means that property owners may have to pay to clean-up all of the contamination on a site, even if they only caused a small part of it, or even none at all. Complex and costly legal negotiations can be required in the event that multiple "potentially responsible parties" have contributed to the problem. In some cases, even lenders who have foreclosed on property have been held liable for site cleanup. In view of the considerable uncertainties around potential costs, some developers forego brownfield development altogether, and analysts find that at least some lenders do also. How important is this problem of liability compared to remediation costs as a deterrent to urban land investment? We examine this and related questions in Chapter 4.

As traditional promoters of local area economic development, State governments have been particularly active in legislating ways to assign liability, programs to encourage "voluntary" cleanups, and financing programs to subsidize brownfield investment. How effective are these initiatives as stimulants to redevelopment? Do developers rely on State assurances as safeguards against future costs to remediate properties they have developed already? How well do developers respond to the offer of economic development assistance through subsidies for capital investments? We examine this question in Chapter 5.

Study Methodology

Given the state of knowledge of these issues, we viewed this study as exploratory, not warranting expensive data collection covering a large number of redevelopment properties for the purposes of statistical model building. Rather, we adopted an approach designed to get the most analytical payoff from data collection in a small number of projects, urban areas and States:

• We selected four States from three types of State policy "profile:" (1) States that offered property developers some form of assurance that if they cleaned their property to the State's standard, they would not be subject to further State action (Oregon), (2) States that offered this assurance, and offered financial assistance to help cover costs of site contamination assessments or cleanup (Pennsylvania and Minnesota) and (3) States that offered neither assurances nor money (Virginia).
• We then chose a large, medium, and small urban area in each of the four States, using population size as a rough proxy for capital availability and relative "sophistication" of the local development community. We also strove for a mix of cities with declining, or stable or increasing manufacturing employment, as a proxy for the brownfields availability and demand.
• We selected four projects from each urban area; two completed projects and two failed development attempts. ("Failed" projects were those in which a developer took steps to begin project development -- e.g., negotiate a property purchase -- but did not subsequently place the project into service.) Where possible, we selected completed and terminated project attempts on the same site to control for potentially large differences in location that may distort comparisons of projects on different sites. We also sought a mix of project dollar values, sources of financing (public or private), and end uses (industrial, commercial, or residential).

For each project, we interviewed developers lenders, public officials, site assessors, lawyers, and others. In our discussions, we asked about "obstacles" and "facilitators" to redevelopment, and asked them to comment on the relative importance of a number of environmental and non-environmental concerns that may have affected their project. The remainder of this summary reports the results of these conversations.

Environmental versus Non-Environmental Factors

Based on our research, we concluded that non-environmental factors -- the "market" as it reflected redevelopment costs and potential demand -- most often posed the critical constraint on project progress. Obviously, projects that went forward successfully did so despite environmental concerns. But even where projects failed because of environmental problems perceived as "critical" by the prospective developer, we cannot conclude that environmental factors, alone, "killed" these deals. In fact, among our matched pairs of projects, later developers successfully redeveloped sites on which earlier developers had failed. Developers who correctly read their markets and were expert at the development process (including the sources and uses of government subsidy) effectively overcame environmental obstacles. Projects on sites not redeveloped later did not fail only because of environmental concerns; problems of costs and potential demand also were critical.

Our goal was not simply to make statements that environmental concerns either did or did not "kill deals." Almost any local economic developer or realtor can point to sites that might have been redeveloped if Federal and State environmental protections did not exist. Our task was to explore the circumstances under which environmental concerns gained prominence in development decision-making. We found that environmental issues mattered most when:

• Potential market demand was weak or highly uncertain.

Our Virginia projects were a case in point: environmental issues caused greater concern in the "downstate" markets -- Richmond and Lynchburg -- where demand for previously-used industrial sites was soft compared to strong demand for urban land in Alexandria, in the Washington, D.C. metropolitan area.

• Developers and/or lenders responded inappropriately to environmental issues.

We found several examples of developers who lacked the expertise needed to effectively undertake complex deals. In addition, several developers who feared huge environmental cleanup bills attempted to evade detection by surreptitious removal of contaminants. These developers fundamentally misperceived their potential liability for cleanup or exaggerated its cost, largely because they had little experience with environmental rules (beyond the "horror stories" that circulate among those active in the field). Similarly, we encountered cases of lenders that refused to lend on projects without State assurances, even though the projects did not require them under State law.

• The land cost differential between greenfield and brownfield was low (usually because of greenfield proximity).

Our research showed that developers with brownfield sites in close proximity to un-developed sites found environmental contamination a more significant obstacle than developers in more urbanized areas. The easy option of greenfield development (even with additional infrastructure costs) meant that marginal environmental costs mattered more in the decisional calculus.

The Relative Importance of Different Environmental Concerns

We found that anticipated or actual costs to remediate environmental contamination posed the most serious obstacles to redevelopment in our project sample. Although developers frequently cited fears of liability for unknown, but potentially large, remediation expenses as a critical obstacle, these concerns were always cited together with issues of actual remediation cost. Liability concerns were never the sole "critical" environmental obstacle to redevelopment. Other findings include those tied to the relative importance of other costs and uncertainties, and the effects of project financing and State program participation on redevelopment efforts:

• Some developers were deterred by high perceived, not actual, contamination costs, particularly in States where brownfield cleanups were not common.

Some developers who told us that cleanup costs were a "critical" or "important" obstacle to redevelopment at the time they made a decision to invest or not invest in a project, also told us that they had exaggerated these costs, in retrospect. We found this most often in States without extensive experience in environmental cleanups -- Oregon and Virginia.

• Several factors we expected would deter redevelopment proved not to be significant obstacles compared to other barriers.

Apparently, developers did not fear that their ability to market property to potential commercial or residential tenants would suffer because of "stigma," or an unfounded belief that a development on formerly contaminated property would continue to pose a threat to human health. Neither did they deem the cost of initial site condition assessment as a critical or important obstacle. However, we did hear reports that developers avoided some industrial areas because they were stigmatized as "dirty."

• Developers sometimes found it hard to borrow money for redevelopment, but these difficulties appeared not to be related to lender fears of cleanup liability.

Lender fears of liability for site clean-up did not place significant obstacles before developers seeking finance for the properties we sampled. Almost all projects with financing problems also had substantial environmental cost problems (and other cost problems, as well). Developers tended not to blame their lenders as overly cautious on environmental issues, even though they may have had some incentive to do so, especially on terminated projects..

These findings reinforce those from our discussion of market versus environmental factors. The primacy of cost concerns argues for public priority to subsidize the extraordinary cost of development where broader public purposes are served. (More on this below.) Although State attempts to lower the perceived level of liability risk are important (and are progressing rapidly in a number of States), policymakers should not expect that State assurances, alone, will be sufficient to induce substantial new demands for brownfields properties. Furthermore, the role of lenders as de facto monitors of property owner (borrower) compliance with environmental statutes argues for public efforts to build the capacity of lenders to understand and apply environmental statutes to underwriting decisions, and encourage developer borrowing to finance redevelopment.

