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Final Report: Urban Regeneration through Environmental Remediation: Valuing Market Based Incentives for Brownfields Development
EPA Grant Number: R829607Title: Urban Regeneration through Environmental Remediation: Valuing Market Based Incentives for Brownfields Development
Investigators: Meyer, Peter B. , Alberini, Anna , Heberle, Lauren , Wernstedt, Kris
Institution: University of Louisville , Resources for the Future , University of Maryland
EPA Project Officer: Wheeler, William
Project Period: March 1, 2002 through February 29, 2004
Project Amount: $277,388
RFA: Market Mechanisms and Incentives (2001)
Research Category: Economics and Decision Sciences
Description:
Objective:The objective of this research project was to examine the relative importance to developers of different market-based mechanisms and other incentives (MM&I) for promoting the remediation and reuse of brownfields (i.e., previously used and potentially contaminated urban sites).
This core objective never changed over the life of the project. After consideration of policy implications, we expanded efforts to determine the extent to which developers' preferences for different incentives and investment conditions are misperceived by public officials. In the final design and analysis, we pursued three distinct elaborations of the basic intent, trying to:
- determine how to persuade developers to pay attention to potentially contaminated sites at the lowest possible public sector cost;
- isolate the relative importance of different incentives to developers that might consider brownfield properties and to measure the financial utility of the incentives to developers, which might be very different from the financial cost to the public sector;
- and establish the extent to which public economic development agencies (EDAs) accurately perceive what is important to developers and determine how EDAs' current practices should change to actually attract developers.
The processes by which these objectives were pursued ended up changing somewhat over the course of the research project. The original design for data collection from developers anticipated face-to-face interviews in four to eight metropolitan areas to address how a key variable, the condition of the local real estate market, could affect a developer's interest in brownfields. The final design involved mail instruments preceded by mail and/or e-mail correspondence announcing the forthcoming arrival of a survey. The key variable of the condition of the local real estate market was addressed through the use of two different scenarios, one with a rapidly growing real estate market, and the other a stagnant real estate market.
The Developer Study-Forced Choice Among Incentives
The survey was administered to 2,600 members of the Urban Land Institute (ULI). ULI provided the names and contact information for developers among its membership. The introductory letter/e-mail was set over the signature of the ULI President using ULI letterhead. Responses were obtained from 313 developers. The 12 percent response rate is consistent with the range experienced by ULI in other surveys of its members, who respond in proportion to their interest in the topic. The developers surveyed were not brownfield, or even infill, specialists.
Questioning developers regarding their attitudes about the “importance” of different incentives to redevelopment is problematic, because many respondents might answer strategically if they believe that the answers to such questions may affect public policy. It may be in their best interests to make sure as many incentives are available as possible. Absent a questionnaire format that requires choices among incentives or possible attributes, respondents often indicated that everything is important. Past brownfields incentives studies have exhibited response patterns suggesting that such strategic behavior shaped the findings.
To mitigate such problems with strategic responses, survey instruments can be structured to require mutually exclusive choices. This study used forced choices between alternative bundles of five different incentives provided for a specific brownfield redevelopment scenario. Conjoint analysis of the responses by the 313 respondents to the 5 forced choices each was asked to provide the statistical basis for the study findings on the value of different incentives to developers considering an investment on a brownfield site. The five incentives included:
| Incentive | Number of Choices | Alternatives |
| Site Assessment Cost Support | Two | $0, $100,000 |
| Public Hearing | Two | Required, Not Required |
| Protection from Additional Cleanup Cost | Two | Available, Not Available |
| Protection From Third Party Liability Claims | Two | Available, Not Available |
| Subsidy for Redevelopment | Four | $0, $125,000, $250,000, $500,000 |
The peculiarity of the choice attributes listed here is that there are two different monetary elements. Theoretically and computationally, conjoint analysis requires a single numeraire that provides the basis for pricing the other attributes. Procedurally, we also used the single numeraire, but we allowed for the possibility that the value of the dollars in one monetary incentive might vary from those in another. The Site Assessment support was described as a reimbursement that was provided whether or not the project was undertaken, whereas the Subsidy for Redevelopment was available only if the project went forward. The first incentive, therefore, helped defer sunk costs associated with project investigation that would be a dead loss to the developer if the site proved uneconomic from his or her perspective.
With the exception of a subsample of developers who had a high percentage of recent projects in brownfields, most developers failed to distinguish between the two types of monetary support. Although the experiment did not produce policy-significant results in this comparison of different types of money, it did demonstrate the possibility of such an analysis. A statistically significant finding was that some respondents can distinguish between the different conditions under which funds are provided and thus assign different values to funds based on the strings attached.
