1. Brownfields 2004: Gateway to Revitalization September 20-22, 2004 Bringing the Bucks to Brownfields: How to Attract Sector Financing Lending Requirements and Environmental Risk William Muzychko, PNC Financial Services Group, Inc.

2. Lenders’ Limitations 1. Banks are Risk Adverse By NatureBy Nature Regulatory RuleRegulatory Rule 2. Banks are For Profit Entities Public CompaniesPublic Companies

3. General Lending Requirements (5 C’s of Credit) 1. Willingness to Repay the Loan (Character) 2. Cash Flow of the Borrower (Capacity) 3. Market Influences and Other External Factors (Conditions) 4. Borrower’s Equity (Capital) 5. Collateral ( Collateral)

4. A Lender’s Perspective -Sponsorship -Guarantor -Project Team -Project Fundamentals -Loan Type / Asset Class -Loan Purpose -Recourse -Permanent Lender

5. Sponsorship 1. Reputation and Experience 2. Management Team 3. Local/Regional vs. Non-Local/Regional Developer

6. Guarantor 1. Ability and Willingness 2. Guarantor Covenants

7. Project Team 1. Project Manager 2. General Contractor 3. Bonding Requirements 4. Architect 5. Environmental Consultant

8. Project Fundamentals 1. Bank Underwriting 2. Pro-forma 3. Market 4. Appraisal 5. Phase I, II, etc.

9. Loan Type / Asset Class 1. Office 2. Multi-family 3. Industrial 4. Retail 5. Hotel

10. Loan Purpose 1. Construction 2. Acquisition 3. Mortgage 4. Refinance 5. Income Property 6. Owner Occupied

11. Recourse 1. Principal Repayment Guaranty 2. Completion Guaranty 3. Cost and Carry Guaranty 4. Environmental Indemnity

12. Permanent Lender – Underwriting Assumptions Spreads over 10 yr Treasury: < 50% LTVSub 1.5% 50% - 65%1.50% - 1.65% 65% - 75%1.65% - 2.25%

13. Permanent Lender – Underwriting Assumptions LTVs - Life Company vs Conduit: Retail 70-75%75-85% Office65-70%70-75% Multi-Family75-80%80% Industrial70-75%75-80% Hotel50-55%55-60%

14. Environmental Risks to Lending 1. Impairment of Cash Flow 2. Decline in Value of the Collateral 3. Inability to Repay/Refinance 4. Enforcement Action 5. Direct and Indirect Liability 6. Image/Reputation Risk

15. Cash Flow 1. Newly Discovered Issue 2. Failure of Risk Transfer Method 3. Excess Remediation Cost 4. Offsite Contamination 5. Business Interruption 6. Catastrophic Event

16. Collateral Value 1.Inadequate Property Valuation 2.Phase I ESA Issues 3.Adjacent Property Land Use Changes 4.Soil/Groundwater Contamination 5.Contaminant Migration 6.Change in Property Use or Tenants 7.Excess Remediation Costs 8.Activity/Use Limitations

17. 1.NFA Letters 2.Inadequate Due Diligence 3.Discovery During Construction 4.On/Off Site Contamination 5.Construction/Renovation Issues 6.Damage to Structure 7.Mold Growth Repayment & Refinance

18. Enforcement/Third-Party Actions 1.On-Site Conditions 2.Off-Site Conditions 3.Changes in Standards 4.Health & Safety Issues 5.Third-Party Considerations

19. Liability 1.Nondisclosure of Known Environmental Impairments 2.Statutory or Tort Actions 3.Lender Liability 4.Shareholder Lawsuits / SEC Reporting 5.Compliance Violations 6.Potentially Responsible Party (PRP) 7.Former Facility (Legacy) 8.Natural Resource Damages

20. Image/Reputation Risk 1.Lack of Senior Management Commitment and Support 2.Oversight or Enforcement Actions by Regulatory Agencies 3.Credit Image Risk 4.Negative Press

22. Mitigants to Environmental Risk Daniel Kaley, Vice President Citizen’s Financial Group

23. Mitigants to Environmental Risk 1. Conduct a Thorough Investigation. - Phase I Environmental Assessment - Phase I Environmental Assessment - Phase II Investigation - Phase II Investigation - Phase III Remediation - Phase III Remediation - Regulatory Investigations - Regulatory Investigations - Remedial Cost Estimates - Remedial Cost Estimates

24. Mitigants to Environmental Risk 2. Financial Remedies - Indemnification Agreements - Indemnification Agreements - Escrows - Escrows - Insurance - Insurance - Letters of Credit - Letters of Credit - Government Grants - Government Grants - Low Interest Government Loans - Low Interest Government Loans - Tax Incentives - Tax Incentives - Opportunity Zones - Opportunity Zones - Financial strength of the borrower - Financial strength of the borrower

25. Mitigants to Environmental Risk 3. Regulatory Remedies: - “No Further Action” Letters - “No Further Action” Letters - Covenants Not to Sue - Covenants Not to Sue - Approved Remediation Plan - Approved Remediation Plan

26. Mitigants to Environmental Risk 4. Other Remedies - Borrowers’ Development Plan - Borrowers’ Development Plan - Previous Experience - Previous Experience - Coordination among Development Team - Coordination among Development Team - Scheduled Disbursements - Scheduled Disbursements - Alternate Collateral - Alternate Collateral

28. Now What?

29. Common Frustrations Too little information Too little time No supporting rationale Consultant assumes the authority of a regulator Reports focus on known issues but fail to investigate unknowns

30. Successes and Failures Understand the lender’s risk tolerance Organize the information Over-communicate Provide support for all conclusions Tie up loose ends Make it easy for the reviewer Keep the information forever

31. EBA Survey Existing Contamination

32. EBA Survey Prior Contamination

33. EBA Survey Prior USTs

34. About Phase I Reports Reaching the goal or Going through the motions?

35. Historical Use Features Conditions Improvements Industry Business Operations Activities Practices

36. Standard of Evidence Circumstantial - Evidence providing a basis for inference of a fact. Direct - Evidence that stands on its own to prove an alleged fact, such as testimony of a witness Empirical - Physical evidence such as copies of closure letters, phase II investigations, etc.

38. Financing Contaminated Property Transactions Dean Jeffery Telego Environmental Bankers Association

39. Overview: Lenders Financing Contaminated Property Transactions Take Home Messages Banker’s Historical Perspective, overcoming the barriers and challenges Underwriting Brownfield Deals General Credit Environmental Risk Management Rules, Standards, and Stages Future Trends, Market Forces, and Emerging Issues

40. Underwriting Brownfield Deals Credit Risk Questions affecting the Deal Types of Credit Risks –Categories of environmental risk –Bracketing the risk –Doing the deal despite the risks

41. Historical Perspective and Forces Affecting Lending on Brownfields Brief History of environmental lender liability and CERCLA Brightline test and policing loans Downturn of real estate market in late 1980s & early 1990s Evolution of bank regulatory guidance and policies Design of bank environmental risk policies and procedures

42. General Credit Environmental Risk Management Rules Stages Standards

43. Future Trends, Market Forces, and Emerging Issues EPA’s Brownfields Action Agenda to Land Revitalization Agenda and One Cleanup Program Public/Private partnerships and pilots Role of states, risk-based decision making Outreach to banking community Recent brownfield legislation and All Appropriate Inquiry Standards and Practices