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Traditionally, lenders have been hesitant to make loans secured by contaminated properties. In the past several years, however, larger banks, insurance companies, and even some smaller banks and other lenders have become more knowledgeable in environmental matters. Consequently, in certain circumstances, they can be more willing to make loans secured by contaminated property. For the potential borrower, then, it is crucial to understand the factors that a lender will consider when deciding to make such a loan. In general, bankers analyze risk. Therefore, the project that presents a minimized risk to the lender has a greater opportunity for approval. Banks assess projects using the “5 C’s” of credit:

Moreover, to obtain a loan secured by contaminated property, the prospective borrower should demonstrate to the lender at least a basic understanding of the environmental risks involved in the loan transaction. While each individual lender has its own lending policies, every lender shares some primary concerns, including:

Generally, a lender looks to a borrower’s operating income as the first source of funds for repayment on a loan. Operating income is often referred to as the borrower’s capacity and is typically measured by rental income on the property or profits generated by business operations conducted on the property. If a borrower is forced to fund an expensive site investigation or cleanup or pay damages to third parties, such as neighboring property owners, those environmental liabilities may be so high in relation to the borrower’s operating income that they impair the borrower’s capacity to repay the loan. After operating income, a lender will look to the borrower’s liquid assets, such as cash in the bank from past business operations, as a source of repayment. Such assets are often referred to as a borrower’s capital. Liquid assets are distinguished from the property that secures the loan. In evaluating a potential loan on contaminated property, a lender must initially ask the following questions:

To minimize their liability related to revitalization of potentially contaminated sites, bankers have taken several steps:

Phase I and II environmental site assessments are required routinely for sites at which known or suspected contamination problems are present. The investigations increase the processing time for loans, and they add to transaction costs for borrowers. Lenders may also seek indemnification from sellers for any preexisting contamination. Indemnification agreements often address issues related to cleanup expenses and the costs of fines, third-party claims, and the determination of "reasonable" costs, cleanup standards, and limits on potential liability.

Financial institutions grappling with issues of contaminated property, collateral value, and credit-worthiness of borrowers may remain reluctant to lend on revitalization projects. The reluctance of lenders has evolved from earlier concerns based on unfounded fears about lender liability. More banks appear to have acquired the expertise to distinguish between the real and perceived risks associated with lending for the revitalization of potentially contaminated sites. With increased expertise, more banks have adopted environmental risk management programs to help limit their exposure, making revitalization lending more attractive. It would be helpful to locate a lender with experience dealing with contaminated properties.

Some lenders insist on several underwriting “rules” that limit their own exposure to risk, but also make private financing more easily accessible and more predictable for other parties in a revitalization project. Predictability is a major consideration for developers and investors. The underwriting standards typically include:

Some lenders have gained sufficient confidence in the quality and credibility of state voluntary programs that they now, at least informally, use state assurances when determining whether or not to make a loan for a potentially contaminated site revitalization project.

In “Financing Brownfields Redevelopment Projects – A Guide for Developers” (EPA, 1999), EPA suggested the elements for inclusion as shown in the Elements to Include in a Project Finance Plan Exhibit.

In addition to information that the lender may require, the developer will also need to secure from each candidate lender pertinent information related to obtaining or satisfying loan requirements. A summary of general information developers need from lenders includes: