What Is a Brownfield Investment?

A brownfield (also known as "brown-field") investment is when a company or government entity purchases or leases existing production facilities to launch a new production activity. This is one strategy used in foreign-direct investment.

The alternative to this is a greenfield investment, in which a new plant is constructed. The clear advantage of a brownfield investment strategy is that the buildings are already constructed. The costs and time of starting up may thus be greatly reduced and the buildings already up to code.

Brownfield land, however, may have been abandoned or left unused for good cause, such as pollution, soil contamination, or the presence of hazardous materials.

Brownfield sites may be found in unattractive locations, making it harder to develop for the public or employees. So if investors can’t be attracted, it won’t be able to sustain itself.

Understanding Brownfield Investments

Brownfield investing covers both the purchase and the lease of existing facilities. At times, this approach may be preferable, as the structure already stands. Not only can it result in cost savings for the investing business, but it can also avoid certain steps that are required to build new facilities on empty lots, such as building permits and connecting utilities.

The term brownfield refers to the fact that the land itself may be contaminated by the prior activities that have taken place on the site, a side effect of which may be the lack of vegetation on the property. When a property owner has no intention of allowing further use of vacant brownfield property, it is referred to as a mothballed brownfield. Sites that are significantly contaminated, such as by hazardous waste, are not considered to be brownfield properties.

Brownfield Investment and Foreign Direct Investment

Brownfield investing is common when a company looks toward a foreign-direct investment (FDI) option. Often, a company considers facilities that are either no longer in use or are not running at full capacity as options for new or additional production.

While additional equipment may be required, or existing equipment may need to be modified, this can often be more cost-effective than building a new facility from the ground up. This is especially true in cases where the previous use is similar in nature to the new intended use. The addition of new equipment is still considered part of a brownfield investment, while the addition of any new facilities to complete production do not qualify as brownfield. Instead, new facilities are considered greenfield investing.

The EPA has designated brownfield as a potential improvement site that has been previously improved, as well as one that has potential impediments to improvement.

Brownfield vs. Greenfield Investing

While brownfield investing involves the use of previously constructed facilities that were once in use for another purpose, greenfield investing covers any situation in which new facilities are added to previously vacant land. The term greenfield relates to the idea that, before the construction of a new facility, the land may have literally been a green field, such as an empty pasture, covered in green foliage prior to use.

The Disadvantages of Brownfield Investments

Brownfield investments can run the risk of leading to buyer's remorse. Even if the premises had been previously used for a similar operation, it is rare that a company looking finds a facility with the type of capital equipment and technology to suit its purposes completely. If the property is leased, there may be limitations on what kinds of improvements can be made.

Key Takeaways

  • When a company or government entity purchases or leases existing production facilities to launch a new production activity, it is called a brownfield investment.
  • Greenfield investments, unlike brownfields, undertake new construction of property, plant, and equipment.
  • A brownfield investment is a common form of foreign direct investment (FDI).
  • Land that may be contaminated by prior activities on the site is called brownfield.