An analysis of uncertainty in brownfield redevelopment using real options

Brownfield redevelopment is generally described as any other land development plus the added twist of uncertainty due to contamination. The added uncertainty has traditionally been attributed to the risks associated with cost of remediation and future environmental liability. Developers and investors of Brownfield projects expect a higher rate of return on their investment because of the extra time and effort involved due to perceived risk. Lenders with more experience are preferred because they are more open to risk. Some developers and investors see a business opportunity in Brownfield development depending on their insight and expertise.; In a traditional sense, a Brownfield redevelopment investment is not a good business opportunity unless it possesses some unique qualities like a desirable location or minimal contamination—a quality that brings a Brownfield closer to a greenfield. Otherwise, a public agency is expected to take the lead in initiating development of a Brownfield. The main objective of this research was to capture the investment behavior of the developer who chooses to invest in a Brownfield. Brownfield investments involve substantial uncertainty. The Real Options Method was used to account for the uncertainty element in Brownfield redevelopment when modeling the investment behavior of a Brownfield developer.; The results of applying Real Options to Brownfield redevelopment were twofold. The cash yield (δ) element of the method was found to reflect the intrinsic decision making of a successful Brownfield investor. When established for a geographical region, the cash yield can be used to plan future Brownfield redevelopments using the insight of the successful investor.; The second result involved the source of uncertainty (risk). The valuation for a Brownfield redevelopment loan application has two phases: Real estate and environmental contamination. A Brownfield project must make sense as a real estate development before the loan is approved. Identifying sources of uncertainty in an investment is an important step of the Real Options application. During the application of the Real Options Method to the case studies presented in this thesis, the real estate (location) feature of brownfields was found to be as significant as environmental contamination in complicating brownfield redevelopment. Traditionally the emphasis has always been on contamination.; Apart from their direct impacts, both results of the research can be used to reshape brownfield redevelopment policy at all levels of government. The cash yield component of the Real Options Method can be used to direct redevelopment efforts. In addition, the importance of location should be emphasized as well as the issues relating to environmental contamination.