Looking Past The Headlines: Trump’s Impact on Brownfields, Commercial Real Estate Lending

What the New Administration Means to Site Redevelopment and Property Lending

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NOTE TO READERS: This article was just published in the Summer 2017 Edition of the Environmental Bankers Association’s Journal, and appears here with permission from the publisher. Links to the full Journal containing timely articles related to lender property risk management are provided after this article.

Just a few months into the new Presidential Administration, there are more questions than answers about what lies ahead for commercial real estate lending and site redevelopment. Will Dodd Frank be repealed? What’s the future of the Fannie Mae and Freddie Mac lending programs? Will funding for the U.S. EPA’s brownfields programs be slashed under Administrator Pruitt?

There is no doubt that the federal legislative environment is a very dynamic one. More clarity will emerge as new agency heads take their places, budgets undergo the negotiation/approval process, and new programs and policies take shape. This article summarizes what we know now with respect to contaminated property assessments/redevelopment and commercial real estate finance.

EPA Uncertainty and Brownfields

One panel at the May PRISM 2017 conference in Charlotte titled: “Brownfields Under Trump: What the New Administration Means for the Future of Site Redevelopment,” focused on the future of brownfields redevelopment opportunities as a new EPA moves into position. Moderator Mary Ann Grena Manley, Deputy Editorial Director, EHS Division at Bloomberg BNA, acknowledged that

“All of the talking and tweeting about the U.S. EPA potentially going away or gutting regulations is making everyone understandably nervous. The good news is that, for better or for worse, because of our notoriously slow regulatory and legislative process, it is unlikely that anything drastic is going to happen quickly.”

In the months following the inauguration, it has been business as usual, and for the most part, there have been no sweeping impacts on industry and the regulated community yet. The future of EPA’s programs hinges largely on decisions made on the federal 2018 budget battleground. It has been widely publicized that the current proposal reflects a reduction in spending in a number of areas, including brownfields—but historical perspective is important. As noted by Patricia Overmeyer, the Land Revitalization Coordinator at the U.S. EPA’s Office of Brownfields Cleanup and Redevelopment: “Brownfields appropriations have been going down since FY11, even during the Obama administration.”

EPA’s grants programs are at the heart of the agency’s brownfields program, and they fuel any projects for assessments and remediation across the U.S. Most are competitive grants to assess and clean up brownfield properties that are contaminated, or perceived to be contaminated, with hazardous substances or petroleum products.

The word on the street is that it is unlikely that Congress will approve all of the proposed cuts, but there are likely to be some real reductions. On the bright side, it appears that programs for the remainder of 2017 will go unscathed under the omnibus resolution deal so any consultants who support assessments/remediation under EPA’s brownfields programs should see that work continue at least through the end of this fiscal year. As of early May, Overmeyer noted that “although we still do not know our exact budget, we know it will be no more than $80 million. My best guess right now is a budget between $75 and $80 million.”

Brownfield graph

EPA Administrator Scott Pruitt has openly stated that brownfield redevelopment is one of his top priorities, and there appears to be continued bipartisan support for that position. However, Manley noted that it will be interesting to see how these opposite forces—high priority, low proposed funding—will play out as the budget is finalized. It is also worth noting that the Trump Administration has infrastructure as a top priority, and it would seem that brownfields redevelopment falls squarely in that bucket.

The Administration’s infrastructure package is expected to be introduced sometime over the next month so more details will be evident then. As federal funding for brownfields comes under fire, Charlie Bartsch is one expert who believes that “avenues like public-private partnerships and tax credits will continue to play a critical role in site cleanup and redevelopment opportunities.” Bartsch is currently an Independent Strategist for Communities in Economic Transition and the former Senior Adviser for Economic Development to the Assistant Administrator at the U.S. EPA. When the budget passes, Bartsch thinks it is likely that some of the federal redevelopment incentives will still be there, but funding levels are likely to be lower.

Notably, if passed in its current form, “the FY18 budget would represent the EPA’s lowest staffing level since 1985.” It would reduce headquarters staff by one-third and eliminate nearly all regional EPA staff. Referencing what Bartsch referred to as the FY2018 Trump “Skinny Budget” Funding Proposals for EPA, the overall trend appears to be headed toward devolving regional functions to the state and local governments. The current proposal cuts brownfields programs by 13 percent, and shifts much of the non-core brownfields investment and oversight to states and localities. In this volatile climate for brownfields funding, programs like new markets tax credits are authorized for $3.5 billion annually through 2018, and low-income housing tax credits for $3.5 billion annually, will be even more important.

Brownfields redevelopment will also be a critical part of infrastructure investments and manufacturing growth strategies that are expanding into contaminated and legacy sites. “Public-private partnerships will be key,” said Bartsch. “This is the time to develop new ones that fit with current trends.”

Is A Redevelopment Renaissance Ahead?

With an “outside the Beltway perspective,” Dan French, co-founder and CEO of Brownfields Listings, is bullish on site redevelopment opportunities based on a broad macro view of the U.S. market in a global context. Observed French,

“We’ve never seen a ‘perfect storm’ setup like this for brownfields before. The U.S. is returning to the industrial heyday. If you look at the long-term trends, our country offers the best opportunities for investment and infrastructure, especially in our urban cores—provided we can keep the lanes clear.”

