In our first article on tax increment financing (TIF) for brownfield redevelopment (Brownfield News, April 2007), we reviewed how certain states have structured brownfield incentives to work with local TIF projects. In this article, we review other ways to get over the mismatch between brownfield projects and the use of the private bond market for a TIF: through the use of certain federal funds, and through private equity, usually brought to the table by entities that specialize in brownfield financing.

Federal Programs and TIF
Two federal programs—HUD 108 and EPA’s Brownfields Cleanup Revolving Loan Fund (BCRLF)—have been successfully matched with TIF financing on brownfield sites.

HUD 108 allows cities to obtain loans at favorable terms, based partly on the security provided by a city’s annual Community Development Block Grant (CDBG) allocation. For brownfield projects that are financed through TIF, borrowing from HUD 108 allows the funding to channel into the project at a much earlier point. Flexible terms, such as interest-only payments for five years, also help communities finance upfront costs well before the TIF revenues start coming in.

At least two cities, Baltimore and Chicago, have successfully carried out brownfield projects using HUD 108 with TIF repayment.

HUD 108 has been used extensively for TIF/brownfield projects in Chicago. In 1996, the city developed a strategy to address the increasing problem of abandoned industrial property by acquiring property through tax foreclosure and eminent domain; borrowing from HUD 108 ($72 million total) to finance cleanup, site preparation and infrastructure; and re-paying the loans through land sales and TIF proceeds.

One of the resulting redevelopment projects is the 37-acre California Avenue Business Park, which used $9.1 million of the HUD 108 funds to clean up and prepare the land. The park now has two occupants and a third is committed, bringing employment to about 300 people. Full build-out is expected to generate 600 jobs.

Baltimore is using a $13 million HUD 108 to finance the acquisition of 11 acres of land just south of M&T Bank Stadium on the Upper Middle Branch of the Patapsco River. The area will be redeveloped as “Gateway South,” a green business park. TIF and land sale proceeds will repay the HUD 108 loan. Baltimore has accepted a development proposal from Cormony Development, LLC, which features 800,000 square feet of new space and is projected to generate at least 1,500 jobs and $100 million in new investment.

EPA’s Brownfields Cleanup Revolving Loan Fund (BCRLF) is another flexible source of financing, although it can only be used for cleanup. Similar to HUD 108, BCRLF funds can come into a project at a much earlier point and with more flexible terms than TIF funds raised through the private bond market.

The City of Des Moines, Iowa, structured a $1 million BCRLF loan to finance the cleanup of the former Pittsburgh-Des Moines Steel site in the Riverpoint West redevelopment area. The developer’s plans call for three industrial/flex buildings with about $15 million in new improvement value. The city is dedicating 50 percent of the tax increment for 12 years to the cleanup.

The loan is structured with no payments for three years. Then, as the new buildings go on the tax roles, payments are made from the tax increments generated in that year, with the developer responsible for any shortfall.

Mega Brownfield Projects and Private Equity
Big, high-impact projects—those in the $500 million range and up—may also have big gaps, with heavy upfront investment needed for site prep costs. TIF is probably the only incentive of sufficient magnitude to close the financing gap. But the TIF won’t help with the upfront site prep costs, and the usual brownfield-related government programs are insufficiently funded to address, for example, a $20 million-plus problem. That is where a project may need the equity investment of a national firm that specializes in brownfield financing.

Cited here are three mega-brownfield projects that are using TIF as the chief gap-closing source with private equity covering most of the brownfield/site prep costs:

TIF (known in Georgia as Tax Allocation District Financing) is the key financing incentive for Atlantic Station, the $4 billion redevelopment of a 138-acre steel mill in midtown Atlanta. AIG Global Real Estate and Jacoby Development, Inc., are the development partners whose vision of the formerly contaminated site includes 6 million square feet of Class A office space, 5,000 residential units, 2 million square feet of retail and entertainment space, 1,000 hotel rooms, and 11 acres of public parks.

TIF is providing $167 million of the total $250 million needed for cleanup ($50 million), site prep and infrastructure. It is the only governmental source that is of sufficient magnitude to cover a gap of that size. Also, because of the TIF-brownfields mismatch, the cleanup and site prep activities had to be funded by other sources and then reimbursed after the TIF funding arrived. A significant part of that upfront funding came from AIG.

The project is exceeding expectations in terms of sales rates, leasing and return on investment.

Cherokee Investment Partners’ redevelopment of the 50-acre Gates Rubber Factory in Denver illustrates why TIF has become the incentive of choice for large-scale redevelopment projects. TIF financing from the city and the county totals $85 million, well beyond any conceivable grant-loan funding from state and local brownfield financing programs. The TIF is designed to pay for cleanup and site preparation, but Cherokee is directly financing $126 million for these upfront costs, which will be reimbursed through the TIF.

The long-term plan calls for a total of $2.5 billion in new investment with up to 4,000 residential units and 4 million square feet of office, retail and entertainment space. About half of the planned development is now committed.

Cleveland Flats/East Bank is 30 acres of dilapidated buildings and abandoned industrial plants. A plan put together by Flats East Development, LLC (principal, the Wolstein Group) envisions a vibrant new mixed-use community, featuring 500 residential units, 280,000 square feet of retail and entertainment space, 200,000 square feet of office space, 2,000 parking spaces, and 2.5 acres of green/park space.

The $100 million in public costs for cleanup, site preparation and infrastructure will leverage the total project investment of $400 million. Strnisha Development Advisors packaged incentives from 10 different government programs.

At $67 million, TIF financing constitutes the largest portion of the public subsidy. The upfront brownfield costs are being addressed by a combination of private equity at a total of $60 million, and governmental sources of possibly $7 million through a combination of Clean Ohio and county brownfield funding.

A Green Infusion
It is interesting to note that each of the projects cited above are models for sustainable development, each committed to green buildings and LEED certification. There is little data that ties together brownfields and green buildings, but it seems that green/sustainable development is becoming the standard for large-scale, urban mixed-use projects.

While TIF is sometimes perceived as a tool used to subsidize sprawl, in these cases, the benefits extend beyond community revitalization to energy efficiency and lowering green house gases.

Evans Paull is senior policy analyst for the Northeast-Midwest Institute.