Cherrytree Group LLC Blog

Last week’s blog post, “Energizing Tax Credits: Turning Brownfields to Brightfields” identified the strategy of using multiple tax credit sources to fund a renewable energy project.  Typically these properties are remediated and adapted for a commercial use such as retail, multifamily, office, and so forth.  In doing so, a property owner/operator can utilize the Massachusetts Brownfields  Tax Credit as a vehicle to reimburse up to 50% of its spending on remediation.  

When the Massachusetts Brownfields Tax Credit is used in combination with the tax credits available for renewable energy production, the opportunity for savings and equity generation is considerable.   

By way of example, assume that the Brownfields site has $600,000 in eligible BTC costs; a $1,000,000 cost for the solar system; and had other development costs as detailed hereunder. The project's development pro-forma would be as follows:



There are two categories of costs associated with this project.  First there are the Site Acquisition and Remediation costs which include the purchase of the Brownfields site ($750,000) and all expenses related to remediating the site ($600,000).  The total costs of this portion of the project are $1,350,000.  Financing these expenses with an acquisition loan of $1,080,000 would require an equity contribution of $270,000 i.e. 20% of the loan amount.  

The second category of costs is the costs related to the Solar System Installation and associated fees and costs.  These Renewable Energy Installation costs ($1,095,000) plus the acquisition loan amount ($1,080,000) total $2,175,000. This amount would represent the project’s permanent financing requirements.

This is where tax credits become important.  The Brownfields Tax Credit (BTC), which covers 50% of the $600,000 in eligible costs (which provide net proceeds of $0.75/credit dollar), would bring in $225,000.  The Investment Tax Credit (ITC) which amounts to 30% of Renewable Energy Installation costs (which provide net proceeds of $0.75/credit dollar) would bring in $225,000.  These amounts, plus the $120,000 in deprecation write offs equals $570,000 total Tax Credit Equity.  

As the tax credit equity can be applied to the project’s permanent financing needs, the $270,000 in owner equity plus $570,000 Tax Credit Equity totals $840,000 bringing the permanent loan down to $1,605,000.  What is important about this is that nearly 40% of equity has been contributed to the project, resulting in a 61% LTV. This creates favorable underwriting of the loan, wherein the owner has contributed only $270,000 of the project’s total equity of $840,000.

The financial benefits of BTC’s and ITC’s are important in the initial financing of the project, however once the renewable energy infrastructure is put to use, a new tax credit comes into play.  The Production Tax Credit (PTC) is issued by unit of renewable energy produced.  Once the renewable energy system (in this case a solar array) is in operation, PTC’s create a steady source of income for the owner/investor, which together with the sale of the power via a power purchase agreement, (if cash flow positive) could put the owner in position to complete a cash out refinancing.  By structuring the deal this way, the owner/investor has a positive cash flow, owns the land and equipment, and has cash back from the project, all equaling a value of significantly more than the $270,000 investment that he or she has put in.   

The Massachusetts Brownfields Tax Credit (BTC) is a tax credit that Massachusetts taxpayers can use to offset taxes owed to the Commonwealth on a dollar-for-dollar basis (for up to 50% of a taxpayer's annual tax obligation).  Since its enactment in 1998, the BTC has provided financial support to owners of contaminated land across Massachusetts.  The BTC program has helped stimulate the redevelopment of land that may have otherwise remained contaminated, undeveloped, and unused.  

The BTC has a long history of supporting development and stimulating the economy in Massachusetts.  This post is a review of the BTC history, an outline of the eligibility requirements, and an exploration of the future of the program (specifically how the BTC can be combined with Renewable Energy Tax Credits to turn Brownfields into Brightfields).  

Brownfields Eligibility Requirements:

When discussing BTC’s it is necessary to understand what qualifies as an eligible Brownfields Tax Credit site in Massachusetts.  The precursor to a BTC application is the remediation of an environmentally contaminated property as mandated by MGL Ch 21E that has followed the procedures of the Massachusetts Contingency Plan (MCP).  In order to qualify for the Tax Credit, the taxpayer must "achieve" a permanent solution, defined as the filing of a Remediation Action Outcome (RAO) or Remedy Operation Status (ROS) with the MA Department of Environmental Protection (DEP).  The contamination is generally subsurface soil and/or water contamination.