Brownfield Redevelopment Policies

State and local financial subsidies and legal assurances aided revitalization in a number of our sampled projects. But because financial assistance can be expensive and potential demand is high, State aid cannot be allocated to all projects that meet a "public benefit." Under what circumstances, then, should government act?

Most policymakers believe that government should act when private markets fail. Fortunately, our background research for this project shows that markets have begun to respond to environmental problems in ways that should spur investment in brownfield properties. First, insurers have developed products that reduce risk to project investors, including coverages for over-runs on cleanup expenses, costs to remediate undiscovered contaminants, liabilities due to incomplete or improper remediation and other risks. Second, lenders in some States and larger urban areas seem to have emerged from a period of skittishness over legal liabilities, and new forms of venture capital for brownfields redevelopment have become available. Third, some developers have become specialists in acquisition and redevelopment of contaminated lands, which allows them to seize opportunities not apparent to those unfamiliar with environmental assessment and remediation practices.

Despite these positive trends, the market cannot offset the additional risks and costs of investment in most cases. Insurance tends to be affordable only for larger projects; lenders retain their traditional conservativism, especially when faced with the risk that contamination will reduce asset value; and developers with special brownfields expertise also tend to focus on larger properties. Therefore, some developments will continue to require public assistance to move forward, and States will continue to play a role in redevelopment decisionmaking.

What role should State and local governments play? Borrowing traditional policy analysis tests for the appropriateness of public action, we argue that State intervention makes sense if it: (a) establishes the basic "rules of the game" that protect public health but allow economic transactions to take place relatively efficiently, (b) "makes markets" by encouraging multiple and near-simultaneous private investments in certain areas or sectors, and (c) acquires and disseminates information more efficiently than private actors find possible. Each of these are discussed in turn.

First, the basic "rule of the games" in this study are State assignment of liability among sellers and buyers and assurances to developers through No Further Action Letters or Covenants Not to Sue that successful cleanup will shield them from future State action. States do, however, reserve the right to "reopen" a case if new contamination is discovered or standards of cleanliness change. Further, Federal EPA retains the right to act regardless of the assurances States provide. Our research shows the importance of clear assignment of liability, protection of buyers from liability for past contamination, and certification of cleanups as meeting State standards. (Recall that we also found that State assurances are unlikely by themselves to move many projects forward.) We conclude that:

• Land-use-based cleanup standards (different levels of cleanliness for different land uses) and institutional controls (protection, but not full cleanup) can spur faster, cheaper, redevelopment, but the Federal government must ensure protection of human health and the environment.

Our research finds that industrial projects appear to be more sensitive to up-front cleanup costs than are other types of projects, and that reduced standards for industrial land can help lower these costs. So can "institutional" or "engineering" controls (e.g., deed restrictions or fencing) that stop short of full clean-up, but prevent exposure of persons and the environment to in-ground contaminants. Both land-use-based standards and institutional controls limit future land uses. The Federal government maintains an interest in ensuring that if State Voluntary Clean-up Programs choose to use these methods, they have the capacity to do so effectively. Particularly important is State capacity to monitor the effectiveness of institutional controls over the long-term.

• Economic development staff training on environmental standards, remediation technologies, and liability issues is critical to effective links between economic development and environmental protection program implementation.

Developers regarded development finance and agency help in navigating the regulatory maze as significant facilitators to project success. In effect, development agencies (especially on larger projects) are developers' point of entry into the environmental policy and legal arena. Especially important are links between State environmental and development agencies responsible for rural and smaller urban areas, where county and local governments are not particularly well staffed.

• State Voluntary Cleanup Programs promise to help smooth transactions, encourage the flow of credit, and reduce future uncertainties, but they can be counter-productive in some local markets.

As an indicator of the success of the Pennsylvania and Minnesota voluntary clean-up programs, developers and lenders broadly accept State liability assurances as bona-fide hedges against future clean-up risk (in spite of possible "reopeners" or independent Federal action). In Minnesota, for example, developers want the State's No Further Action letters even if they don't need them, just to show lenders that environmental risks are nil. In Oregon however, and especially in the State's smaller urban areas, lenders demand State assurances as a precondition for lending, but the State cannot process the letters quickly; some deals fall through because of these delays. (Prior to the Oregon law, some lenders would have extended credit for similar projects on the strength of an environmental consultant's opinion.)

Second, State initiatives to encourage brownfield redevelopment also can include direct financial aid to brownfields developers. Our second test of appropriate public action is whether these policies make sense by making markets -- encouraging multiple investments in certain areas of the State or city (e.g., an industrial port district) or in certain sectors (neighborhood-based retail) -- or removing imminent threats to public health. Findings from our study sites include:

• Among study States, the policy with the clearest stimulative effect on the competitiveness of brownfields is Oregon's controls on urban growth.

As noted, nearby greenfield sites can be a major competitive disadvantage to brownfields. However, as Oregon development reaches the growth limits set in the 1970's, demand for brownfields properties has increased noticeably. These policies are politically difficult to implement and they tend to be sustainable only in very strong markets. Other less intrusive techniques -- transferable development rights, for example -- may be good second-best options. (These limit growth overall, but property owners and prospective developers can buy and sell these rights, allowing "transfer" from one place to another.)

• We found no strong economic rationale for restricting subsidies only to cover site remediation costs, versus other costs that make redevelopment unprofitable.

Our research found that remediation costs were an obstacle to redevelopment, but that other factors also deterred investment (e.g., high land or infrastructure costs). Any type of above-normal cost can sink desirable deals; experienced project developers tend to roll environmental costs into projections of overall costs and revenues, then evaluate the result just as a developer on a clean site would do. Unless public health or the environment face imminent threat (as they do on Federal Superfund sites) there is no economic rationale to earmark funds for remediation, only. Such earmarking limits the flexibility needed by agency staff to tailor subsidies to developers' financial need.

• We found multiple examples of subsidies that failed to pass basic tests of efficiency, either because developers received more than they needed to make projects work, or the projects themselves produced little public payoff.

Economic developers underwrite industrial, commercial, and market-rate housing projects to offset extraordinary costs or absorb the risk of shortfalls in demand. We studied several projects in which public subsidies produced meager returns of public benefit, either because they would have happened anyway, or the projects proved unmarketable no matter how much subsidy was invested. State and county subsidies for greenfield development were particularly inappropriate, as they subsidized investments that probably would have been made anyway. These subsidies aggravate the competitive disadvantage of potentially marketable central city sites.

Our third policy criterion is the public agency role in accumulating and disseminating data to support investor decisionmaking. State and local efforts to educate the redevelopment industry on environmental standards, remediation technologies, and legal liabilities are a good example of this. Our findings argue for more strenuous efforts in this area:

• Efforts to bolster networks among developers, lenders, and economic and environmental agency staff can encourage critical flows of information among parties to redevelopment.

In a number of cities, local partnerships formed to combat barriers to redevelopment of urban land have stimulated new "systems" in which information flows have eased tremendously. For example, the Chicago Brownfields Forum (not part of our study) brought together the full range of local stakeholders to review environmental deterrents to investment and recommend concrete steps for public and private action. In turn, participants in the Forum served as links to others in their industries not directly involved.

