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What are brownfields?
“Brownfields” are abandoned, idled, or underused properties where expansion or redevelopment is complicated by real or perceived environmental contamination as a result of historical land use practices. Brownfields can include obvious uses such as old factories, dry cleaners and gasoline stations, but also less obvious uses such as former schools. Many brownfields are ideally located in downtowns, along waterfronts or in/adjacent to existing residential areas. It is conservatively estimated that there are at least 30,000 brownfield sites in Canada1.
Brownfield sites present both potential liabilities and financial opportunities for current owners, investors and developers. The key challenges to cleaning up and redeveloping brownfield sites include:
- the cost of required environmental studies and site remediation;
- difficulty obtaining project financing from traditional sources of development capital; and
- fear of regulatory (government) and civil liability due to environmental contamination.
Numerous studies have shown that the costs to develop brownfields can be significantly greater than greenfields. Yet, numerous brownfield sites across Ontario and Canada have been successfully cleaned up and redeveloped for a range of residential, commercial and industrial uses. This demonstrates that the challenges to brownfield redevelopment can in fact be successfully overcome.
- which municipalities offer these incentive programs, and the range of eligible costs and development types;
- incentive program application forms and processes;
- grant and loan agreements that must be entered into with the municipality; and
- documentation and submission requirements.
Every agreement is different so it is important to review all the terms and conditions. In order to record an accrual, it is necessary to be able to quantify the grant amount.
Quantification would likely require a property assessment from MPAC so that the grant amount may be calculated.
ASPE section 3800 is silent on the measurement of the grant receivable. However, a TIG receivable is considered a financial asset under section 3856. Therefore, the receivable would be recorded initially at fair value and subsequently measured at amortized cost. Determining fair value would typically be calculated by discounting the expected cash flows using a market rate of interest.
Since the TIG is a longer term receivable, should an allowance for uncollectable grant receivable be established? Most agreements provide that the grant is only paid if the municipality collects the tax. However, since municipal taxes are fully secured against the property, collection is virtually assured and an allowance is not supported.
If the TIG is on account of remediation to property that is a fixed asset of the owner, it would be recorded as a reduction of the value of the land. A fixed asset is either property for your own use or property that you will be renting or leasing to a third party.
If the TIG is on account of property that is inventory to the owner, i.e. land developer/builder, then the TIG will reduce the cost of redevelopment. This means that the reduced costs are taken into income as building lots or units are sold to third parties in the usual manner.
Where the TIG is treated as a reduction in the cost of a capital asset (i.e. land), the TIG should have no tax impact until the asset is sold. In addition for capital assets, the tax treatment should not create a negative cash impact.
In situations where the TIG is on account of inventory and the developer is able to apply the grant to development charges (and therefore receive the grant at the development stage), there is also no cash impact.
In many situations, a TIG will be paid over 10 years to a developer. Therefore, if the development is sold out in the first few years after the TIG is triggered and causes the recognition of income before 10 years has passed, there will likely be a negative cash flow impact. In such a case, income tax would generally be payable on the grant even though the cash has not been received. Most of the TIGs we have seen exceed $1 million and many times the project profit does not exceed the grant amount, thereby creating a cash flow problem.
To minimize the negative cash flow, we should consider if there are any reserves available. As discussed previously, an allowance for doubtful collections would not be available. However, there may be an argument to claim a reserve for tax purposes for amounts not collected related to real property sold. If it is possible to claim such a reserve, it may help reduce the negative cash flow under certain circumstances, but not in all situations.
A possible solution is to sell the TIG. The TIGs are legally transferrable and there appears to be a market for the sale of the future cash flow since the payer is a municipality. Of course the income stream will be discounted, and there may be tax consequences on the sale.
Other issues related to brownfields?
Brownfields by their nature present greater business risk and can be a challenge for the following reasons:
- Projects are generally much longer term than other developments.
- The longer term creates increased market risk as time may change the demand for your project due to economic or other reasons.
- The longer term also exposes the owner to greater interest rate risk in addition to higher carrying costs.
- Actual remediation costs are subject to estimates with a significant amount of uncertainty. These are sometimes dealt with using unrealistic contingencies.
Therefore, with the above in mind it is prudent to properly structure these investments to mitigate some of the risks of brownfield redevelopment.
How we can help
About BDO
One of the nation's leading accounting firms, BDO Canada provides assurance, accounting, tax, and advisory services. As a member of the BDO international network, which spans more than 150 countries and 1,400 offices, BDO provides seamless and consistent cross-border services to clients with international needs.
About RCI Consulting
Luciano Piccioni, President of RCI Consulting, has over 25 years of experience in planning and economic development in both the public and private sectors. Luciano is recognized as one of Canada's leading experts in community improvement planning and municipal incentive programs. He has successfully applied for municipal incentive programs on behalf of numerous developers and has prepared far more CIPs than any other consultant in Canada.
1. National Roundtable on the Environment and the Economy, 2003.