This article, written by our executive(s), originally appeared in the The Bureau of National Affairs, Washington, D.C., BNA Environmental Due Diligence Guide , Special Report, Volume 9, Number 2, p. 16, February 17, 2000. Contact us for Reprint Permission.

Special Report #1
Greenbacks for Brownfields:  Mortgage Lenders Don’t Make You Sing For Your Supper—But They Do Want to Hear a Good Story

In 1998, the United States Conference of Mayors identified brownfields as the number one problem facing American cities.  A survey pinpointed lack of funding as the number one impediment to brownfield revitalization.  In this and the next five issues of BNA’s Environmental Due Diligence Guide, various sources of brownfield financing will be examined.  This issue focuses on traditional mortgages.

Power of the Story
You are driving your family to a popular restaurant.  On your way there, you see an unappetizing site.  It’s the kind of place you would not step foot on with your kids.  But, then you turn on the radio and a guy starts to talk about that same rusted remnant.  He says “ . . . it once helped spur the city’s industrial economy.  Years ago, it was buzzing with swarms of people assembling guns, tanks . . . they helped the World War II effort.  Some bright eyed (crazy?) guys want to buy it and make a new shopping mall . . . “  Since we were children, we have enjoyed hearing stories.  But stories do more than entertain.  In the corporate world, they can change our perception of a contaminated or troubled site, often more quickly than just facts and figures.  Stories motivate us to reach for higher goals by changing our vision of what is possible. 

People and News
We spoke to one of the world’s most famous story tellers, Mark Victor Hanson.  Hanson provided us with some insights into mortgage loan presentation.  Hanson is the co-author, along with Dr. Jack Canfield, of the wildly successful Chicken Soup for the Soul series.  The co-authors have 26 consecutive best sellers and have sold 55 million books in 39 different languages.  Each book consists of 101 stories.  Can Hanson and Canfield help us use stories to secure financing?  Sure.

How Stories Help Financing
Hanson’s and Canfield’s stories share a common theme: The conviction that problems are “a great resource in the wrong place at the wrong time.”  Successful revitalizations have shown that many brownfields are great resources in the wrong place at the wrong time.  However, times are changing.  With proper management, brownfields can be valuable assets whose time has come. 

According to Hanson, stories help us see things in a more positive light.  Stories motivate us to see the possibilities, not just the problems, inherent in a situation.  This is exactly what brownfield developers must do when pursuing mortgage financing. 

 “A risk you can’t quantify isn’t worth taking.” 
— EVAN HENRY, VICE PRESIDENT, BANK OF AMERICA
     
Model to Follow
We talked to Evan Henry, vice president of the Bank of America.  He suggests a model to follow when trying to secure mortgage financing for a brownfield.  Henry calls this model the “5 Cs of Credit.”  Brownfield developers can frame their story around these points:

1)  Character of the borrower. This is the first and most important criteria lenders use to evaluate a loan.  Remember, banks lend to good borrowers.  They don’t lend to brownfields or any other property type.  Borrowers must demonstrate that they have access to the technical, legal, and business expertise needed to deal effectively with environmental problems. 

2)  Capacity or ability to repay (first source of repayment).  The borrower must demonstrate that the cash flow from the project will be sufficient to meet all expenses, including mortgage payments, with a comfortable margin built in.  To tell this part of the story, you should include stories about the market and how similar space is faring.  Service providers, such as lawyers, engineers, real estate brokers, and appraisers lend credibility to this part of the story.  In this part of the presentation, you should cover three environmental issues:  a) cost to comply with present and future laws and regulations; b) cost to investigate and remediate; and c) liability from direct damages, as well as indirect damages such as diminution in property value. 

3) Cash and other liquid assets (second source of repayment). Remember, liquid assets are subject to being drained off by the same factors as discussed above. 

4)  Collateral or fixed assets, including the property being pledged in exchange for the loan (third source of repayment).  Developers generally want to proceed with a non-recourse loan.  Under this type of loan, the lender only has recourse to the property being pledged.  Of course, at a brownfield, the environmental problems can decrease the value of the collateral.  Therefore, borrowers need to demonstrate that after the cost-to-cure has been deducted from the “clean value” of the property, the loan is still fully secured.  This portion of the borrower’s story should begin with a valuation or appraisal and should continue with a credible evaluation of the cost-to-cure any environmental problems to the satisfaction of regulators. 

5)  External conditions.  External conditions include changes in legislation or regulation, such as those allowing for risk-based cleanup.  External conditions also include other factors, such as new insurance products that provide strong liability protection.  External conditions or changes can alter the economic cost to deal with environmental problems, and can dramatically affect a developer’s bottom line, and therefore, the ability to repay the loan. 

Lenders Need Assurance
The upside at commercial developments goes to the developer.  It is the developer who gets increased income due to higher rents and who benefits from any increase in the market value of the property.  The lender’s return on the development is fixed.  No matter how much the property appreciates or how high rental income goes, the lender’s return remains the same.  It consists of an interest rate pegged about 4 percent higher than the lender’s cost of funds, i.e., deposits.  The lender obtains this 4 percent return in exchange for financing about 75 percent of the development.  On the other hand, the developer’s return is potentially infinite.  This division of the spoils makes lenders unwilling to take on the extra risk posed by unmanaged environmental problems.  Because the developer gets the upside, it must solve the problems and take the risks.

Successful loan applications look and smell like regular commercial loans.  That is the story lenders must hear before proceeding with commercial morgage loans, including brownfield loans.  Of course, the story must be backed up with credible evidence from respected professionals such as lawyers, engineers, and appraisers.  Loan applications that do not credibly address the “5 Cs of Credit” will have to secure financing from other sources.  Those sources will be discussed in upcoming columns. 

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