• We found less "sophisticated" systems in need of considerable technical help; the role of lenders as de facto agents of environmental program enforcement argues for strengthening their capacity to apply environmental requirements.

State governments should take the lead role in guiding environmentally-sound redevelopment efforts in less urbanized areas of their States. Pennsylvania's regional administrative structure takes an active, and apparently successful, role in areas without substantial in-place capacity. Lenders have much at risk in brownfields redevelopment and can be unnecessarily conservative in areas where environmental requirements are not well understood. Technical education programs designed for (and aggressively marketed to) smaller lenders promises considerable payoff in credit availability.

We did not intend to research program or policy issues tied to specific Federal initiatives, but we believe our research has implications for Federal policy. (Because our emphasis was on State programs and not Federal agency enforcement, as such, we do not comment on recent amendments to CERCLA that cover lender liability or other issues.) Based on our findings, we suggest that:

• In view of various pressures on States to relax environmental cleanup and enforcement statutes, there is a clear need to maintain a Federal "floor" that allows States to innovate without fearing future Federal interference.

We found that land-use-based cleanup standards and institutional controls can lead to cheaper and swifter cleanups for cases where some contamination is left in-place, compared to cleanups that require more aggressive remediation techniques. But some respondents feared (although one hoped) that a State's ability to monitor the effectiveness of these remediation approaches could suffer under if State budgets shrink; e.g., in a future economic downturn. Inter-State economic competition also may produce pressures to reduce standards; e.g., neighboring States competing for similar types of investment may "ratchet-down" standards in an attempt to make industrial development comparatively more attractive. We argue that consistent monitoring of State remediation decisions and local capacity to maintain the integrity of institutional controls are needed to shield public health from competitive pressures. This also will allow State officials to innovate without fear of future Federal sanctions.

• The Federal government should continue efforts to discourage public investments in development that increases the competitive disadvantage of brownfields.

The Federal government plays an indirect but important role in influencing the location of private investments across regions, States, metropolitan areas, or localities. In recent years, particularly with passage of the Inter-modal State Transportation Efficiency Act (ISTEA) that encourages new regional planning initiatives, the Federal government has backed away from earlier uncritical support for suburban economic development. Federal policymakers should encourage better targeting of Federal Community Development Block Grant and industrial development bond investments, which do not have to be targeted to distressed areas.

• Direct or Indirect Federal Investments in the form of capital subsidies for brownfield redevelopment should be explicitly linked to local capacity-building efforts.

The USEPA now administers a brownfields pilot program that encourages formation of new local partnerships for brownfields developments. These partnerships consist of relationships among public agencies, developers, lenders, and community representatives to create capacity to redevelop brownfield sites. We think this approach makes sense: new local institutions can sustain momentum once Federally-funded efforts end. We warn, however, that direct Federal investment in local development projects makes little sense unless explicitly tied to a demonstration model that seeks broader programmatic lessons. (Federal funders lack knowledge of local development needs, policies, and markets to make informed choices among alternative development proposals.)

In sum, we found through this research that under the right circumstances, brownfields redevelopment on contaminated sites can proceed. These circumstances include underlying market demand, savvy developers, and reasonably sophisticated networks of developers, lenders, and public agencies. Although environmental conditions can present critical obstacles, we found that most deals worth doing can be completed successfully in spite of these conditions. We also found that liability assurances can be of significant benefit in encouraging brownfield investments, but that these assurances, alone, can't offset more serious concerns over remediation costs. Finally, packages of government support for capital investment and help through the regulatory maze are important, but need to be targeted effectively to yield much in the way of long-term public benefit.

Chapter 1

Background and Research Issues

Policy Issues

Over one hundred and fifty years of industrial development in the wealthiest nations in the world have left their mark, and since at least World War II, economic production has relied on ever more quantities of complex chemical compounds. As a result, hazardous substances pervade the US economy. The Congressional Budget Office estimated that Americans are responsible for generating more than one metric ton of hazardous waste per person per annum (Congressional Budget Office 1985). Over the same period, increasingly mobile capital has fled inefficient production locations, leaving behind potential environmental hazards.

This environmental contamination aggravates well-known comparative disadvantages of previously developed "brownfield" sites in urban centers relative to undeveloped "greenfield" locations in suburban, exurban, and rural areas. As previously-developed sites, brownfields often contain buildings and facilities from earlier industrial periods. These facilities typically are liabilities, not assets, because they cannot accommodate more recent production processes. These sites require clearance, sometimes the acquisition of many smaller plots to form a single large site for modern single-story production facilities, and otherwise present redevelopment costs not found in previously undeveloped, greenfield, sites.

When sites are contaminated, not only must buildings be cleared for new uses, but chemicals stored on the properties and spilled into the soil must be removed. Thus older industrial areas - often major portions of the land areas of urban centers (which continue to house large proportions of the population)--face growing problems in attracting new development capital. In addition, the continuing underlying problem with brownfield sites is the presence or apparent risk of environmental hazards that threaten nearby residents.

The Federal government has articulated a national purpose to protect citizens from hazardous materials, and to help States and localities redevelop economically depressed areas. In 1976, the Congress passed the Resource Conservation and Recovery Act (RCRA), and following a four-year debate over the promulgation of implementing regulations, the 1980 Comprehensive Environmental Reclamation, Cleanup, and Liability Act (CERCLA). The 1980 CERCLA now sets the Federal framework for assigning liability for past contamination and for the most seriously polluted sites (so-called "Superfund" sites) for direct expenditures for site clean-up. (Within the Federal framework, States and localities have crafted a variety of legal, financial, and regulatory responses to site contamination. This legal framework will be discussed, below.)

This national interest in cleanup of contaminated sites can be justified on a number of grounds. First, the current generation benefits from the accumulated wealth amassed by past generations. Arguably, all U.S. residents have benefitted from the high economic growth made possible, in part, by use of toxic chemicals and its attendant environmental neglect. In effect, we borrowed from the future by not cleaning up. Of course, the debts thus incurred were often not voluntary or conscious: the dangers of indiscriminate disposal of chemicals were not known or well-understood. But these "loans" are now being called. Repayment takes the form of cleanup and safe disposal of the chemical and other toxic residues of past production practices, and is arguably a national responsibility.

Second, the immediate potential health - and indirect economic - impacts of hazards do not affect all citizens or parts of the country equally; i.e., national intervention can be argued on equity grounds. Hazards appear to be concentrated in areas adjacent to abandoned or underutilized old production facilities (and those near plants continuing to produce with potentially hazardous industrial raw materials). U.S. population dynamics suggest that the residents of those areas are disproportionately poor and minority. Thus the brownfields problem and the linked issues of cleanup and redevelopment inequitably affect the least-advantaged groups among us, and those least able to exercise the "mobility" option. These groups also live in jurisdictions--central cities and older industrial suburbs--that are least able to mobilize the financial capital needed to clean up or contain hazardous sites.