In addition to the MCP reporting requirements resulting in the designation of a Release Tracking Number (RTN) to the site and the filing of the RAO or ROS with DEP, the taxpayer filing for the BTC must meet the following criteria:

1. The taxpayer cannot have caused the contamination;
2. The taxpayer must be the owner or lessee of the contaminated site during the cleanup period;
3. The taxpayer must incur remediation expenses of at least 15% of the assessed value of the property at the time of the initiation of the cleanup;
4. The contaminated site must be used for business purposes;
5. The contaminated site must be located in an economically distressed area (EDA);  
6. The taxpayer must be in good standing with DEP;
7. The remediation expenses must have been incurred after August 5, 1998 and before December 31, 2013 (unless the statute is extended); and
8. The RAO or ROS must be filed with DEP before August 5, 2013 (unless the statute is extended).  

The Current Climate:

In the past, properties in Massachusetts that met all of the above requirements were considered valid applicants for the BTC.  This is still true today however, it is important to note that without an extension, the Massachusetts BTC is set to expire on August 5th, 2013. What this would mean is that for sites that have not yet filed an RAO or ROS by August 5, 2013, there would no longer be a BTC available to them.  However, there are two options before the legislature to extend the BTC: either for 2 years or 5 years.  

Many industry professionals have come together to support the extension. As the BTC is widely supported by government, private developers/ owners, and environmentally conscious groups, we all expect that the BTC will be extended from its August 5th, sunset date for a 5 year period.

One particularly convincing argument for the extension is an economic analysis conducted by NAIOP which indicated that for each $1 of the BTC issued, the State is ultimately receiving back $7 in terms of direct economic investment in MA, evidenced by increased payroll, sales, and income taxes, as well as providing property tax revenue to the cities and towns, eliminating contaminated sites, and spurring economic development in the Commonwealth.   

Although the future of the Brownfields program has yet to be determined, at a minimum the Department of Revenue will be accepting Brownfields applications up until August, 2013 with costs eligible through December 31, 2013.

Brightfields: Bridging Brownfields and Renewable Energy

Given the construction focus on green development, LEED certification, and renewable resources, there is now a more realistic possibility of adding renewable energy production, or energy efficient equipment to Brownfields developments.  This renewable energy add-on is either in addition to the property’s primary use, or as the new commercial use itself.  

Brownfields sites have become increasingly popular with developers who wish to create renewable energy sites (typically wind and solar).  This is because the contaminated Brownfields sites are inexpensive to purchase, and may be eligible for multiple tax credits (both BTC’s and Renewable Energy Tax Credits).  Sites where contaminated land is cleaned up and converted to Renewable Energy use are called Brightfields.  

An example of a Brightfield project is in Brockton, MA where a foreign-based company built a solar array on a site formally used to produce methane-gas lamps. The site was remediated and the renewable energy equipment was installed, ultimately saving the company hundreds of thousands of dollars on their project.

From a tax credit standpoint, the transforming of BTC eligible sites to renewable energy sites is a significant opportunity.  As discussed above, brownfields sites are generally much less expensive to purchase than clean sites, and are eligible for tax credits amounting to 50% of clean-up costs.  When used in combination with the tax credits available for renewable energy production, the opportunity for savings and equity generation is considerable.   

When discussing Renewable Energy Tax Credits (REC’s), it is important to note that there are 2 types of federal REC’s available.  There is the tax credit for investment in renewable energy infrastructure and equipment, which amounts to 30% of the investment in renewable energy (ITC).  There is also, the tax credit that is available for the production of renewable energy (PTC), which amounts to a subsidy for each kilowatt hour of renewable energy produced.  On the federal side, you need to choose between the ITC or the PTC. However, there are also State PTC's available for renewable energy production, which has led project developers to usually choose a combination of the Federal ITC and a State PTC to finance the costs of building the project and producing the energy.

The future of Tax Credit programs in Massachusetts is bright.  The BTC program is one of the most successful in the country, and has been used to help hundreds of tax payers receive funds, with the potential to now combine the benefits from this program with the benefits from state and federal renewable energy programs.  These tax credit programs can and will pave the way for a cleaner, more ecologically and economically friendly state.

Warren A. Kirshenbaum, CEO, to lead series…

Warren A. Kirshenbaum, CEO of the Cherrytree Group, a Newton, MA tax credit broker, syndicator and consulting firm, has developed a Speaker Series to educate the public about the role of tax credits in development.

