Realizing the Potential of Brownfields | NAIOP (2024)

Incentives hope to spur reuse of underutilized and abandoned properties.

The term “brownfield” emerged in the mid-20th century when urban decentralization and deindustrialization left behind large numbers of underused or abandoned properties. These properties included former industrial sites and areas near potential sources of contamination. Even if a brownfield property did not need remediation because there was little or no actual contamination, the associated risk deterred investment.

When Congress passed the 1980 Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) and created the Superfund program to clean up severely contaminated sites, it unintentionally exacerbated underinvestment in brownfields. CERCLA established strict, retroactive liability for all owners or operators of contaminated property, regardless of when or how contamination had occurred. This heightened the risk and cost of acquiring an interest in potentially contaminated properties. The need to investigate to rule out contamination, and the prospect of identifying unknown impacts in the future, shifted investment away from previously used properties and toward the certainty of greenfields with no contamination risk.

Many states created incentives to restore the balance and support investment in underutilized or abandoned properties in the 1990s, and the Environmental Protection Agency (EPA) established a pilot program providing grant funding to selected projects in 1993. In 1997, Congress adopted a brownfield tax incentive that encouraged cleanup and redevelopment of certain sites by allowing taxpayers to reduce their taxable income by the cost of eligible cleanup expenses in the year the expenses were incurred.

The 2002 Small Business Liability Relief and Brownfields Revitalization Act marked a major turning point by codifying and formalizing existing EPA brownfields programs. It also established new protections for owners, operators and investors acquiring an interest in a brownfield who documented that they had conducted reasonable diligence and taken measures to ensure they did not contribute to or exacerbate any preexisting contamination.

The 2002 act established the “all appropriate inquiries” standard that is implemented through now-familiar Phase I environmental site assessments (ESAs). The protection a valid ESA provides remains a critical benefit that significantly reduces the risk of brownfields investments.

The 2002 act also expanded the definition of brownfields. Earlier EPA programs limited eligibility for funding to “abandoned, idled or under-used industrial and commercial facilities.” Congress extended eligibility to former residential and agricultural properties. The act defined brownfield sites to include “real property, the expansion, redevelopment, or reuse of which may be complicated by the presence or potential presence of a hazardous substance, pollutant, or contaminant.”

Importantly, the definition adopted in 2002 excluded properties that were subject to remediation requirements under state or federal law. Brownfields are, by definition, ready for redevelopment without requiring significant cleanup. What distinguishes them from greenfields is the need to take reasonable steps to check for contamination and confirm that the intended use is appropriate. This definition qualified an estimated 450,000 to 1 million properties nationwide for federal brownfields incentives.

Brownfields Investment Incentives

Current federal brownfields programs fall into two general categories: competitive programs that provide grant opportunities and technical support to a limited number of projects, and tax incentives that support redevelopment based on the nature of the proposed project or use.

EPA-administered Competitive Brownfields Grants
EPA reports that it has awarded funding for more than 5,000 revitalization projects since the brownfields grants program was established. In 2023, funding from the Infrastructure Investment and Jobs Act of 2021 (IIJA) supported 267 grant awards to 262 communities. Selection criteria prioritize projects in communities that meet environmental justice standards, and an intensive application process requires the backing of local governments or community organizations. These programs target properties that require remediation (as opposed to those with potential contamination that still qualify as brownfields). The IIJA allotted $1.5 billion to EPA-administered competitive grant programs for brownfields through fiscal year 2026. The majority of this funding is dedicated for use by local, regional, state and tribal governments, and for government-led coalitions of public and private entities.

EPA programs supporting brownfields redevelopment include assessment, cleanup and multipurpose grants. Assessment grants of up to $2 million, with spending for individual sites capped at $200,000 per grant, are available to eligible communities for identifying, evaluating and planning potential brownfields projects. Cleanup grants of up to $5 million are available for properties owned by government or nonprofit entities, with the potential for a single site to receive multiple grants. Multipurpose grants of up to $1 million support investigation, cleanup or revitalization activities. The IIJA also funded a revolving loan program administered by EPA that supplements funded projects with loans up to $1 million, to be repaid over a period of up to five years.

In addition to these funding programs, EPA administers technical assistance and job training to support brownfields redevelopment.

Tax Incentives and Credits
Because competitive grant programs are necessarily limited by appropriations, they are generally awarded to projects requiring cleanup. Tax incentives and credits help offset the lower — but still significant — costs of investigating brownfields with little or no contamination. These sites are still at a disadvantage in competing with greenfields for investment.

Early on, the tax incentive under Section 198 of the Internal Revenue Code had the potential to support brownfields redevelopment on a much larger scale. In 2004, Congress expanded the remediation costs eligible for deduction to all sites with a release or threat of release of a hazardous substance (including petroleum products) as certified by state environmental agencies. Congress reauthorized the incentive every year through 2011 but hasn’t reinstated it since that time.

A national coalition of public and private entities organized by Smart Growth America, the Center for Creative Land Recycling and the National Brownfields Coalition has formed to promote the Brownfields Redevelopment Tax Incentive Reauthorization Act, which continues to be introduced annually. In 2023, the bill attracted 12 co-sponsors and bipartisan support but stalled in the House Ways and Means Committee. If efforts to reinstate the deduction succeed, the incentive could support redevelopment at thousands of sites nationwide, including those near former dry cleaners, gas stations and properties with underground storage tanks.

A more targeted tax provision intended to attract investment in brownfields is the energy community adder to investment and production tax credits for renewable energy projects established by the Inflation Reduction Act of 2022. Sites meeting the broad definition of brownfield adopted in 2002 are eligible for an additional 10% credit. IRS guidance created a “safe harbor” test that provides assurance for the subset of brownfields where contamination can be confirmed. However, it does not address how to evaluate properties with potential contamination, resulting in a much narrower practical application of the credit than is authorized by statute. As authorized, this credit has the potential to support a substantial number of renewables projects, large and small, throughout the U.S.

The Future of Brownfields

Challenges associated with brownfields redevelopment are not going away. They could escalate as evolving regulations continue adding to the list of contaminants that can trigger liability and remediation requirements. For example, the recent federal designation of certain per- and polyfluoroalkyl substances (PFAS) as hazardous substances under CERCLA (see article, p. 94) and as drinking water contaminants could increase the costs and risks of brownfields investment.
The protection provided by a Phase I ESA, the first major federal benefit for brownfields investors, is as important as ever. EPA grant programs provide resources for a limited number of selected sites, but broader incentives are still needed. Restoring the brownfields tax incentive would represent a critical step in that direction.

Louise Dyble is an attorney in the Real Estate, Energy, Land Use and Environmental Law Practice Group at Sheppard Mullin.

• Magazine Article
• Development/Ownership
• Environment
• Brownfields
• Tax
• Investment
• Land Development
• Redevelopment