Third, site contamination deters redevelopment. Central city industrial decline, combined with (often Federally-subsidized) suburbanization, poses broader environmental and economic efficiency issues. Growth of urban sprawl, increased reliance on single occupancy cars for travel to work and loss of leisure time to commuting imposes environmental costs of their own (e.g., deteriorated air quality). Urban fiscal problems have been exacerbated by loss of revenues from abandoned lands while environmental hazards on those sites may have driven up local healthcare costs. Returns to public capital--roads and bridges, water and sewer systems, and so on--are depressed while potentially productive sites are held off redevelopment land markets. Successful reclamation, redevelopment and reuse of brownfields may be expected to not only reduce broad urban environmental problems such as air quality, but also enhance metropolitan area economic capacity.

However, these legitimate national interests can conflict. On the one hand, protection of health and safety obliges action to clean up or contain contaminated sites, and to appropriately distribute the costs of doing so. On the other hand, economic efficiency and the resulting redistribution of employment and income to the economically disadvantaged argues for clean-up standards and cost allocations that do not deter investment. How contradictory are these general policy goals? Given the multiple barriers to urban redevelopment--land values, site configuration, deteriorated infrastructure, security costs, and a litany of other concerns--how consequential are the deterrent effects of environmental hazards and regulations? This policy issue drives our first research question (described in the next section).

A second policy issue is the unintended consequences of environmental protection policy. Some analysts of urban land markets have suggested the considerable uncertainties created by Federal remediation standards and assignment of liability for clean-up costs chill the market for brownfield sites, and indirectly, for proximate sites, as well. It has been argued that current holders of property "sit on" under-used sites even though they could be put to productive use, for fear of incurring unknown, but potentially very high, clean up costs. It also has been argued that owners, investors, and potential redevelopers may exaggerate the potential costs. Therefore, even though the goal of site clean-up standards and assignment of liability is to promote site remediation, aspects of current policies may in fact deter investors from pursuing options that would do just that. Our second research question is on the relative importance of costs and uncertainty about costs in deterring brownfields investment.

Finally, this research examines, indirectly, the inter-governmental dimension of the policy problem. National legislation has established the basic framework within which States are free to devise policy solutions that augment Federal efforts or mitigate their adverse effects. States have chosen varying mixes of policies. How well do various mixes work to promote urban redevelopment without sacrificing site clean-up objectives?

Each of these three issues--the significance of environmental costs relative other deterrents to investment, the relative effects of components of environmental costs, and the effectiveness of State interventions--are treated in turn, below. It should be noted at the outset that our analytic approach holds constant cleanup standards and technologies; i.e., we will not examine the issue of "how clean is clean" nor will we assess the appropriateness of alternative toxic remediation procedures.

Research and Analysis Questions

Three research questions constitute the core of this study:

1. How significant are site contamination concerns as a deterrent to urban brownfield redevelopment, compared to other factors that retard re-use?

2. Which of the environmental costs and uncertainties most deter investments in brownfield redevelopment?

3. Which combinations of State policies and programs best encourage investment in brownfield clean-up and redevelopment?

Factors shaping urban redevelopment are national and global in scope: technological change shifts the spatial requirements for production facilities, international capital markets affect flows of funds to US urban areas. This research limits its focus to the role played by the presence, or fear, of contamination on brownfield sites. Data collection was tied directly to the uncertainties and costs of contamination on particular sites and contextual factors at play in the urban areas and States in which sites were located. We control for these factors through our selection of States and urban areas within States. Our basic analysis approach (described in the next section) is to examine how public and private parties to redevelopment decide to accept or reject the costs of clean up and the potential risks and liabilities in redeveloping brownfields.

1. How significant are environmental hazards and regulations as a factor in discouraging redevelopment of urban brownfields compared to other deterrents?

Urban brownfields collectively present an enormous redevelopment problem if hazards or regulations raise project costs or discourage capital flows compared to greenfield alternatives. There are several reasons why Federal law should be expected to have this affect: the requirement that sites be cleaned, and the assignment of liability for cleanup costs.

The Federal law embraces the principle that "polluters pay;" that private sector (or at least, non-Federal) funds pay for clean-ups. The central tenet of CERCLA and its successor laws--imposition of strict, retroactive, joint and severable liability--means that the entire chain of property owners, and potentially their advisors and other investors, can each be held liable for any and all contamination on a site and for any damage caused by that pollution. These are "potentially responsible parties." Further, these parties can be held liable whether or not the damage occurred while any one held title ("strict" liability). Acceptance of full liability by one party cannot absolve others of potential liability in the event that the costs of mitigation exceed the assets of the party accepting responsibility (liability is "joint and several").

Thus, in addition to potentially high costs to remediate past pollution, considerable uncertainty surrounding potential liability abounds for all parties with any present or past relationship to a contaminated or potentially polluted property. Both costs to remediate and uncertainties about liability have discouraged at least some lenders from placing mortgages on brownfields properties because they may of questionable value as collateral and because lenders may fear incurring cleanup liability if they foreclose. (Schnapf, 1992; Toulme & Cloud, 1991). Witkin (1992) argues that to reduce this uncertainty, some lenders avoid potentially polluted land altogether; others demand very extensive site investigations. Uncertainties also may depress projected returns on investment in property development and thus impede clean-up and re-use of under-employed and potentially (not necessarily actually) contaminated land.

Developers also may avoid contaminated brownfield properties because they produce inadequate returns compared to non-contaminated brownfield sites or greenfields. This can be because:

• Brownfields pose higher costs, including both remediation costs and transaction costs such as environmental assessment fees, project delays pending full investigation of the scope of contamination, increased loan underwriting costs, reserves to cover unpredictable clean-up costs; and legal expenses to reduce due diligence liability risk and reassess evolving regulatory requirements in view of changing legislation and case law.
• Sites generate lower revenues because of property "stigma" that reduces its marketability at prevailing rents, long-term monitoring and continuing legal expenses, or
• Developers require higher rates-of-return to compensate for the uncertainties over mitigation cost, changing standards for mitigation over time as legislation and case law evolve, improved detection and mitigation technologies, that tend to lead in time to more stringent regulatory standards; and lender- or agency-imposed deed restrictions, restricting development options;

But despite depressed potential returns from investment in brownfield property, simply removing risks of environmental liabilities or costs of cleanup will not necessarily have any effect on rates of brownfield re-investment. The list of other factors that deter brownfields investment is well known. Clearance and site-preparation costs on brownfield sites usually exceed those of greenfield sites (especially if they are served by comparable infrastructure). Costs of construction may be higher on brownfields, especially those associated with vehicular access, off-site removal of debris, and on-site security. Costs of information - locating potentially available brownfields that may not be formally listed for sale - may help push capital toward the greenfield alternatives, regardless of environmental conditions on inner city lands.

