Capital gaps remain the biggest barrier to brownfield redevelopment. As credit markets tighten, brownfield redevelopers look to the public sector as they package financing for site cleanup and reuse. But competition is increasing for funds, making them harder to secure. The EPA had a record number of applicants for assessment and cleanup grants; less than one-in-three applicants will receive funding. HUD’s Community Development Block Grant (CDBG) program, which provides flexible revitalization and social service funding, is feeling the pressures of the home mortgage crisis and the social service demands of the economic downturn.

As a result, more developers are considering tax incentives, which offer a number of advantages over traditional program grant funding. Tax incentives can increase a project’s internal rate of return. Some credits can be sold for cash or syndicated to attract additional upfront capital investment. Most importantly, they are not subject to a competitive grant process; if a project meets the criteria, it gets the credits.

Some developers have turned to the federal brownfield tax expensing incentive to provide some financial cushion for their projects, but that incentive has suffered from lack of a long-term authorization, making it unsuitable for large, multi-year projects.

Although it has been in place continuously from 1996 to Dec. 31, 2007, authorization has seen fits and starts of one- or two-year increments. It is currently suspended, pending a congressional extension.

Savvy developers have tapped into federal tax incentives not specific to brownfields, but with strong brownfield applications. Three incentives in particular have seen increased use.

Historic Rehabilitation Tax Credits
Congress adopted rehabilitation tax credits in the 1970s. This discouraged the unnecessary demolition of sound older buildings and slowed the loss or relocation of businesses from older urban areas by balancing the development costs between older, established (and often declining) areas with emerging, newly built suburban centers—the same goal advanced by proponents of brownfield cleanup and reuse. This credit has become a key financing tool for brownfield reuse in many communities, attracting redevelopment capital into all types of projects in blighted areas not ordinarily considered for investment. About half the states now offer a rehab credit which can be combined with federal incentives to create a powerful financing tool.

This incentive offers investors a credit against their total income, taken the year the renovated building goes back into service. Credit can only be claimed on depreciable, income-producing property. Rehabilitation of certified historic structures qualifies for a credit equal to 20 percent of the cost of the work. Rehabilitation of nonhistoric structures built before 1936 qualifies for 10 percent; unlike historic structures, this may not be applied to rental housing.

According to the law, rehabilitation must be substantial—the greater of $5,000 or the adjusted basis of the property. Most reconstruction-related work and architectural and engineering fees are eligible for the credit, along with remediation, such as lead paint or asbestos removal, done in the restoration of historic features.

The rehabilitation tax credit works well with other economic development grant and loan programs or property tax abatements. It can be an ideal complement to a brownfield redevelopment initiative in an older industrial area.

According to data compiled by the National Park Service in 2005, about 1,100 projects approved for historic rehabilitation tax credits attracted $3.1 billion in private investment. Half were renovated for office or commercial use.

Examples include:
• the former American Can Company plant in New Orleans, renovated into 268 units of mixed- income housing through a $42 million public-private financing mix that included $7.8 million in historic rehab tax credit equity via syndication
• the defunct turn-of-the-century Statler Hotel in St. Louis, renovated into a downtown convention/hotel complex. Private capital was attracted through a mix of four different tax incentives, including historic rehabilitation tax credits.

New Markets Tax Credit
Over the past five years, the New Markets Tax Credit (NMTC) program has allocated $15 billion worth of credits to stimulate investment in distressed areas. The most recent allocation, announced Oct. 5, 2007, released about $3.9 billion in credits to 61 Community Development Entities (CDEs) in 45 states. The winning CDEs include nonprofits such as Local Initiatives Support Corporation; individual CDCs; bank and brokerage house subsidiaries set up by Wachovia, Bank of America, Merrill Lynch, and others; redevelopment entities organized by companies such as Home Depot; and targeted efforts such as Brownfield Revitalization, LLC, of California.

The program was established by Congress to bring new jobs, physical revitalization and ownership opportunities to low-income communities. It is a natural fit for many brownfield project situations and several of the winning CDEs identified brownfields as targets in their applications.

The New Markets program provides federal income tax credits to investors who make qualified equity investments in community entities designated to receive a NMTC allocation. The credit to investors totals 39 percent of the cost of the investment, claimed over a seven-year period: 5 percent annually for the first three years and 6 percent for the final four. Investments cannot be redeemed or withdrawn before the end of the seven years. The communities must invest in low-income areas and distribute their allocations within five years. Eligible CDE investments include facilities such as health or child-care centers, charter schools and homeownership projects.

About two-thirds of the $5.7 billion invested through 2006 was directed towards for-profit businesses and commercial real estate, including retail, mixed-use and industrial facilities.

Examples include:
• Bethel New Life, a faith-based CDC in Chicago, which used $1.5 million in New Markets Tax Credit investments to develop a LEED gold-certified retail center on an abandoned site adjoining a rapid transit station
• Summit Place in West Allis, Wis., which used $7.5 million for the adaptive reuse of a tractor factory into office space
• the expansion of a family-owned iron and steel manufacturing facility in Milwaukee, doubling its size.

Energy Efficiency Tax Incentives
The Energy Policy Act of 2005 provided businesses with several credits to encourage energy-efficient construction. When integrated into building design, such credits are important in easing cash flow requirements.

These include a commercial building deduction of up to $1.80 per square foot for buildings that achieve the 50 percent energy savings target established by the American Society of Heating, Refrigerating, and Air Conditioning Engineers, and up to 60 cents per square foot for building subsystems meeting at least a 16 and two-thirds percent target; and a 10 percent credit for businesses installing solar energy systems.

While this incentive is new and little activity has been tracked, the owner of a small six-store retail strip center in Springfield, Mo., estimates a return of as much as a $100,000 from his energy efficiency design. Congress has shown interest in expanding these incentives.

Reality Check
Tax incentives are important in brownfield project financing, but they have limitations that must be factored into financing equations.

• Rehab tax credits have the most impact when knowledgeable local development staff help package and market them with other programs and offer technical support. Developers and site owners often find the certification process complicated and time consuming. They are uncomfortable with the potential financial impact of a denial of tax-credit certification. Capable local development officials can help the site owner prepare a complete application that minimizes processing delays.
• New markets tax credits are not for the casual developer. The process can be a complex one to navigate. In many cases, it is best to approach a CDE with allocations that must be consumed within five years and market a brownfield project to it.
• Energy tax incentives are slow to work their way into the market. Considerable outreach and education is needed for both developers and accountants.

For more information:
Historic preservation tax credits
www.nps.gov/history/hps/tps/tax;
www.ncshpo.org

New markets tax credits
www.cdfifund.gov

Energy tax incentives
www.energy.gov/taxbreaks.htm

Charlie Bartsch is senior fellow/vice president with ICF International in Washington, D.C.