Given the shortage of land, interest in infill sites, including brownfields, is on the rise. Although some of the federal programs are in jeopardy with the new administration’s proposed funding cuts, there are many other options available for moving brownfields projects forward. Most brownfield efforts are undertaken by private owners or by municipalities, and states are ramping up their brownfields site cleanup efforts even as federal programs face cuts. Since 2012, Connecticut has invested $191 million to investigate, remediate and revitalize more than 160 old or vacant factories, mills, warehouses and other contaminated sites and structures. Governor Malloy included $40 million in next year’s proposed budget to cover grants and loans for brownfields programs, the same level as in the current fiscal year. Connecticut’s emphasis is similar to other states pursuing brownfields redevelopment as a way to boost economic engines and move properties back into reuse.

Other EPA Updates

Overmeyer also made a few critical comments about EPA’s databases. First, the new Superfund Enterprise Management System is nearly ready to go live this spring. The first data set pulled from SEMS (the equivalent to the legacy CERCLIS data set) has not been posted yet. EPA Regions are currently reviewing data for their regions. After that, a data set will be posted that should be very similar to previous CERCLIS information with the exception that EPA will not be posting financial data any longer.

Second, EPA developed—and the Assistant Administrator signed—a Direct Final Rule recognizing the updated ASTM Phase I Forestland Standard (E2247-16) as AAI compliant in early January. The Federal Register had not published it yet as of January 20, and therefore returned the rule to the agency. The rule is now awaiting approval and re-signature by new administration to recognize the forestland standard as an avenue for property purchasers to meet the AAI provisions required for CERCLA liability protections.

The Future of Capital Markets Under Trump

The good news on the capital markets front is that U.S. bank lending into commercial real estate has now surpassed its pre-recession peak, and analysts are generally optimistic about the near-term forecast. If Trump policies ease the regulatory burden on banks, it could spur more lending activity at a time when commercial real estate markets are still healthy. Speakers from the Commercial Real Estate Finance Council (CREFC) spoke at PRISM on a track titled Commercial Real Estate Finance—Trends and Politics to address what federal proposals could mean over the near term.

The Market Is Not Falling Off a Cliff

In terms of the capital market outlook, Lisa Pendergast, Executive Directors, CREFC, believes the market is “relatively far along in the recovery, but no one is seeing a cliff at this point.” One of the most notable recent trends has been the dramatic shift in lending sources as new ones gained market share, multifamily

GSE and insurance company lending ramped up and CMBS contracted. Deals for commercial real estate were down in the first quarter, but not dramatically. As the market approaches the midyear point, loan originations are starting to pick up in a positive way, particularly as the a wave of refinancing gets underway from the ten-year loans (“the most aggressive 2007 vintage”) come due. CMBS pipelines are also starting to fill back up now that issuers have figured out how to comply with risk retention. Construction lending, however, has been much more challenging today in the face of HVCRE restrictions.

Based on a CREFC member survey, 55 percent of member banks believe that commercial real estate property markets have peaked, especially in multifamily and hotel assets, and a solid 67 percent expect the economy to perform at least somewhat better this year than in 2016. Capital availability is currently high, and a large number of lenders stand ready to lend to borrowers. The forecast calls for flat-to-slightly increasing activity from banks and insurance companies, a decline for CMBS with the difference made up by new lenders.

Commercial real estate transaction activity will likely slow after this year, partly with a downturn in loans maturing which translates into less product at a time when valuations are leveling out from the peak of the market.

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Moving Pieces In Washington

Key issues that the banking industry will be watching closely this year are: tax reform, a potential rollback of Dodd-Frank and changes to Fannie Mae and Freddie Mac. Pendergast was reassuring, noting that “lending is going to change under the new administration, but the conversations about ‘how?’ really haven’t even started yet, especially on issues like the future GSE lending.” Both political parties agree that the GSEs have performed well, so the likely question according to CREFC’s Deputy Executive Director Michael Flood will be: “Do we privatize or keep them the same and make them one agency instead of two?”

Investors very much favor Fannie and Freddie deals, and the “performance of these securities has been fantastic. The timeframe for any substantive change, however, could be as long as a 10-year horizon so the market should have plenty of time to adjust.”

In terms of how to react to the latest headlines about future reforms that could impact the lending climate, Flood shared his three rules: “First, look beyond the noise and pay attention to what Congress is doing as budgets are built. Second, nothing happens fast by design in Washington. Third, remember that you need 60 votes to get something through the Senate, and there are 52 Republicans so everything gets moderated.”

The Dodd Frank Reform issue is also an important one, as well as the implications of tax reform. It is important to remember that underwriting criteria by lending institutions grew more conservative even in advance of Dodd Frank’s implementation, and that is likely to continue as long as banks exercise caution in the wake of the 2007 collapse. While a full repeal of Dodd Frank is unlikely to gain majority support, it is reasonable to expect modifications as the rule goes under the microscope.

On all fronts, there will be a great deal of Congressional negotiations getting underway over the next few months, with important implications for the lending community, but for now, the forecast is for moderate growth, barring any unforeseen geopolitical or economic upset.

FOR MORE INFORMATION
To read this article and others, the EBA Summer Journal is here in its entirety, containing other articles by noted subject matter experts, including:

  • The risks of PCBs
  • The Value of Quality Historical Source Review for Phase I ESAs
  • Understanding Arsenic In New Jersey

More information on joining EBA is available here.