Environmental factors will pose problems for redevelopment only if associated risks and costs convert competitive investment prospects into noncompetitive ones. If the policy goals of regeneration and environmental clean-up do not conflict, there are no compelling reasons to relax environmental standards. Clearly, contamination is not an absolute barrier to new investment, and even regulatory requirements regarding cleanup of contamination to stringent standards - and the imposition of liability for the damages done by pollution and for future cleanup requirements - do not always deter brownfields reinvestment. Some portion of urban areas, including polluted sites, has been and continues to be attractive to new investment (Bartsch and Collaton, 1995.) For some developments, projected costs associated with possible contamination (or even known pollution) may be a constraint, but they are not the critical constraint; that is, projects may not be shaped or rendered uneconomic as the result of these constraints, given other limits on - and opportunities facing - investors.

The significance of the possibility - or knowledge of - pollution on a site can be expected to vary with the characteristics of the project and local real estate and development markets, as well as local financial capacity and institutions. Among the factors shaping the significance of the possibility of pollution on a "go - no go" decision on a redevelopment project are local metropolitan area conditions such as:

1. The relative competitive position of central city land compared to suburban and exurban property in the local real estate market, which will be a function both of the mix of local economic activities (since different activities exhibit varying location demands) and the strength of the overall local economy.

2. Differential infrastructure availability across the metropolitan area and the infrastructure demands of local expanding sectors, which may indicate a competitive disadvantage for older developed areas.

3. Zoning and land use controls in the city and surrounding areas, the size of available land parcels available in different jurisdictions, and the scale and space demands of local or potential in-migrant expanding firms.

4. Characteristics of the metropolitan area population and that of the population in the neighborhood of a possible project, insofar as they affect investment returns and profitability. (For example, this may reflect either demands for certain types of housing in different parts of a metropolitan area or business demands for, or avoidance of, certain types of neighboring production units.)

These issues will be discussed in Chapter 3.

2. Which environmental costs or uncertainties are the most significant deterrents to brownfield redevelopment?

Developers routinely discount potential returns based on perceptions of risk (or put another way, demand higher returns commensurate with risk). Therefore, the uncertainty engendered by the CERCLA processes is expected to affect investment behavior. Several of the cost items listed in the preceding subsection pertain directly to costs of uncertainty. Risk exaggeration produces undervaluation, and developers may avoid economically viable projects.

There is a strong belief among many policy analysts and practitioners that CERCLA liability has significantly retarded efforts to renovate brownfield lands and buildings through its impacts on perceived real estate investment returns (Glaser 1994). This view is further promoted in Congressional hearings testimony (US House 1989, 1991; US Senate 1991, 1993). For example, Edward Kelley of the Federal Reserve argued at one Senate Hearing that CERCLA reduces the willingness of lenders to extend credit to businesses, explaining that, "With the average projected cost of remedying contamination at sites on the National Priority List climbing to over 25 million dollars, liability in CERCLA cases may far exceed the amount of the lender's original loan" (1991:101).

Research suggests that bankers' fears of additional costs are exaggerated. Unreasonable risk avoidance may stem from lenders' perceptions that all contaminated sites require the high clean-up expenses typical of National Priority List (NPL) sites, even though NPL sites number fewer than 1,500 of the estimated 400,000 or more potentially contaminated sites in the U.S. In testimony presented in House hearings, however, the Small Business Administration (SBA) presented data on its losses as a lender to small businesses (the very type of enterprises expected to present the greatest risk to financial institutions), showing 140 cases involving contamination problems and agency losses (SBA 1989), covering roughly eight years' experience under CERCLA for an agency making thousands of loans annually. Projected losses due to cleanups required on properties owned by SBA averaged under $300,000, and losses due to abandoning properties with excessive cleanup burdens were under $550,000 per site.

Because SBA is a government agency, not a for-profit lender, its efforts at due diligence-- assaying risks due to possible past of current contamination of property--would be expected to be less strenuous than those of private financial institutions. If the experience of this one nonprofit lending institution resembles that of the entire financial sector, fears of major losses due to CERCLA liabilities may well be exaggerated.

This extended example shows how one feature of the CERCLA requirements affects lender decisionmaking. Other examples could be adduced to explore the effect or remediation costs in circumstances where extent of contamination is well known. Still others could show that although remediation costs were low, the initial site assessment cost proved an insuperable initial hurdle to further efforts to redevelop a site. Therefore, this research examines the relative balance among environmental costs and uncertainties, including:

• The extent to which the transaction costs associated with site assessments, that is, CERCLA Phase I and Phase II investigations, constitute a barrier to consideration of some sites as possible investments.⁽¹⁾
• The extent to which cleanup costs alone constitute a barrier to pursuit of redevelopment. (A corollary to this issue is the extent to which cleanup costs are determined by requirements at different levels of government or whether such efforts are dictated by other pressures.)
• The extent to which anticipated restrictions on land uses and requirements for future monitoring of environmental conditions on brownfields constitute a barrier to reinvestment in them.⁽²⁾
• Investor concern about stigmatization of land labeled as previously polluted, and the extent to which such fears produce lower estimates of returns on investment and divert capital from such projects.⁽³⁾
• The role played by experienced or feared project delays due to regulatory requirements in undermining potential investor interest in brownfields redevelopment, and
• The extent to which liability exposures under CERCLA constitute the primary barrier to redevelopment when other cost factors are favorable.

These issues are covered more fully in Chapter 4.

3. Which combinations of State policies and programs best encourage brownfield clean-up and redevelopment?

Site remediation and redevelopment occurs within a legal, regulatory and financial framework of Federal, State and local governments. The Federal framework has been touched on, above. It establishes clean-up standards, requires joint, strict, and several liability for clean-up of past contamination, and provides financial support for remediation of sites determined to be of national priority. Within this framework, States are free to devise a variety of policies that augment efforts in these areas. Local governments also may establish policies that affect site remediation, or offer financial support for site clean-up. In addition to these sets of environmental policies, governments also adopt legal, regulatory, and financial policies to further redevelopment goals. Given the legal and financial powers of State government compared to local jurisdictions, and their relative activism in brownfield contamination issues, they will receive primary attention in this research.

All 50 States have passed their own "Superfund" legislation, establishing standards, specifying forms of liability for cleanups, and sometimes providing funds for site remediation. These statutes allow States to play a role in enforcement of Federal environmental statutes, and promote remediation of sites that fall below the size or level of contamination needed to trigger direct Federal responses. These statutes can contain provisions that provide:

1. Liability protection for at least some potentially responsible parties and/or those who may join the chain of title and responsibility; and,

2. Financial assistance to address costs associated with the possible presence of hazards that undermine the economic viability of redevelopment efforts.

Liability protection takes the form of proportional liability, departures from "strict" liability, and Covenants Not To Sue (CNTS) or "no further action" letters, and sometimes certificates of (partial or total) cleanup completion. Under proportionate liability, cleanup costs assessed to parties cannot exceed the share of clean-up cost (or damage to third-parties) attributable to their actions, unlike the Federal statute, which can hold "deep-pockets" responsible for a high share of the costs even though their blame may be quite small. Relief from strict liability means that those without fault incur no blame; for example, current property owners cannot be held liable for contamination caused by previous owners. Covenants Not To Sue, executed between the State and property buyers, shield innocent purchasers of contaminated properties from action under State statutes (and in the few cases where USEPA is a signator, under Federal statutes, as well). No Further Action Letters declare a State's satisfaction that remediation of a contaminated site has satisfied State requirements, subject to conditions (e.g., groundwater monitoring) specified in the letter.

