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Opportunity Zone Rules Should Clean Up Industrial Waste: EPA

Dec. 24, 2018, 8:25 PM

The government’s environmental watchdog is asking the IRS to ensure a new tax break will apply to developers using the incentive to clean up old industrial sites.

The Environmental Protection Agency asked the Internal Revenue Service to clarify how investments made in brownfields—abandoned sites potentially contaminated by hazardous chemicals—can qualify for the new opportunity zones tax break, since the sites take more time to improve than the proposed rules currently allow.

The opportunity zones program, part of last year’s tax overhaul (Pub. L. No. 115-97), promises potentially massive tax breaks on capital gains that are recycled into development projects and businesses in previously overlooked areas.

The EPA highlighted in a Dec. 18 letter that the final program rules, likely in early 2019, should carve out exceptions and include definitions that give investors certainty that projects that improve brownfield sites will qualify for the tax incentive.

Industry Concerns

While the tax break has attracted a great deal of attention from investors across various sectors, some of them—and some city-level economic development organizations—have expressed concern that the proposed rules limit use of the incentive to real estate projects, ultimately failing to provide the flexibility for overall economic development of designated opportunity zones.

“The issues of vacancy and blight are a first-order concern for many of these communities, so it’s a very positive sign that the EPA is leaning into the rule making,” said John Lettieri, co-founder and president of the Economic Innovation Group, a bipartisan public policy organization based in Washington.

The heads of the EPA and 15 other government agencies and departments—including Commerce and Labor—were recently appointed to a White House committee that will help programs tap into the estimated $6 trillion in idle capital gains eligible for the program.

Top Priority

Brownfields were the number one priority under the leadership of former EPA Administrator Scott Pruitt, according to Larry Schnapf, principal at environmental law firm Schnapf LLC in New York City and adjunct professor at New York Law School.

The opportunity zones program has “received a lot of attention in the brownfield industry as a potentially powerful tool to attract capital to brownfield sites located in these areas—particularly since the old Section 198 tax deduction for cleanup costs has expired,” Schnapf said.

But reusing or redeveloping the sites is often complicated by contamination from past use.

Most property investments assume the land already meets health and safety standards, so the “original use” definition in the proposed rules may unintentionally disqualify brownfields, the EPA letter said, adding that the IRS should expand the “original use” definition to explicitly incorporate brownfields remediation and redevelopment.

Timeline Trouble

The EPA’s letter also highlighted the 30-month improvement timeline as another area where brownfield properties may face an additional hurdle, said Leah Yasenchak, cofounder of Medford Lakes, a New Jersey-based Brownfields Redevelopment Solutions Inc.

According to the proposed rules, a property must be “substantially improved” within 30 months of acquisition—a rule aimed at ensuring proper investment and revitalization of a property. But brownfield sites typically require investigation and remediation prior to development.

“Allowing for two distinct 30-month timeframes for remediation and redevelopment is critical to ensuring that both remediation and redevelopment can take advantage of these tax incentives, thus allowing communities to fully realize the benefits of Opportunity Zone designation,” Yasenchak said.

To contact the reporters on this story: Siri Bulusu in Washington at sbulusu@bloombergtax.com; Amena Saiyid in Washington at asaiyid@bloombergenvironment.com

To contact the editors responsible for this story: Meg Shreve at mshreve@bloombergtax.com; Colleen Murphy at cmurphy@bloombergtax.com