The hypothetical scenario for which the alternative bundles of incentives were offered involved a decision on whether or not to make a contract offer on property for a townhouse project that the developer's company would then lease to individual households. This project would take place under the following circumstances. (Figures in the brackets represent the project costs for the hypothetical in the markets with “high” and “little or no” potential for property value appreciation.)
Market Condition. The project is undertaken in an area with [high/little or no] potential for property value appreciation that might raise the return above expected values.
Environmental Assessment Cost. The expected cost for environmental studies, including assessment, sampling, and response planning is $100,000.
Site Remediation Cost. Based on known prior uses, the environmental engineers report that the expected cost for meeting state regulatory requirements is $900,000, including protection from any cost overruns.
Land Cost. The expected purchase price for the site is [$6/$3] million.
Development Cost. The expected development cost at the site, including construction, marketing, interest, legal and administrative fees, etc., is [$18/16] million (in addition to acquisition, assessment, and cleanup costs).
Revenues. The expected present value of the townhouse development after construction is [$30/24] million.
This scenario failed to address an important dimension of any real development project: time. We could not introduce this dimension without having to reduce complexity elsewhere and made the decision that we would, implicitly, assume that all the developers calculated the elapsed time expectations and uncertainties in relatively similar ways. The issue of whether or not a public hearing would be waived, one of the incentives, probably served to allow those with the greatest time concerns to raise that issue by putting more weight on the waiver than others might have.
The Private Sector Respondents
The responses appear to have come largely from a cross-section of developers involved in their companies' project appraisal and investment decisions.
- Eighty-nine percent of respondents were themselves engaged in real estate development.
- Ninety percent of respondents participated in decision making.
- Sixty-four percent of respondents had their own capital at risk in projects (as owners, shareholders, or investors).
- Nearly 50 percent of respondents previously conducted more than 60 percent of their projects on urban infill sites.
- Twenty-two percent of respondents had never worked on sites with potential contamination problems, but more than 19 percent were specialists, doing more than 60 percent of their projects on brownfield sites.
- Whether or not they undertook brownfield projects, 90 percent of respondents had dealt with environmental assessments of prospective development sites.
- The majority of respondents sold new developments rather than leased space. In almost all other respects, however, the respondents had direct experience with projects like the hypothetical development project described in the survey.
- Seventy-nine percent of respondents had engaged in residential property development.
- Sixty-three percent of respondents had developed townhouses.
- Fifty-four percent of respondents said that the hypothetical scenario was about the same scale as their projects, with 20 percent doing generally larger projects and 26 percent working on smaller projects.
Key Conjoint Analysis Findings
The valuation results for the (n = 1,475) choice experiments derived from the survey are described here for the three non-monetary incentives, all measured in terms of the sum of the two forms of monetary support described above. We addressed statistical issues regarding the significance of findings, successful avoidance of bias in responses, and so forth, in some of the papers and articles written under this grant. All valuations reported here were derived from statistically significant findings of the different conjoint analysis models tested. We report first on the impact of the prospect of windfall gains in property value (the real estate market effect) on valuations (Table 1).
Table 1. Impact of the Prospect of Windfall Gains in Property Value on Valuation
| INCENTIVE | VALUE | AS PERCENTAGE OF | |
| RESPONDING SAMPLE | PROJECT | PROFITS | |
| Avoiding a Public Hearing | |||
| Both Types of Projects | $211,543 | 0.9% | 4.7% |
| High Windfall Potential | $215,267 | 0.9% | 4.3% |
| Little Windfall Potential | $210,409 | 1.1% | 5.3% |
| Eliminating All Cleanup Cost Risk | |||
| Both Types of Projects | $701,776 | 3.1% | 15.6% |
| High Windfall Potential | $687,509 | 2.8% | 13.8% |
| Little Windfall Potential | $714,900 | 3.6% | 17.9% |
| Eliminating Third Party Liability Risk | |||
| Both Types of Projects | $968,817 | 4.1% | 21.5% |
| High Windfall Potential | $969,305 | 3.9% | 19.4% |
| Little Windfall Potential | $962,281 | 4.8% | 24.1% |
It appears that only the values for Eliminating All Cleanup Cost Risk are consistent with the premise that incentives would be worth less in markets that have lower expected returns. Public hearings, however, may be more contentious in rising property value areas and thus may be worth more to avoid. Similarly, third party liability risk ¾ dangers of suits from other parties ¾ may be somewhat greater in more affluent areas, such as those with high windfalls.
Looking at the valuations for all projects, the ranking of the valuations for the three incentives reflects the greater uncertainty of third party lawsuits when compared to that involved with cleanup costs for sites that have been assessed and analyzed before the first shovel is turned. The much lower valuation assigned to the public hearings resulted from the assessment on the part of many developers, mostly those with substantial brownfields experience, that public hearings are a net positive. This opinion about hearings, uncovered in Likert questions discussed further below, appears in the presurvey interviews conducted with some developers to relate to cleanup risk reductions associated with information obtained in the hearings from long-term neighbors of the site and to reduce third party claims risks associated with the outreach inherent in the public hearings process.