As noted, most common are forms of assurance that protect property owners from liability under State statutes, with little protection from private lawsuits pursuing PRP contributions or direct USEPA liability claims or other Federal charges. (Only one State so far offers the "carrot" to mitigators of full Federal as well as State liability protection on completion of cleanups to a specified standard.)

Financial assistance may be brownfields- or contaminated land-specific, or may simply be available for all economic development projects that meet State policy criteria. Most assistance takes the form of reducing costs of capital for development projects and investments, appearing as loan subsidies, reduced interest rates, loan guarantees, and the like. Assistance tied specifically to land contamination may State or local government funding for Phase I site assessments, Phase II assessments for projects in the development stage, and/or remediation. Brownfields-specific assistance is not available in States that do not also have some form of liability protection program.

Following policy evaluation research practice, we will assess State policies according to criteria of effectiveness, efficiency, and fairness. Effective policies are those that produce more site clean-ups, more quickly, compared to alternative policies, holding constant cost, severity of contamination, type of reuse, and other factors. Efficient policies are those that effect site clean-ups at least cost compared to policy alternatives. Fair policies are those that distribute costs according to relative benefits. Our assessment of policies on each of these criteria will recognize their differential effects across types of properties, projects, urban areas, and States. (We recognize, of course, possible tradeoffs among these criteria; e.g., the most efficient policies may not be the fairest.)

We expect a number of factors to influence how well any set of State policies perform in relation to these criteria. These factors also can affect conclusions regarding the "appropriate" distribution of responsibilities and discretion among Federal, State, and local governments. These factors include a State's relative priority to polluted land cleanup and reuse, extent of geographic targeting of funds for clean-up and redevelopment, industrial histories and urbanization, administrative/fiscal capacity and need for reinvestment, topographic and climatic conditions, and variations in land use patterns, and residents' interests in safeguarding public health and environment

Our analysis of these issues can be found in Chapter 5.

Analysis Approaches and Methods

Our overall research strategy called for decisional analysis--examination of the incentives and disincentives to investment decisions on the part of primary actors in a sample of redevelopment projects. We then compared data on actors' decisions and redevelopment project outcomes across projects, controlling for characteristics of local land and capital markets and State policies.

Decisional analysis relied on data on actors' perceptions, motivations, and self-reported behaviors. There are three reasons for relying on reportage rather than measurement of actual behaviors and project characteristics. First, costs of prospective liability or the effect of environmental restrictions on future land values cannot be measured directly. Second, we are not in a position to reconstruct the full project economics of redevelopment deals, both for reasons of complexity and confidentiality. Third, economic decisions (and how they are affected by policy) are made based on decision-maker perceptions of expected returns.

To conduct the decisional analysis, we collected information on three elements of the urban redevelopment process. (1) the "system" of actors involved in redevelopment project decisions, (2) the stages of a redevelopment project, and (3) the broader institutional and legal environments within which urban redevelopment and environmental efforts take place. Each of these are treated in turn, below.

Redevelopment Project Actors

There are many parties to redevelopment efforts -- developers, lenders, public officials, and so on -- who must cooperate to effect successful economic redevelopment. These parties can be thought about in terms of local "systems," in which redevelopment actors, who belong to institutions with clear financial or policy interests in redevelopment, interact in relatively predicable ways. Across localities, systems differ their capacity to undertake redevelopment effectively; for example, in developers' or lenders' understandings of various environmental statutes.

The types of actors potentially involved in brownfield site redevelopment are shown on Table 1.1. The table distinguishes between Primary Actors and Secondary Actors, based on whether their financial interest is direct or indirect. There is arguably always at least one actor from the first group for all sites or possible projects (there could be more than one), but there may or may not be any of the second group involved. The primary actors on the table are linked to associated secondary actors; "associated" because the primary actor usually is the most direct financial link to each associated secondary actor.

It is impossible to predict exactly how many actors might be involved in any one redevelopment prospect, and each actor described above can take on a number of characteristics that affect his or her decisional calculus. These characteristics, for each type of actor, include:

Developers or redevelopers can vary primarily by size, expressed in total value of projects put in place over the past 3 - 5 years, or per annum; geographic scope (local, regional, State, national, global); headquarters location (local, regional, distant domestic, overseas); race/ethnicity of owners or local senior personnel; profit-motivation, including for-profit, nonprofit, and public; land ownership status (owner of property to be developed, developer only) and previous experience in redevelopment of brownfield sites (number & value of projects proposed, projects completed).

Site assessment engineers may have a variety of relationships to the property, and might actually have been retained by financiers rather than owners; some will have engaged in at least preliminary (typically CERCLA Phase I) studies before any project really moves forward.

State-sanctioned cleanup certifiers operate under State contracts or licenses under some State programs; they may be the same engineering firms as do site assessments.

Current landowners might include the municipality in which the site is located, or might be irrelevant or inaccessible in the case of "orphan" abandoned properties. In addition to variables of profit motivation, geographic scope, headquarters location, and size (extent of local land-holding), variation can include sector if the owner is engaged in economic activity in addition to land-holding;

Current tenants or site occupants would be affected by a redevelopment project forcing them to relocate, and may have lease rights for which compensation may be due; they also may contribute to, or have to share in the costs of, pollution cleanup. (Note that occupants might include squatters or other informal or illegal users, the displacement of whom may still have neighborhood effects.)

Current lien or collateral holders could include a variety or parties, some not even in the financing business, since land and facilities might be offered as collateral for large scale purchases of inputs to a production process, and liens might exist for other purposes, such as utility rights of way, the maintenance of which could limit redevelopment options.

Others with current financial interests in a site include all parties with financial ties to the current owners or users of the property, since, whether or not the facilities are offered as collateral, the financial condition of the owners and occupants may be affected by the redevelopment effort, whether through the funds obtained from sale, the costs of relocation caused by a sale, or costs arising from need for mitigation of site contamination. Variation includes characteristics of size (extent of local lending, other investments, and other economic activity), geographic scope, headquarters location, and type of institution, including bank, insurance company, mortgage company, investment fund (bank trust department, retirement fund, etc.), and private investor.

Potentially Responsible Parties may not want to have financial interests in a site, but the presence of any contamination that requires mitigation may lead the current owners, lenders, and users to turn to others in the chain of title (thus sharing joint and several liability) for financial participation, in which case the latter may attempt to influence mitigation and development strategies. Variation includes, in addition to size (expressed as annual revenues or sales), geographic scope, and headquarters location, extent to which they are known: clarity of the chain of title and use of the site; and extent of orphan share-holding: known bankruptcies and cessations of trading of parties in the chain of title or use;

Economic development agencies or organizations may be public, private, or partnership, and one or more that may be involved, through promoting a property, closing a financing deal, and/or providing redevelopment incentives. They vary according to scale ( municipal, county regional, State), type (public department, independent agency or authority, public-private partnership or government-sponsored nonprofit, private nonprofit, for-profit), programs (types of lending/subsidy/promotional programs operated (including dollar values and terms and conditions of assistance), and proportionate effort in the area selected for study (if the scale is regional or State).