Kirshenbaum said that his organization will provide a speaker to any real estate, civic, business or fraternal group seeking to learn more about what tax credits are available for development.

“Many developers are unaware of the prevalence of tax credits for historic rehabilitation, environmental remediation, and other areas that can make a significant difference in the bottom line cost of the project,” said Kirshenbaum. He added, “There are credits available both at the federal and the state level, and they can be quite sizeable.” He noted that the speaker Series would educate people on the various types of credits that are available and how to take advantage of the opportunities.

Tax credits in a development project can be used for a variety of purposes. Some developers and investors use the tax credit as an equity investment. Others utilize for the tax advantages. One of the more versatile advantages of tax credits is that these credits can be re-sold. Typically, it is larger investors who purchase tax credits from other entities but not always.

To request a speaker or learn more about tax credits, please contact Warren Kirshenbaum at 781-235-8485.

About Cherrytree Group
Cherrytree Group assists developers and business owners interested in securing available tax credits at both the federal and state levels.  With significant industry expertise in the brownfields and environmental remediation fields, as well as tax credit brokerage and syndication areas,  Cherrytree Group advises business owners, real estate owners and developers on ways to monetize expenditures. In addition to tax credits, the firm assists with raising and syndicating private equity. Other services include monetizing, or trading tax credits, incentives, or grants; developmental finance; and the structuring to finance and acquire distressed real estate assets.

The firm focuses on tax advantaged development or "green" development such as the structuring and syndication of transactions involving Brownfields, historical rehabilitation, and renewable energy tax credit transactions. Additionally, Cherrytree Group advises clients on the structuring of real estate ownership entities, leasing, land use, and zoning/permitting.

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.

Posting about tax credits, or another business issue this week seemed superfluous.  On Monday afternoon, I was soaking up the gloriousness of Patriots Day in Boston, and relishing the sights and sounds of happy, cheering spectators as I focused on the finish line while seeking to complete running my first marathon.  I had trained all winter, and there was a lot of snow in Boston this winter.  A year ago, I hadn’t run more than 5 miles, and now I was about to finish a marathon.  My 14 year-old son had run the last 3 miles with me and we got a picture together, and experienced a spiritual father-son moment.  As I held my shiny medal, and wrapped myself in a shiny Mylar BAA blanket to ease the shivers, we heard a loud explosion, and then another one.  Of course I knew what it was, but my reflexes were slow, and my mind was working faster than my limbs.  We were shuttled through an anguished crowd to make way for first responders. Bombs exploding at the Boston Marathon,-- unfathomable, but a sad reality  My mind flashed back to a sparkling Autumn day in New York, when I was walking to my office in Midtown Manhattan on 9/11 when I witnessed the tragedy of terrorist attacks on the World Trade Center that shook me to my core.  Our lives were altered on that day, and, as a family we ended up moving to Boston and starting again.  I couldn’t believe this was happening again in the place I now call home.  Growing up in apartheid South Africa, the struggle for freedom had turned very violent as well, and witnessing bombs and other terrorist acts while growing up led me to yearn for a life in America where my children would not have to experience those kind of feelings.  I am sickened at having to experience this trauma once again.  Of particular concern to me was to hear my son say that while we were scuttling away from Boylston Street he was scared that other bombs would go off around us, or to hear my 11 year old daughter ask why both cities that we have lived in had experienced terror.

It’s hard to understand why people do the things they do, and I am not positing a grand solution.  I believe that security will be enhanced at next year’s Boston Marathon, and yes there will be a Boston Marathon next year, and I will be running in it.  I have no choice but to think of the glorious run, the beautiful part of the day, and the realization that I raised money for Project Hope, a wonderful charity where I witnessed the fruits of that fundraising effort when I saw people move up and out of homelessness.  I am thrilled that I was able to meet and spend time with the special people on my Charity Marathon Team, and to experience a transforming life event that dug deep into my inner being to find the strength to run 26.2 miles and share that with people I love.  I will take these positive feelings and experiences into the world to pay it forward and I will never stop believing.  Right now, however, I wish for swift justice and peace.

The USDA has funding availability for the Rural Energy for America Program for fiscal year 2013. The program provides financial assistance in the form of grants, guaranteed loans, and combined grants and guaranteed loans for the development and construction of renewable energy system and energy efficiency projects. It also provides grant funding for conducting renewable energy feasibility studies.

