May 2, 2013

Massachusetts’ Standoff With the Brownfields Tax Credit

 As I write this article, I am digesting a lot of chatter about the legislative prospects for the passage of an extension to the Brownfields Tax Credit Statute (the “BTC statute”).  There are two bills currently before the Joint Committee on Revenue to extend the BTC statute: House Bill 2515, sponsored by Representatives Cabral and Finegold, asks for a 5-year extension, while House Bill 2755, sponsored by Representative Wagner, asks for a 2-year extension.  Both bills were recently  heard by the Joint Committee on Revenue.  The LSPA and a few of its members, as individuals, testified before the committee on April 9th supporting the  extension of the BTC as a net positive economic, environmental, and social benefit to the Commonwealth.  Last year, the Legislature did pass a 2-year extension of the BTC statute; however, that extension was vetoed by Governor Patrick.  We are hopeful that this year the result will be different. Many of us who operate in this industry have been working on and lobbying for an extension of the BTC statute.

What does the “sunset” of the BTC Statute mean?

Signed into law as Chapter 206 of the Acts of 1998, the Brownfields Act is an expansive and important piece of legislation.  Within the Brownfields Act there is a provision, M.G.L. Chapter 63 §38Q, which, as currently amended, allows taxpayers who  have successfully remediated a contaminated property and achieved either a permanent solution RAO or ROS status prior to August 5, 2013, to be eligible for a tax credit (the “BTC” or “tax credit”) equal to 50% of the eligible costs of the remediation if there is no AUL, or equal to 25% of the eligible costs of the remediation if the permanent solution includes an AUL.  Eligible costs are those costs incurred after 2008, that are directly related to the remediation, as defined in M.G.L. Chapter 21E (“21E”).  Although there is no bright line test to determine which costs are direct costs, experience and current Department of Revenue (“DOR”) approvals have determined these costs to include LSP fees, testing costs, 21E related legal expenses, soil removal, clean fill, excavation, and certain demolition costs, to name a few.

Should the legislature allow the BTC to sunset (expire), there would be consequences for taxpayers whose projects have yet to achieve the requisite RAO or ROS status.  There would need to be clear direction from the state as to how the sunset of the statute would affect taxpayers, but a reading of the statute indicates that taxpayers whose projects have not yet achieved RAO or ROS status byAugust 5, 2013, would no longer be eligible for the tax credit.  With the achievement of an RAO or ROS prior to the sunset date of August 5, 2013, direct costs incurred prior to and subsequent to the sunset date, i.e., up to and including December 31, 2013, will be available for consideration for the tax credit.  Following the sunset date (August 5, 2013) the tax credit will not be available to taxpayers that either commence a remediation after August 5, 2013, or who do not achieve a permanent solution prior to August 5, 2013 (i.e., new remediations).  At the risk of being repetitive, I feel that it is important to note that those properties that have already achieved an RAO or ROS, or do so prior to the sunset date, will still be eligible for the tax credit.

The Legislature and the Governor

Given that last year Governor Patrick vetoed a proposed 2-year extension of the BTC statute, there is concern this year as to how the Administration will act.  It is not clear which of the two bills, H.2515 or H. 2755, will receive the legislature’s and the Administration’s support.  Clearly, the LSPA and all those testifying in support of the extension prefer H. 2515, which extends the BTC to 2018.  .Click here to read the LSPA’s letter in support of the Brownfields Tax Credit extension.

Why do we care about the Brownfields Tax Credit?

The LSPA (as an organization representing LSPs, and other business professionals that service, support, derive employment from, and require environmental remediation) supports the BTC as an effective tool in the property owner/operator’s arsenal in remediating contaminated properties.  The BTC assists potential buyers/developers (and sellers) in structuring transactions to consummate the purchase of contaminated property, as opposed to allowing such properties to remain blighted and continuing to present an environmental risk to the community at large.  The redevelopment of these properties, and the assessment and remediation activities associated with this redevelopment, often turn on the availability of the BTC to make the economics of the project work.

Consider the following real-life examples as a sampling of transactions that I have worked on, or am currently working on, that demonstrate the effectivness of the BTC.:

  • A family trust whose property was contaminated through no fault of its own, and which had the contamination spread to two abutting properties, was forced to remediate all three properties.  The remediation resulted in the completion of construction of a large ice skating facility that is now a well-utilized public amenity.  Proceeds from the BTC were needed to complete the remediation; without the BTC, the project would not have commenced, and we certainly would still have three undeveloped contaminated properties in this neighborhood.
  • A large developer constructing a building to be leased out to a financial services company as a single tenant needed to remediate contamination on the site, the cost of which amounted to several million dollars.  In order to attract the tenant and move forward on the development, which will spur the wholesale redevelopment of a very important part of Boston with apartments, restaurants, stores, and smaller offices, thereby creating jobs, economic activity, and a draw for large scale employers to Boston, the developer needed the BTC to help finance the tenant improvements demanded by the tenant.  Without the BTC, a development such as this, which is important to the state’s economy, would not move forward.
  • The land on which once stood a long abandoned automobile dealership was cleaned up and a new CVS pharmacy was built in its place.  Without the BTC, this project would not have moved forward, and the community would still have the abandoned auto dealership contaminating that neighborhood.

Clearly, the Brownfields Tax Credit is a powerful and instrumental tool that has facilitated the remediation of countless contaminated properties in Massachusetts.  The state has instituted a procedure whereby contaminated properties can be transformed into active, income- producing properties, eliminating the risk of soil and groundwater contamination to the communities involved, creating work opportunities and jobs, and in general expanding the Commonwealth’s economic base. The BTC program is a positive and effective use of our taxpayer dollars, and is a program that should undoubtedly continue to be extended.