Environmental protection agencies in the public sector will not ordinarily be intensively involved unless some problem is uncovered on the site; depending on the level of sophistication of environmental compliance monitoring at the local level, there may be involvement from all three levels of government. Variation includes scale, programs, proportionate effort, and proportionate budget to urban land and groundwater problems.

Tax collection agencies may be important for several reasons: (1) because unpaid tax liabilities can lead to tax liens and public sector acquisition of property title, (2) because the value to the public sector of a redevelopment will depend on the revenue increases deriving from it, that this agency may be expected to forecast, and (3) the willingness of the public sector to get involved in subsidizing or promoting a redevelopment project may depend on the revenue yield projections.

Potential redevelopment project financiers include banks, insurance companies, retirement plan administrators, and so on. Their type and number may, but is not necessarily, be associated with the type and scale of redevelopment project involved. Variation includes type of financial institution, geographic scope, proportionate effort, headquarters location, and economic sector.

Potential liability insurers can affect willingness to lend by providing protection from losses associated with environmental (among other) liabilities; these insurers may be arms of the public sector (such as economic development or even environmental protection agencies), but their insurance role would still need to be distinguished from their other functions.

Potential redevelopment clients include the expected renters, lessors or purchasers of the redeveloped properties, especially when projects are pre-sold or pre-rented; the more formal the plans to pass property on to other parties, the more important those parties may be to the investment decision. Variation includes geographic scope, headquarters location, and activity type proposed for the site, including headquarters, production, research and development, distribution, etc.

Redevelopment client financiers may be critical if a project depends on lease or resale, the intended occupant is willing, but the financiers on whom that party relies balk at supporting the project.

Redevelopment client insurers could similarly affect the outcome of a project, especially insofar as they make available, or deny, coverage for certain environmental liabilities to the re-purchaser or lessee, or to that party's financiers.

Neighboring property owners may have strong financial or environmental concerns associated with the spillover externalities of any redevelopment project. These may be positive or negative, and may extend well beyond immediately adjacent properties. Different owners may, in fact, perceive different impacts, a fact which may be obvious when considering commercial relative to residential users. However, uniformity in assessment of impact, and thus of probable role in supporting or opposing a proposed project, cannot be assumed, even across owners of properties with the same land uses.

Neighborhood organizations, if they exist, may be recruited to play a role by neighboring property owners. These organizations may be very diverse, and include actors both for and against any proposed change, including commercial organizations, such as a downtown business association, and or community-based, involving primarily residents and/or property owners.

The Major Stages of the Redevelopment Process

We distinguish major stages of the redevelopment process because a number of different actors enter and exit the process over time, and because different environmental and non-environmental problems appear and are resolved at different stages of the process. Stages include:

1. Initiation. Identification of a possible project by a developer or current landowner.⁽⁴⁾ This stage includes "due diligence" searches to acquire background information about the parcel(s) of land involved. This can be quite difficult if current owner(s) cannot be found (or no longer exist). The due diligence search determine the need for an assessment, or it's possible by-pass.

2. Environmental Assessment. Assessment of site contamination (CERCLA Phase I and II, if needed), and possible negotiation with current owner(s) and other potentially responsible parties over mitigation and/or payment of cleanup costs. This potentially costly stage may be the first project breaking point, and may be repeated several times, especially if potential financiers of the project are unwilling to accept site assessments not done to their own standards.

3. Pursuit of Financing. Financial packaging, possibly involving multiple funding sources (or possibly only self-financing), including funding for site mitigation and cleanup costs. This may require multiple efforts with multiple lenders before a package is made final. Repeated failures may lead to the need to pursue Stage 4, which might otherwise be by-passed.

4. Pursuit of Regulatory Relief and/or Subsidies. Negotiation with regulatory authorities and/or economic development agencies for aid in boosting returns on investment.

5. Remediation Planning and Implementation. Completion of hazards mitigation and related site remediation, including any parcel assembly and clearance. Risks linked to remediation may only appear at this stage and may halt further work, especially if the market has shifted over a long development period.

6. Site Redevelopment and Reuse. Redevelopment and initiation of new site use by the developer or others to whom the land is leased or sold.

The impacts of environmental hazards and regulations can be felt at any stage. Problems with environmental conditions on site can cause repeated recycling through stages 3 through 5. However, the very risk of contamination can deter Stage 1 initiation, and the presence of hazards will shape the magnitude of phase 2. A history of contamination, despite successful mitigation, may also affect phase 6, reducing the lease or purchase price(s) the end user(s) of the site may be willing to pay. The different stages at which the hazards or regulations affect project outcome may suggest different policy modifications or interventions.

Among the factors shaping redevelopment potential that are independent of the existence of environmental hazards or regulations are physical and economic features of the effort. For the development site these include:

• site characteristics, including size and current market value of the site, number of parcels comprising the site and need for land assembly, and distinguishing or unique topographic or geological characteristics,
• past uses and evidence of past pollution, and current status and use (including active, idle and abandoned sites),
• current ownership (and potential title holders, in instances in which creditors or tax lien holders have elected not to take title), and
• zoning and current land uses of adjacent and nearby properties

For the physical and financial characteristics of the proposed redevelopment:

• Proposed new land use, and demonstrated market for this use,
• Extent and types of development near to the site of the proposed redevelopment
• Scale of redevelopment effort (in dollars)
• Reliance on public sector subsidies or other public participation in this project, and developer/project capacity to debt finance or self-finance the project.

Contextual Factors Influencing Redevelopment Project Outcomes

Variation in contextual characteristics may shape redevelopment project outcomes more than the presence or extent of hazards or the legal provisions covering these hazards. The dimensions along which the project context may vary includes the broad market, legal and regulatory context, specific aspects of State and local policies, and a number of site characteristics, as illustrated in Table 1.2.

The lists of actors, stages in the redevelopment process, and factors influencing redevelopment outcomes presented in the preceding sections imply a lengthy inventory of data items, most of which are quantifiable, in theory. We did not, however, collect exhaustive, systematic, and easily comparable data on all projects selected for analysis. Rather, we used readily available data to characterize each area and each project selected for investigation. Our most important source of information were the actors engaged at each stage in the redevelopment process. Development project actors provided information on:

• the bases for the decisions made about redevelopment project type, including: a) scale and market value factors, b) site condition factors, and c) regulatory and public policy factors;
• contributors to, or detractors from, project success and completion, including a) individuals, institutions and organizations: roles played and their impacts, and b) regulations or public policies, by level of government; and
• estimated site clean-up cost and basis for cost estimates.

Our method for collecting these actor evaluations is presented in the next chapter.

Chapter 2

Characteristics of Sampled States, Areas, and Projects

This study's nested sampling design called for selection of redevelopment projects in each of three urban areas in each of four study States. This chapter summarizes our selection process, documents the characteristics of projects selected for analysis, and reviews our data collection methods.