According to information published by the USDA in the Federal Register, there is up to $20.8 million available for fiscal year 2013 awards, which is enough to support up to $10.4 million in grants and $43.4 million in loan guarantees.

Information posted to the USDA website specifies that there are two technology categories eligible for the funding: renewable energy projects and energy efficiency improvement projects. The renewable energy category includes biomass and bioenergy projects, including those that produce liquid biofuels and those that produce electric power. Biomass and anaerobic digestion projects that produce thermal energy or electric power are also eligible. The program also allows funding for retail flexible fuel pumps, such as those commonly used to dispense ethanol blends.

Applications for renewable energy systems and energy efficiency improvement grants and combination grant and loan guarantees are due April 30. Applications for renewable energy system and energy efficiency improvement loan guarantees are accepted on a continuous basis through July 15. Renewable energy system feasibility applications are also due April 30.
 
For assistance, contact The Cherrytree Group.

Biomass Magazine

Brownfields History:

Massachusetts law forces owners or operators of contaminated property to clean up the property without regard for who caused the contamination.  The Massachusetts Brownfields Tax Credit was enacted in 1998 to assist communities in cleaning up contaminated sites and fostering redevelopment, because without such assistance the market for sales and development of contaminated properties would be adversely affected.   The Brownfields Tax Credit helps owners/operators of brownfields sites, who were not responsible for the contamination, to fund the cleanup of those sites.
 
Originally, the Massachusetts Brownfields Tax Credit (BTC) program included sites with RAO’s from 1998 through 2005.  Once 2005 approached, legislation was passed that extended the Brownfields tax credit to include sites cleaned up from 2005 through 2009.  Similar legislation has been passed every two years since, each time extending the Massachusetts Brownfields Tax Credit program for the subsequent two years.  This brings us to 2013, when the Massachusetts Brownfields Tax Credit program is once again set to expire.  In 2012, extension of the BTC statute failed passage, and for the first time since its original enactment; the Massachusetts Brownfields Tax Credit program was not extended for another two years.

Current Climate:

As it stands, the Massachusetts BTC program is set to expire on August 5th, 2013, for projects that are currently in remediation status and do not receive a permanent solution by that date.  Governor Deval Patrick recently vetoed a proposed two year extension of the Massachusetts Brownfields Credit, which would have extended the program from 2013 through 2015, pending a procedural review of all tax credit issuances in the Commonwealth.   
So what does the pending expiration of the Massachusetts Brownfields Credit really imply for those with Brownfields contaminated sites?

The answer is optimistic.

If the Massachusetts BTC Program does wind up expiring on August 5th, it does not mean that all Brownfields Tax Credits will cease to be issued.  It simply means that for properties that are currently in the process of being remediated, should the remediation not be completed by August 5, 2013, i.e. with an RAO or ROS being files with the DEP, then tax credits would no longer be available for that property.  This is good news for owners of Brownfields sites where the contamination was remediated prior to August 5th because there still may be a window of eligibility for applications for Massachusetts Brownfields Tax Credits.

For more information on applying for or monetizing Brownfields Tax Credits, contact The Cherrytree Group.  

The first thing to note about renewable energy tax credits is that there are two separate tax credits related to renewable energy.  First, there is a credit known as investment tax credit (ITC).  This credit is earned by investing in renewable energy infrastructure. The second type of credit is a production tax credit or PTC.  This credit is a unit measure of renewable energy produced and is granted for each kilowatt hour of renewable energy produced.  To illustrate the basic application of ITC’s and BTC’s, imagine you are investing in solar energy.  The money spent on installing the solar panels (investing in the renewable energy infrastructure) would generate the ITC and the renewable energy that would be generated by the solar panels (the actual production of the renewable energy measured by kilowatt hour) would apply to the PTC.  

The ITC amounts to 30% of the investment made in renewable energy and the PTC is a tax credit granted for each kilowatt hour of renewable energy produced.  The PTC, or production tax credit, differs in amount depending on the type of renewable energy that is being generated.   It is important to note that when applying for Renewable Energy Tax Credits, the applicant may apply for ITC’s or PTC’s but not both.  However, the ITC and the PTC are federal tax credits, making it possible to earn a state tax credit in addition to the federal tax credits.  The existence of both state and federal renewable energy tax credits is important because it allows developers or owners of renewable energy projects to apply for a federal ITC along with a state equivalent of the PTC

By applying for both the federal and state tax credits, the developer/owner maximizes the tax credits issued, which eventually translates into money back into the project.  The monetization of the ITC is generally going to be helpful in generating funds that will be used as capital expenses in building the project itself.  The state PTC's will be used to supplement the cash flow of the project once it is operational.  The governmental theory behind the implementation of these tax credits is to create a mechanism that works as a means to assist the renewable energy industry in its early developmental phase until it can compete on an equal footing with the established fossil fuel and natural gas industries.  
 
