Brownfields Tax Credits Presents Real Estate Investment Opportunities
As we have witnessed, environmental spills and contaminated sites are felt across entire communities, such as the recent BP oil disaster in the Gulf of Mexico. For this reason, the Massachusetts Brownfields Act was passed in 1998 to encourage and provide an incentive for the cleanup and redevelopment of contaminated sites, which are often referred to as Brownfield sites, located in Massachusetts. The Act provides financial incentives to attract new investment in these properties, including a tax credit that can be up to 50% of the net removal and response cost of the work. While Brownfield sites present an opportunity for real estate investors, many are not taking full advantage of the tax credits, while the deadline to begin these projects is drawing near. Read on to learn how the Brownfields Tax Credit can work for you.
How does the Tax Credit Program work?
The Massachusetts Brownfields Tax Credit Program provides a tax credit of up to 50% after a cleanup is completed, and 25% for a cleanup that uses an Activity and Use Limitation (AUL). An Activity and Use Limitation is a title document which is created by the Massachusetts Contingency Plan (MCP), which allows a land owner to voluntarily restrict the future use of the applicable property as part of achieving site closure. The party taking the credit must be an eligible person, and the project must be located in an Economically Distressed Area (EDA). In 2006, the deadline for eligible cleanup costs was extended to January 1, 2012. Recent changes expanded the program to allow credits to be sold, transferred or assigned to other taxpayers.
Are you Eligible for the Tax Credit?
Tax credit recipients often include commercial property owners, developers, small businesses, and not-for-profit organizations. Eligibility for the Massachusetts Brownfields Tax Credit Program is limited in several ways, as identified below by the Massachusetts Contingency Plan (MCP):
- The taxpayer must “commence and diligently pursue” the relevant environmental response action(s) on or before August 5, 2011 and the net response and removal costs must be incurred between August 1, 1998 and January 1, 2012.
- A Permanent Solution or Remedy Operation Status for the site must be achieved and maintained in compliance with the MCP. In other words, cleanup for the most part must be completed before the tax credits are available. A Permanent Solution means that the active cleanup of the site is done.
- The applicable property must be used and owned or leased by the taxpayer for business purposes, and the property must be located within an economically distressed area (EDA) in Massachusetts.
- The net response and removal costs must be no less than 15% of the assessed value of the property prior to “response action on or before remediation.”
- The amount of any state funds received from the Massachusetts Redevelopment Access to Capital Program and/or the Massachusetts Brownfields Redevelopment Fund is deducted from the expense base for which the credit is available. This is done so that even “Eligible Persons” do not get a double benefit in connection with cleaning up a particular site.
- The taxpayer cannot be responsible for the contamination and must be an Eligible Person, as defined by Chapter 21E. Only innocent owners or tenants of the site can qualify for the Brownfields tax credit, and those parties must not have owned or operated the site at the time the relevant contamination was released.
- · The maximum amount of the credit allowed in any taxable year cannot exceed 50% of the tax owed by the taxpayer.
- A taxpayer may carryover any unused portion of the credits from one tax year for up to five taxable years.
What are the Costs to You?
As a real estate investor, you are eligible to recover any costs you incur to assess, contain or remove the contamination. These costs typically include Licensed Site Professional (LSP) services, engineering costs, contractor expenses related to the cleanup, laboratory analyses and testing, and Department of Environmental Protection (DEP) and other agency fees.
Although the requirements to qualify can seem vast and complicated, if you have invested or plan to invest in a Brownfield site, then it’s important to ensure that you get the tax credits that you deserve. For more information or questions, contact us at (617) 969-3300.
Posted on: June 21, 2010
Joel H. Berenson, CPA
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