Abstract
This paper shows that brownfield redevelopment occurs at a lower than socially optimal rate due to a stigma effect. A theoretical framework is employed, incorporating asymmetric information showing this stigma within the brownfields market generates a first-mover problem. Developers require a risk premium on their rate of return to offset this stigma, which discourages investment. Asymmetric information further widens the gap between offer and asking prices, reducing successful transactions. Implications of the theoretical framework are explored using a survey of real estate developers in the Denver metropolitan area. Brownfield developers’ typical characteristics along with their risk and stigma premiums are quantified and found to be substantially in excess of cleanup costs.
Highlights
Due to differences in regulation, production techniques, and heavy industrial use in the past [1], communities have found themselves left with sites, the redevelopment of is which desirable due to its location and attributes, but is difficult to attract individuals willing to tackle the uncertainty and obstacles associated with the potential clean up [2,3,4,5,6,7]
Due to the perceived risk associated with brownfield sites, developers cannot expect to receive the full value of their property when they go to sell it even after remediation
Using a survey of real estate development professionals in the Denver metro area, this paper statistically quantifies the risk premiums associated with brownfield redevelopment
Summary
Due to differences in regulation, production techniques, and heavy industrial use in the past [1], communities have found themselves left with sites, the redevelopment of is which desirable due to its location and attributes, but is difficult to attract individuals willing to tackle the uncertainty and obstacles associated with the potential clean up [2,3,4,5,6,7]. Due to the perceived risk associated with brownfield sites, developers cannot expect to receive the full value of their property when they go to sell it even after remediation These effects contribute to a lower level of brownfield remediation and fewer transactions on which to base expectations and beliefs. This situation leads to profitable transactions and remediations not being undertaken, as potential buyers rely on noisy market data to estimate profitability and cleanup costs [19,20]. Using a survey of real estate development professionals in the Denver metro area, this paper statistically quantifies the risk premiums associated with brownfield redevelopment This analysis finds private sector buyers require additional compensation in the form of a higher rate of return above cleanup costs to consider a brownfield redevelopment project.
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