As state tax credits differ from state to state and require knowledge of the local statutes, regulations, and marketplace, you would be best served to work with providers that have knowledge of a particular state's intricacies.  Accordingly, as we only offer services related to the ITC and select state credits, my comments here will be limited to the ITC.
 
The ITC is granted to the entity that incurs the investment in renewable energy, so when looking to "monetize" a renewable energy tax credit, one would need to attract an investor into the tax credit entity so that the investor can earn the right to use the tax credits as a flow through from the tax credit entity.  In a general sense, these transactions are structured in a similar manner to the structures used in the federal historic tax credit.

Essentially, the investor would invest a sum equal to less than the full dollar value of the tax credit into the tax credit entity in exchange for a substantial majority equity interest in the entity.  The amount of this investment is going to be subject to negotiation and agreement between the parties.  Pricing will differ widely from deal to deal based on the deal itself as well as whether or not the project's depreciation allowance is attractive to an investor.  The investor, or more accurately, the investment partner, as an owner of the entity would be entitled to a share of the profits that the project generates, or be liable for the losses, and would have all other attributes of an owner, such as the obligation to fund deficits.  The terms of the investment may contain additional financial considerations, such as a management fee sought by the owner/developer, or an asset management fee or preferred return to the investor, as well as a procedure (and a dollar amount) for the investor to be bought out of the deal.  As the investor partner is usually looking for an investment return and the use of the tax credits, they generally have limited knowledge of the renewable energy industry,  they usually cede management and control to the owner/developer.  Accordingly, these monetizations involve the completion of a detailed set of documents that call for representations, and even guarantees by the owner/developer in order to satisfy the investor.  This relationship will continue for a period of at least 5 years, as that is the length of time that the renewable energy project needs to be "in service" to avoid a recapture of the tax credit.   

For more information on applying for or monetizing Renewable Energy Tax Credits, contact The Cherrytree Group.

When rehabilitating a historically significant property there are significantly more building regulations and material costs associated with the rehabilitation process than in new construction because of the need to build in a manner that retains the historical appearance of the structure while incurring rehabilitation expenses that are qualified expenses in the tax credit context.
   
State and federal historical rehabilitation tax credits act to lessen the financial burden of historical rehabilitations.  When you combine the state and federal tax credits, these incentives can recover up to 40% of the construction project’s budget.  In many cases this means the difference between an unrealistically expensive project, and one that is financially feasible.
 
These incentives sound great, right? Well they are.
 
So, you are a developer looking to rehabilitate your property.  You do your research, and find that your property meets the guidelines for the historic tax credit.  In general, the property (or the neighborhood) needs to be listed on the National Registry of Historical Properties (or is eligible to be listed on the Registry).  The rehabilitation expenses must be Qualified Rehabilitation Expenses (QRE’s) as determined by the National Park Service.  Also, there is an annual cap on this tax credit, so there are selection criteria that ensure that the tax credits are awarded to those projects that best serve the public interest.  The tax credits are issued by the National Park Service for the federal credit and by the state historical commission for the state credit. Procedurally, therefore you would work with a consultant to apply for state and federal credits.  After several rounds, you receive yourtax credit allocation.
 
Now what?

The next logical question you ask is: how do these historic tax credits translate into the cash needed to fund my project?

The answer is as follows:

Corporations are able to offset the taxes owed to the federal and state governments from their active income sources using the historic tax credit.  The offset is dollar to dollar thus pegging the value of the historic tax credit at a dollar per credit or more (if depreciation deductions are available for use).  For individuals, the historic tax credit is only available as an offset against passive income, so it is significantly more limited as a useful tax credit to individuals.  The historic tax credit is allocated to the entity that rehabilitates the property, so usually there is a structure put into place in which an investor (that being the party that desires to use the tax credit) becomes an equity holder of the entity that effectually receives the tax credit.  Investors will invest in the entity at a rate of less than the total value of the tax credits, and then seek the use of the tax credits, a preferred return, other fees, such as an asset management fee, or a share of cash flow, and the ability to be bought out of the entity at a date at least 5 years in the future.