Turning to how developers' experience affected valuations, we classified the 313 respondents into 2 groups based on the percentage of past projects that were brownfields (Table 2). The cut-off point of 60 percent provided a “specialists” subsample of 60; the need for a sufficient number of choice experiments for estimation precluded using an 80 percent cut off.
Table 2. Impact of Developers' Experience on Valuations
| INCENTIVE | VALUE | AS PERCENTAGE OF | |
| RESPONDING SAMPLE | PROJECT | PROFITS | |
| Avoiding a Public Hearing | |||
| All Respondents | $211,543 | 0.9% | 4.7% |
| Brownfield Specialists | $129,303 | 0.6% | 2.9% |
| Non-specialists | $237,348 | 1.1% | 5.3% |
| Eliminating All Cleanup Cost Risk | |||
| All Respondents | $701,776 | 3.1% | 15.6% |
| Brownfield Specialists | $681,228 | 3.0% | 15.1% |
| Non-specialists | $726,887 | 3.2% | 16.2% |
| Eliminating Third Party Liability Risk | |||
| All Respondents | $968,817 | 4.1% | 21.5% |
| Brownfield Specialists | $648,894 | 2.9% | 14.4% |
| Non-specialists | $1,081,261 | 4.8% | 24.0% |
Clearly, there are major differences in risk perceptions and thus valuations of incentives between those with more and less brownfield experience. The findings appear at first glance to support the presumption that knowledge accrues from experience, with the valuations consistently lower for the specialists, for whom the uncertainties associated with the risks avoided through the incentives would tend to be lower as a result of their experience. Other characteristics of the respondents, however, may explain some of the differences, in whole or in part:
- Brownfield specialists may be simply less risk averse than developers who avoid potentially contaminated sites. Their greater appetite for risk and its potential rewards may be why they decided to work on brownfields.
- Retention of control may mitigate both uncertainty and risk. More than 66 percent of non-specialist respondents say that they mostly or always sell their developments. But less than 50 percent of specialists report selling their developments; 30 percent of them mostly or always lease new developments. A landowner must maintain good neighborhood working relations to hold down operating costs over time. Public hearings, for all their uncertainty, may lay the foundations for such relations. Most contaminated site reclamations combine protective physical barriers with land use controls to ensure the barriers are maintained. A developer who retains ownership also has the control capacity to minimize risks of remedy failures and thus third party liability claims.
Public policy implications can be read directly from these tables that summarize the conjoint study findings:
- There is little evidence that significantly higher incentives are needed to attract developers to brownfields in depressed real estate markets than in other markets. This finding suggests that tying brownfield incentives to enterprise zones or other special redevelopment areas may not be a desirable public policy if the objective is to maximize mitigation activity, not economic regeneration.
- Public hearings about site mitigation plans and the environmental conditions of the redevelopment plan are far less of a concern to developers than cleanup cost of third party liabilities. Public offers to minimize disclosure of brownfield reclamation efforts, common in state voluntary cleanup programs, are not valuable to developers. Many would rather openly discuss their activities as a means of dispelling fears and reducing possible third party litigation.
- State policies that limit state court access for third party liability claims on sites that meet maximum state standards for mitigations may lead to more thorough cleanups, if the cost to comply with those standards are less than the perceived value of third party liability relief, seen by most developers as worth the equivalent of more than 20 percent of their profits.
- The same incentives are worth far more to those with limited brownfield experience than to the specialists. Therefore, the incentives needed to get an existing brownfield redeveloper to take on an additional project are actually far lower than those needed to attract a new firm into the arena. The public policy implication is that governments interested in accelerating the mitigation of contaminated sites need to systematically market their programs and incentives to developers with whom they have not worked with in the past. They cannot count on their existing brownfield developers to rapidly expand operations to cover all the prospective sites.
The Public-Private Perceptions Study
Developers' valuations of the incentives emerge from their perceptions. Public officials may be expected to provide incentives that serve the developers' interests if they share those perceptions. If they do not, however, then they may waste limited resources by offering inducements that are not valued highly by their target audience. To determine whether the public sector was capable of designing appropriate market incentives for brownfield redevelopment, the study also surveyed state and local environmental and economic development officials.
