New Brownfield Bill Would Revive Big Tax Write-offs for Real Estate Redevelopers
Senator Chris Murphy’s new brownfield bill that seeks to restore expired tax incentives that (1) enable developers to fully deduct the costs of environmental cleanup, and (2) exempt some unrelated business income taxes on profits earned from the sale or exchange of certain brownfields.
Yesterday, April 2, 2018, during a roundtable with state and local elected officials, developers, and community members from across his home state of Connecticut, U.S. Senator Chris Murphy (D-Conn.) announced he had recently introduced new real estate redevelopment legislation. The Creating Livable Environments and New Usable Property (CLEAN UP) Act of 2018 follows the path of similar legislation Senator Murphy proposed in 2016 that would incentivize the cleanup and redevelopment of contaminated industrial sites across the United States by rewarding developers taking on such risky sites with big tax write-offs.
The CLEAN UP Act would reenact two expired tax incentives. The first would allow developers to fully deduct the costs of environmental cleanups on brownfield sites in the year such costs are incurred, which would allow real estate redevelopers to realize the full savings of the deduction in the first year of investment as opposed to incrementally benefiting from the deduction over several years.
The second would exempt qualified developers from paying unrelated business income taxes on profits earned from the sale or exchange of certain brownfield properties. Under current law, redevelopers are fully taxed on the change in value of the land when they sell it just like any other real estate developer—even if the change in value was a direct result of cleanup efforts. Murphy’s proposed tax incentive would be available to entities who incurred a cleanup charge exceeding $550,000 or 12% of the property’s fair market value. The incentive would not be available to parties who are potentially liable for the cleanup in the first place, so called “responsible parties” (or RP(s)).
By using the tax code to reward tax-paying redevelopers who take on brownfield and redfield sites, the CLEAN UP Act aims to spur additional investment. If a bigger carrot for risk taking does unleash additional capital investment, as it has in the past when these tax incentives were first passed in a much earlier stage of U.S. industrial redevelopment, then there are thousands of communities who stand to gain increased tax revenues, expanded economic development and higher property values as a result from additional real estate redevelopment—plus environmental and quality of place gains.
“Contaminants and other dangerous substances that may have seeped into the ground decades ago make the cost of cleaning up these so-called brownfields simply too high,” Senator Murphy said in a statement. “My CLEAN UP Act will incentivize private developers to come in and take on these big cleanup projects so that new businesses can put down their Connecticut roots and start creating jobs. I know there’s bipartisan support for these tax incentives, and I’m going to work hard to get this passed into law. The opportunity in Connecticut is too big to pass up.”
Over the last several years, Murphy said that he has toured over a dozen Connecticut brownfield sites to learn about ways to transform these underutilized industrial sites into working pieces of a burgeoning economic revitalization. Some of his visits have included tours of the former Century Brass property in New Milford, the former Remington Shaver factory in Bridgeport, the former Chromium Process Co. building in Shelton, the former Nidec Corporation factory in Torrington, O’Sullivan’s Island in Derby, various sites in Ansonia, and Freight Street in Waterbury.
Senator Murphy’s bill is yet another in a long string of recent brownfield redevelopment legislation attempts. Only last week, Congress passed the biggest omnibus spending bill in U.S. history that incorporated the 2018 BUILD Act, which reauthorized the highly targeted and high-ROI EPA brownfield program, It included $80 million to assess, clean up, and reuse contaminated brownfield properties and authorized Congress to spend up to $200 million on the brownfields program each year from 2019 to 2023 plus an additional $50 million per year for state cleanup response funding. The BUILD Act itself was the product of compromise, comprised of numerous House and Senate bills proposed on top of a shell introduced in an earlier version of the BUILD Act that pitched big changes in 2015--which itself was a different iteration of a BUILD Act that proposed reauthorizing the EPA brownfield program back in 2013.
Watch Senator Inhofe's message in support of the brownfield program and the 2013 BUILD Act:
More recently, Senator Booker (D-N.J.) has introduced the potentially landmark Environmental Justice Act. And the administration has been very actively rethinking the Superfund program, proposing substantial Superfund upgrades (inspired by the success of the brownfield program) and focusing site redevelopments with not just one but two different priority lists.
Activity at the state and local level is also very high. And Senator Murphy’s own Connecticut is a good example of the laboratory of the states at work. It’s big, groundbreaking and experimental brownfield program passed in 2017 is known as the “7/7 Brownfield Program” because it creates state tax incentives in two 7-year increments. The 7/7 Brownfield Program added new incentives that the Connecticut Department of Economic and Community Development (DECD) can grant to investors who clean up and repurpose contaminated sites and create local jobs. Following the successful completion of the redevelopment, the new owners pay no corporate, income or sales tax on the land for seven years and property taxes are frozen for five years. And if the property is actually polluted and requires environmental cleanup, then remediation costs can be deducted for the following seven years.
Connecticut’s new 7/7 Brownfields Program will build on the brownfield momentum the state's already had going last year thanks to another substantial effort to establish Connecticut brownfield land banks, which was signed into law by Connecticut’s Governor in July.
The flurry of activity comes in response to a strong economy and high real estate redevelopment demand. The U.S. is enjoying a rare period of coordinated residential, commercial and industrial expansion and it seems to be a brownfield moment. Redevelopment fundamentals are finally strong after decades of industrial decline. There would seemingly be no better time for policymakers to refresh their brownfield policies to take the fullest advantage of the new opportunities emerging as the built-environment evolves into higher and better forms.
What's a "Redfield"?
A Redfield is real property with known environmental contaminants or conditions that the owner, the government or a reliable third party have determined is in need of remediation as a prerequisite to future development—to mitigate potential human health risks or to comply with environmental laws. Unlike a Brownfield, there is no doubt about whether a Redfield requires remediation.
GUEST POST: Bartsch on Final Tax Bill Impact to Brownfield Financing (by Charlie Bartsch)