For larger transactions, i.e. those with at least $2 million in federal and state credits (therefore a total of about $4 million in federal and state tax credits) the investor market is dominated by large banks, insurance companies and Fortune 50 companies.  In the middle market (deals between $1 million and $2 million) there are entities that have smaller but still significant tax obligations that can benefit from the use of the historic tax credit, and for deals under $1 million, it is possible to attract both smaller corporate investors and even individuals with significant passive income.  The pricing of the tax credits (i.e. the investment into the entity) from the investors’ perspective will differ widely based upon the deal itself, the strength and track record of the developer, as well as the size of the tax credits generated by the deal.

It is the job of the broker or syndicator that you are working with to assist you with securing the right type of investor for your deal; negotiate the best terms for you; and to make sure that you understand the syndication process, the risks that the investor is taking, and the nature of the relationship between the investor and the developer as the deal goes forward and the rehabilitation becomes a completed project that will face usual commercial real estate issues, such as lease-up, operating deficits, economic uncertainty, and other such factors.  The better all the parties are prepared, and the more well versed the professionals and participants to the deal are the better the deal will turn out, and the prognosis for a successful long term project will greatly increase.

For more information on applying for or monetizing Historic tax credits, contact The Cherrytree Group.

Suppose you own property that becomes contaminated through no fault of your own.  Due to the potential danger to the community, Massachusetts Law (MGL Ch 21E) forces you to clean up the contamination.  This is strict liability, so there is no concern on the part of the Massachusetts Department of Environmental Protection (MassDEP) as to whether you caused the contamination or not.  This would also apply if you buy property that is later determined to be contaminated.  True, you can use the legal system to bring the responsible party into the equation, but you likely won’t have the time to do that before you begin to face issues from MassDEP. Therefore, you may be stuck with the obligation of cleaning-up the property, which can be a very expensive process.
 
This is where tax credits can help you, and in this instance we are discussing the Massachusetts Brownfields Tax Credit.  A tax credit is a dollar for dollar deduction against the taxes owed to the State.  From this perspective, a tax credit is something that you want to secure but not necessarily use for yourself.  You may not have enough of a tax burden to justify the use of the credit, or the credit may be worth more to you as a saleable asset.  The Massachusetts Brownfields Tax Credit was made fully transferable in 2003 to any Massachusetts taxpayer.  There is a demand for State tax credits from taxpayers that have large or continuing state tax obligations.  These taxpayers are usually large corporations, insurance companies, banks, or small companies and individuals that have a significant annual or one-time tax obligation.  For such a taxpayer, purchasing a tax credit for less than its dollar per credit value will result in an immediate tax savings corresponding to the price paid for the credit.  For you, the sale of the tax credit can provide needed funds that can be used to pay for the remediation, or to pay off the loans that were used to cover the cost of the remediation.

To clearly understand these definitions, remember that a tax credit is very different from a tax deduction.  A tax deduction helps you reduce your taxable income such that there is an adjusted gross income number from which the tax calculation is made.  A deduction is, therefore, an above-the line item.  A tax credit can offset the bottom line taxes due, and, therefore, acts as a payment source.   From a pricing standpoint, a tax credit is worth $1 per credit, whereas a tax deduction is worth the amount of your tax rate, such as 30-40 cents.

Tax credits in the context of environmental contamination can help you recover approximately 35% of the total cost expended on remediation costs after calculating in the purchase discount, and all associated filing fees, costs and expenses, depending on who you work with.  Thus, if you are faced with  a $350,000 tab to clean-up contamination on your property  that you didn’t cause, the Massachusetts Brownfields Tax Credit can recover $122,500 of those costs, leaving you with an obligation of only $227,500.  At that point, you could pursue the responsible party, if possible, without fear of action by the MassDEP.

The Massachusetts Brownfields Tax Credit is a very useful development tool as well, as it helps properties get cleaned up and developed that would otherwise never be cleaned up.  In that way, it creates construction jobs, engineering work, laboratory testing jobs, property tax income for the towns that the formerly contaminated property is located in, and ultimately revenue for the state in sales taxes, income taxes from the expansion of employment and local business revenue, and the reduced human cost of contamination seeping into our environment.

For assistance applying for, syndicating or monetizing Brownfields tax credits, contact The Cherrytree Group.