The officials were initially identified from environment and economic development agency rosters across states, and their numbers expanded through snowball sampling. Surveys mailed to the officials mirrored the set of Likert questions (dealing with brownfield site characteristics, environmental policy impacts on development, and similar issues) asked of developers to permit direct comparisons. Although the conjoint questions were not administered to public officials, they were asked to rank a variety of incentives analogous to those in the conjoint forced choices administered to developers. Rather than the 20 to 30 face-to-face public official interviews originally envisioned in the proposed study design, we surveyed some 100 public officials, although not all responses proved usable.
The data on public officials, n = 90, were drawn from respondents from all 10 U.S. Environmental Protection Agency Regions, more than 80 percent of whom were from counties with populations in excess of 50,000. Although slightly more than 50 percent of them worked for state agencies, 70 percent reported that their work dealt primarily with urban settings. Fifty-eight percent of the officials worked for environment or natural resource agencies, 27 percent for economic development units, and the rest for other planning organizations. Overall, they claimed substantial expertise about redevelopment of contaminated sites, with only two percent admitting less than “moderate” familiarity with the problem and issues, while 46 percent claimed “very strong” familiarity.
Key comparison findings included the following (all significant at the 0.05 level or better):
- With reference to public hearings and community involvement, developers (26.4%) were more likely than public officials (4.4%) to believe that that they “never to rarely” gain if the community is involved in the environmental response planning process and more likely (22.6% to 5.6%) to believe that local officials “often to always” oppose infill.
- Public officials do not perceive developers as risk takers, because 40 percent of them believe that developers “always” know the costs of environmental responses they face, when only 25 percent of developers make this claim. Half of the developers describe themselves and their colleagues as always fearful of new costs for undiscovered contamination during a cleanup, but only 25 percent of officials believe they have this concern.
- Officials similarly underestimate developers' concerns about a whole array of risk and uncertainty issues, including notably: liability for the cost of future environmental standards changes (developers 37%/officials 11%), the need for a firm cap on cleanup costs (44%/11%), and the value of some policy protecting developers from third party liability (47%/25%).
To the extent that these developers' concerns are undervalued by the officials, they will fail to offer the needed incentives. Thus, there is a great need to educate state and local officials about the decision processes and risk perceptions of developers, if those lower levels of government are to provide efficient market-based incentives to private developers to further the redevelopment of brownfields.
Journal Articles on this Report: 6 Displayed | Download in RIS Format
| Other project views: | All 38 publications | 7 publications in selected types | All 6 journal articles |
| Type | Citation | ||
|---|---|---|---|
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Heberle L, Wernstedt K. Understanding brownfields regeneration in the US. Local Environment 2006;11(5):479-497. |
R829607 (Final) |
not available |
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Meyer P, Alberini A, Wernstedt K. All incentives for infill development are not equal. Urban Land 2004;July. |
R829607 (2003) R829607 (Final) |
not available |
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Meyer PB. Public policy to attract private capital to contaminated sites: the relative values developers assign to different incentives. Economic Development Quarterly (in preparation, 2005). |
R829607 (Final) |
not available |
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Wernstedt K, Meyer PB. What do developers want? Brownfield News June 2005:12. |
R829607 (Final) |
not available |
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Wernstedt K, Meyer PB, Alberini A. Attracting private investment to contaminated properties: the value of public interventions. Journal of Policy Analysis and Management 2006;25(2):347-369. |
R829607 (Final) |
not available |
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Wernstedt K, Meyer PB, Alberini A, Heberle L. Incentives for private residential brownfields development in U.S. urban areas. Journal of Environmental Planning and Management 2006;49(1):101-119. |
R829607 (Final) |
not available |
CERCLA, infill, investment decision-making, regulatory relief, liability, risk, uncertainty, cleanup, remediation, real-estate development, sprawl, homebuilders, local economic development, state economic development, regulatory reform, economic, social, and behavioral science research program, brownfields, economics, market mechanisms, remediation, urban and regional planning, brownfield site, brownfield sites, environmental remediation, financial mechanisms, government intervention, market incentives, market-based mechanisms, policy incentives, policy making, construction subsidies, site assessment, assessment cost, mitigation planning, groundwater, land, soil, conjoint analysis, nonmarket valuation, survey, preferences, public good,
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Economic, Social, & Behavioral Science Research Program, Scientific Discipline, Waste, RFA, Brownfields, Remediation, Social Science, Urban and Regional Planning, Economics, Market mechanisms, Brownfield site, socioeconomics, brownfield sites, urban regeneration, market-based mechanisms, decision making, policy making, market incentives, effects of policy instruments, impact of federal policy instruments, environmental economics, financial mechanisms, environmental remediation, policy incentives, government intervention
Relevant Websites:
http://cepm.louisville.edu/publications/publications.htm 
http://www.rff.org/rff/Documents/RFF-DP-04-46.pdf
Progress and Final Reports:
2002 Progress Report
2003 Progress Report
Original Abstract