State Sample

States play significant legal, regulatory, and possibly financial roles in redevelopment of previously-used properties. Our State sample was intended to generate data on the sub-national regulatory context of redevelopment efforts, with variation across the major elements of State-level intervention in the CERCLA regulatory requirements and process.

As discussed in Chapter 1, State brownfields policies take on two dimensions: liability protection for at least some potentially responsible parties and/or those who may join the chain of title and responsibility; and, financial assistance to address costs associated with the possible presence of hazards that undermine the economic viability of redevelopment efforts. Our sampling design called for selection of four States with variation on these two dimensions, including:

• A State with no special provisions directed at stimulating brownfield site redevelopment, and no program for identification and/or mitigation of severely polluted land (Category 1).
• A State providing some level of protection from the risk of environmental liabilities, but no brownfield-targeted financial assistance (Category 2).
• Two States providing some protection from the risk of environmental liabilities, as well as targeted financial assistance to brownfield redevelopment projects (Category 3).⁽⁵⁾

In selecting States, we considered the chronology of States' environmental policy and regulation. Current State policy at the time of our research was of less interest than the regime in place when our sampled redevelopment projects were initiated. Further, because our design called for selection of two redevelopment "cases" associated with a particular site (a completed project and a prior redevelopment project which was terminated), we selected States that had a stable policy environment for both development "cases," roughly the period 1992 through 1994. As a practical matter, we expected it would be difficult to locate parties to redevelopment efforts earlier than 1992. Projects initiated in 1995, meanwhile, were unlikely to have been completed at the time of data collection.

We adopted two additional substantive criteria for the State sample--regional location, and the likely availability of candidates for the urban area portion of our nested sample. The urban area sample was intended to reflect a geographic diversity. Accordingly, we adopted a State sample that includes States from each for the four Census regions: South, West, Northeast and Midwest. At the same time, our State selection was influenced by our goal to select, in each State, three different-sized cities with a history of industrial and commercial development.

States and Policies

Project staff updated earlier work done by the Northeast-Midwest Institute on each State's environmental policy and regulations to arrive at a State-by-State listing based on the 1996 mix of brownfield related programs and policies. We then grouped States into our three policy regime categories. (See Table 2.1)

• Category 1. States with no special provisions directed at stimulating brownfield site redevelopment, and no program for identification and/or mitigation of severely polluted land.

Although many States do not have a voluntary cleanup program, almost all States participate in USEPA's implementation of CERCLA via a State superfund program. Only Nebraska had no State voluntary cleanup program and no State superfund program at the time of our research. (Nebraska subsequently passed this legislation.) Rather than select a State with absolutely no role (and few brownfields, by reputation), we selected from among the least active States remaining in this group.

Two candidates, Virginia and Louisiana, assumed a minimal mediating role in application of Federal regulations vis-a-vis brownfield redevelopment between 1992 and 1994. Although Virginia did have superfund and voluntary clean-up programs on the books during this period, the State yielded jurisdiction over superfund clean-up to USEPA following Governor Allen's election in 1993, and effectively suspended its voluntary clean-up program. Lacking financial resources, Louisiana yielded jurisdiction over superfund site clean-up, as well. We selected Virginia for this category; the State's diverse industrial history promised the greatest pool from which to draw an urban area sample, and a sample of redevelopment projects.

• Category 2. States providing some level of protection from the risk of environmental liabilities, but no brownfield-targeted financial assistance.

There are 30 States in this category. None of these States provide financial assistance targeted specifically for brownfield redevelopment, although some offer non-targeted financial support that can be used for that purpose. To avoid ambiguity, we excluded this subset (California, Illinois, Washington and Wisconsin) from further consideration. Among the remaining candidates, we selected Oregon. With a program in place since 1991, Oregon had a stable regulatory environment for the duration of our target project initiation period. By contrast, other candidate States underwent regulatory changes (some more substantive than others) between 1992 to 1994, with the exception of Alabama. Having selected another southern State, Virginia, we selected Oregon to achieve geographic diversity.

• Category 3. States providing some protection from the risk of environmental liabilities, as well as targeted financial assistance to brownfield redevelopment projects.

There are ten States in this category and among these, we selected Pennsylvania and Minnesota. Pennsylvania's appeal was threefold: (a) a stable regulatory environment prior to a major reform initiative in 1995, (b) Northeastern representation, and (c) a State with in-ground contaminants very similar to other major industrial States. We selected Minnesota because it offered (at the time of selection) the most comprehensive assurances on liability. Although many other States offer assurances similar to those available in Minnesota, no other single State offers potentially responsible parties such a wide range of possible assurances. Minnesota also offered a stable policy context throughout our 1992 to 1994 window.

Urban Area Sample

Our urban area sample was driven by three requirements; it had to:

• "control" for local variation in factors which can influence brownfields redevelopment such as access to capital, economic conditions, and historic development experience;
• provide, in each sample city, at least two matched-pair development projects (four development cases); and,
• provide a pool of development cases which assures variation at the project-level in terms of end-use, scale, and contamination.

To address all three requirements adequately required a complex procedure--effectively, we could not finally select an urban area sample without almost simultaneous selection of development projects. First, we first classified urban areas (cities, in effect) according to the main factors we wanted to "control" for. Second, we identified a preliminary urban area sample. The results of these two efforts are reported in this section. Third, we investigated via telephone reconnaissance and field visits whether recommended cities could provide enough (and the right mix of) development cases. Our final selection depended on this reconnaissance and consultation among members of the project team.

Our ideal classification would have grouped cities according to their access to capital (and overall system "sophistication") and historic development experience. However, to avoid primary data collection, we used readily available proxies for these dimensions:

• Access to capital. We used population size (1995) as a proxy for access to capital. All other things being equal, we expect larger cities to offer greater access to capital in terms of the number and types of loans and other investment available for redevelopment. We also expect larger cities to have more "sophisticated" economic development and environmental protection systems to support access to redevelopment capital. We divided cities into three size categories: large cities over 200,000; medium cities between 80,000 and 200,000; and small cities between 40,000 and 80,000 (although our Oregon small city fell below 40,000).
• Historic development experience. We used manufacturing employment change (1977-87) as an indicator of secular decline. Cities witnessed greater rates of manufacturing decline are likely to have a greater supply of previously-used sites for redevelopment. We divided cities into two categories according to this criterion: cities with a "declining" manufacturing base in which manufacturing employment declined faster (or grew slower) than a regional average; and cities with a "stable/increasing" manufacturing base in which manufacturing employment declined slower (or grew faster) than a regional average.

The matrix below presents the full slate of candidate cities according to these two criteria, and also identifies (in bold) our urban area sample. We identified two cities from each of six cells, and also applied the following criteria: we selected one city in each population size category for each State; we did not select more than one city from the same metro area; and finally, we accounted for logistics including (in Oregon) the distance between sample cities, and prior team contacts with city-level economic development and environmental agency staff. Table 2.2 shows the candidate cities in each of these categories; sampled cities are shown in bold.