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CDFA Spotlight:
Federal Brownfield Expensing Tax Incentive
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Rehabilitation tax credits were established to discourage unnecessary demolition of older buildings and to slow capital flight from older urban areas. This cost deduction provides a business incentive to clean up sites contaminated with hazardous substances, and is intended to offset the costs of cleanup. “Cleanup” can also include expenses related to site assessment, remediation planning, costs of participating in a state Voluntary Compliance Program (VCP), or other designated response programs, in addition to costs connected to installation and maintenance of engineering or institutional controls used as part of the cleanup process at a site. While there is no guarantee, most states provide the required certification in a month or less. However, some prospective users have been deterred by recapture provisions of the incentive, discouraging those developers who will not hold onto the property for any length of time after cleanup.
For a site to qualify, there must be a “release, threat of release, or disposal” of a federally-defined hazardous substance, and cannot be listed on EPA’s National Priorities List (NPL). Further, businesses do not need to be located in an empowerment, enterprise, or renewable community to qualify, and environmental cleanup costs at eligible sites may be fully deducted in the year incurred, rather than capitalized over time.
Qualified sites must also meet these requirements:
- The contaminated site must be held for use in a trade, business, or for the production of income, such as inventory warehousing.
- A statement must be obtained from the designated state environmental agency that the site meets the federal definition for a contaminated site: “There has been a release, threat of release, or disposal of hazardous substance at or on the site.” (IRC, Sec. 98)
Planning & Partnering
Proper planning and partnering is essential to attract investors due to several vital remediation stages which impact future use, all requiring communication with state environmental agencies, local planning boards, communities, and federal officials. Actual and perceived lack of regulatory certainty, and risk of exposure to third-party lawsuits and toxic tort actions can easily discourage potential users of the tax deduction. If a site has not been properly investigated, expensive changes may add to clean up costs or invalidate future use. Properly remediated sites may or may not obtain a state “Covenant not to Sue”, depending on what the state offers. Sites can obtain final sign- off from their states, which prevents federal EPA from acting on the site, except in the case of a few specifically prescribed situations. The Center for Brownfields Study (http://sunybrownfields.esf.edu/) provides an excellent strategic outline to avoid common pitfalls associated with Brownfield projects.
Many developers struggle to build a complete financing package – particularly in obtaining capital for three essential activities:
- Early stage site assessment;
- Defining a site remediation plan
Quick Facts
Financing is easier to obtain when presentation packages are highly detailed. A sophisticated package will explain ancillary tax benefits, financing vehicles, access to local markets, infrastructure capacity, transportation options, and other benefits. Partnering with local real estate sales professionals can further facilitate marketing challenges
The Department of Treasury recommends promoting the cash flow advantages of tax incentives, and the financial and public relations advantages of brownfield redevelopment to lenders. They also advocate utilizing programs to expand capital access for small businesses which might locate at a brownfield site.
Attracting Brownfield Tax Incentive Users
Brownfield users are usually forced to pay a higher rate of return to investors or lenders to cover greater perceived risk. This translates into additional points, complicated loan processing, and more lengthy review procedures. Underwriting costs can escalate when independent tests, assessments, and collateral are required.
All of the above extra costs can generate significant financing gaps. This is why initial public investments are needed to reduce risk to acceptable levels.
The Northeast/Midwest Institute recommends public-sector initiatives should meet at least one of several goals needed to blunt the financing gap effect. The Brownfields deduction incentive may attract more investors in localities which:
- Reduce lenders’ risk by providing loan guarantees, companion loans, environmental insurance, and other risk transferring tools. Further, technical assistance programs can identify cheaper cleanup technologies or connect lenders with performance data, making institutional controls more acceptable.
- Reduce borrowers’ cost by subsidizing interest on project loans with tax-exempt financing, low-interest loans, or by reducing loan underwriting costs. Some communities offer loan packaging assistance through CDCs and other local institutions.
- Create incentives through abatements, tax credits, or grace periods to improve cash flow.
- Provide training and technical assistance to offset project costs. These services often form the basis on which redevelopment partnerships are structured.
- Provide direct financing. Money for site assessment and cleanup is usually the most difficult financing to acquire, and states are more frequently allocating grants for this purpose. Public investment can stimulate private investment by placing faith in the economic viability of an area.
More states are considering ways to accept properties with a greater variety of contaminants, making it easier for private developers to work with the program framework.
More than half the states have working financing incentives. Direct financing tools include loans, abatements, credits, loan guarantees, and loss reserves. These efforts will continue, most likely in partnership with new federal incentives.
This link leads to the 2007 EPA brownfield grant levels ($70.7 million):
http://www.epa.gov/brownfields/pilot_grants.htm
Federal Brownfield Expensing Tax Incentive Fact Sheet
Copyright CDFA
This article is intended to provide accurate and authoritative information in regard to the subject matter covered. The author and CDFA are not herein engaged in rendering legal, accounting or other professional services, nor does it intend that the material included herein be relied upon to the exclusion of outside counsel. CDFA is not responsible for the accuracy of the information provided in this fact sheet. The information provided has been collected from a variety of sources. Those seeking to conduct complex financial deals using the tools mentioned in this document are encouraged to seek the advice of a skilled legal/consulting professional.
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