With the 2016 fiscal year almost upon us, and the new Massachusetts Governor, Charlie Baker attempting to close a budget gap of approximately $1.8BN,it is expected that our legislators will take a hard look at incentives and tax credits as a way in which to balance the budget.
Tax credits allow a dollar for dollar credit against income taxes, and with income taxes representing only about 45% of the budget, the Brownfields Tax Credit and the Historic Tax Credit combined correspond to a reduction in income taxes of less than 1% of the budget itself. Over the past 6-8 years there certainly has been an expansion of issued tax credits by virtue of the natural growth of redevelopment of contaminated properties and adaptive reuse of historic buildings, but still total tax credit issuances represent only 3.88% of the budget gap, and when you factor in the increased tax revenue and economic expansion that these programs derive, it can be argued that tax credit issuances actually generate positive revenue for the state.
On November 18, 2013, the Massachusetts Department of Revenue (DOR) implemented a Directive that applies a more vigorous and disciplined interpretation of its rules and regulations in order to more effectively manage the issuance of tax credits, and to create more certainty, both for DOR, and for taxpayers. Adding to this regulatory framework, the new Administration is looking to place its stamp on the state’s procedural infrastructure. Implementation of the 2013 Directive, which also added a new appeal procedure, and required re-training of current staff or hiring of new staff, has slowed down the process, created less consistency in the marketplace, and created a bottleneck in the inventory of available state tax credits. The marketplace can process bad news but uncertainty and inconsistency may lead to more long term market deficiencies and a flight of capital elsewhere, which will affect our state economy in the long run. It would appear that there needs to be a concerted effort placed into making sure the regulations are enforced in a predictable and timely manner.
From a practical standpoint, the change in the administration of the BTC is impacting developer’s project timelines and has the potential to stall future developments due to cash flow problems. For many developers of Brownfields sites, revenue from the BTC is written in to their project budgets as a future funding source. While the project financing must be secured without the BTC (because the credit is issued post-remediation), some developers leverage the expected BTC as a means of securing pre-construction financing. The drawn-out issuance time, and the inconsistency in application of the rules by the state has created cash flow problems for developers, and chilled the ability of lenders to bridge finance using the BTC as a source of collateral. These tools, which are present in other state tax credit programs, such as the Historic Tax Credit, may cause developers to forgo certain developments in Massachusetts and pursue developing projects elsewhere. At a minimum, even with an approved tax credit, the extended wait time leads to increased interest expenses for the developer, and a further erosion of the profitability of the project. A more longstanding impact however, is that many developers’ use expected BTC revenue to fund the pre-construction costs for their future development projects. This is especially impactful for smaller developers who often times have tighter budgets and rely on non-traditional financing for their projects.
One example of this is a developer that we are working with who currently has a $2.5mm Brownfields redevelopment project slated for Boston. They want to redevelop the contaminated site, but in order for the project to be financially feasible, funding from the BTC is needed. While generally speaking, their site is BTC eligible, with the new scrutiny from the state, the inconsistent manner in which the rules and regulations are being implemented, the increased wait time for credit approval, the greater risk for rejection of the tax credit, and the current inability to secure pre-development funding for the BTC, these developers are contemplating whether or not to move forward with the project, or to consider a project in a neighboring state.
We are calling for uniform application of the rules and regulations, certainty, and a reasonable time period for taxpayers to receive their tax credits. With these changes, the market will be able to settle down and more effectively handle the monetization of state tax credits, which benefits development, and thereby, the state’s economy. Balancing the budget will be more effectively achieved by an even implementation of the tax credit issuance procedures, as these tax credits have historically stimulated the development of undeveloped real estate, thereby creating more tax revenue for the state.