Financial Incentives to Redevelop Contaminated Property
~ By Curt Connors Giarrusso, Norton, Cooley & McGlone
Let me tell you a story: A buyer purchased a property at a bank foreclosure sale. The bank’s terms were “as-is” with no meaningful opportunity for inspection. The buyer paid in cash. Post-purchase, the property was determined to be contaminated (e.g. by oil, dry cleaning solvents, etc.) from a long-ago release. Despite having absolutely no connection to the historical and previously unknown contamination, the buyer was left holding the bag for the cleanup. It happens more often than you might imagine.
Many businesses and individuals in the Commonwealth have found themselves unexpectedly saddled with a contaminated property. Even when the money is available for a cleanup, it can seem like throwing good money after bad. Many parties do the minimum required by law and by the Massachusetts Department of Environmental Protection (“DEP”), but at the slowest possible pace (“bleed rate”), thereby increasing their carrying costs for a “worthless” property over years. Some simply give up and wait for DEP to coming knocking. It doesn’t have to be that way.
Believe it or not, the government sympathizes, or at least is concerned about the problem. Potentially productive urban areas that could be redeveloped and contribute to the tax base remain stagnant. Lack of reuse opportunities promotes continuing sprawl, out toward undeveloped areas. The Commonwealth did something to try to reverse the trend.
In 1998, Governor Celluci signed the original “Brownfields” act. The intent was to provide funding and incentives to clean up and redevelop contaminated property, especially in certain areas. It was originally created in 1998 and since amended several times, with expiration originally set for 2010. The good news is that at least one important part of the statute has recently been extended to December 31, 2013, so the door remains open for a limited, but meaningful, period of time.
The “Brownfields Tax Credit” is a key way that the Commonwealth pays you back for taking action that not only promotes better land use, but which also makes business sense. Under certain circumstances (which are broad but important to know), an owner or tenant of contaminated property used for business purposes can take a dollar-for-dollar tax credit against Massachusetts taxes for up to 50% of costs spent in performing a cleanup at that site. In effect, you can get up to half of your money back.
Even better, if your Massachusetts taxes do not need a credit, or if you simply do not want to wait for tax time, the credit is transferable (i.e. sellable) to a third party. Prices can range up to 80 to 90 cents on the dollar. In addition there is not too much bureaucracy; in “recent experience, the Massachusetts Department of Revenue has been processing applications in less than a week,” according to Michael Webster, P.G., L.S.P., with GeoInsight, Inc., Environmental Strategy and Engineering, You do the cleanup, you present the paperwork, then DOR issues a tax credit certificate that can be used against upcoming state taxes or sold right away on the market. It does not take the pain out of the process, but it does help get the otherwise-tanked business investment back on an even keel.
Now for the fine print. There are requirements, and they must be satisfied. Key among them is that the “site” be actually cleaned up to required standards using qualified vendors. If the property is cleaned to the point of essentially unlimited use (at least, not due to the contamination), the 50% tax credit applies. If the cleanup is achieved in part by imposing a use restriction, known as an Activity and Use Limitation (“AUL”), then the tax credit remains but reduces to 25%. Still, in an arena where costs can easily go into the six figures, even a 25% return has value.
Where the site is located also matters. The Commonwealth has designated certain towns and cities (on occasion, limited parts thereof) as “Economic Target Areas” (“ETAs”). Numerous southeastern Massachusetts municipalities have been designated as ETAs, including areas proximate to Boston and near and along the entirety of Cape Cod. The current list of ETAs can be found at the Commonwealth’s website (for a list: www.mass.gov/dep/cleanup/eda.htm; for a map: www.mass.gov/Ehed/docs/mobd/tax_incentives/eta_map.pdf). Beyond ETAs, certain other specific industries/locations can also qualify as an “Economically Distressed Areas” (“EDAs”). EDAs include all ETAs, as well as manufactured gas facilities and other case-by-case properties.
As prefaced at the beginning of this article, another important component is that the party seeking the tax credit must not have played a role in causing the contamination, nor have owned or operated the site at the time the contamination was released. The tax credit is intended to assist and incentivize innocent parties (“eligible persons”), not to reward parties that actually or arguably played a role in the contamination.
There is also a cost threshold that must be met. The cleanup costs must equal or exceed 15% of the assessed value of the property prior to commencement of the cleanup. Given the depreciated value of contaminated properties, that threshold is not hard to meet; however, it must be documented for DOR to process the tax credit application.
The credit can be used to offset up to 50% of taxes owed in a given year; however that is not an issue, in that the remaining credit can be carried over for five tax years until used (or transferred/sold).
Even if you are one of those parties that dripped money into the site over the course of years a decade or more ago, those early costs may still be recoverable along with recent costs. The tax credit applies to costs incurred between August 1, 1998 and January 1, 2014 (provided that the cleanup begins by no later than August 5, 2013).
For parties that may not have the available funding to perform the entire cleanup then seek the tax credit, there are still Brownfields low-interest loan and grant programs and environmental insurance subsidy opportunities (to get lenders to issue loans on contaminated properties) that may still help get a devalued property up and productive again. Some available programs even apply to non-innocent parties in non-ETA locations. If loan or grant programs are utilized, especially from the Massachusetts Redevelopment Access to Capital Program or the Massachusetts Brownfields Redevelopment Fund, a party may still qualify for a Brownfields tax credit, but the financial benefit from the other programs will first be deducted from the net tax credit.
Time is running out on some of the Brownfields incentive programs, but at least in terms of the Brownfields tax credit, the Commonwealth has reset the clock, allowing parties another chance to avail themselves of opportunities to turn the corner on damaged properties and move forward.