Brownfield sites have a way of scaring interested developers away, says Robert Cooper, president of Toronto-based Alterra Group, a real estate developer.
Apart from the costs associated with assessing the site condition and contamination risks, remediating the site and potentially tearing down existing buildings, brownfield developers often pay taxes at a higher rate and face risks and uncertainties that greenfield developers don’t have to worry about, he says.
The brownfield tax hit
Developers of brownfield properties have long struggled with the fact that they generally pay higher property taxes than developers of greenfield sites. Assessors look at the surrounding land uses to determine property taxes, explains Pamela Kraft, managing director of planning and development for Kilmer Brownfield Management Ltd. in Toronto.
“If the area is zoned industrial, they’ll say, ‘Okay fine, it’s in the industrial tax class’.” If everything else around it is taxed at $3.50 an acre, then this should be $3.50 an acre.”
There’s also an assessed value for any buildings on the property. “The municipality will usually decrease that amount if the developer tears down the building,” says Kraft. “And there’s a reduction because it’s vacant, but it’s still in no way comparable to the greenfield situation.”
By contrast, most greenfield sites are agricultural in nature, so they tend to be classified in the least expensive farm tax class. “Then the farmers get a substantial discount for farming purposes,” says Kraft. That means property taxes remain low throughout the planning approval process, including rezoning.
“So if you take a 15-acre greenfield site and a 15-acre brownfield site, the differences in taxes can be $200,000 to $500,000 over a three-year period,” points out Kraft.
On top of that, as participants in the National Round Table on the Environment and the Economy pointed out as early as 2003, the Income Tax Act often requires remediation expenses to be treated as improvements to real property and capitalized rather than expenses that can be deducted from other income.
“We always prefer to expense all costs,” says Cooper. “Expenses are fully deductible in the current year’s taxes, while capital costs have to be written off over several years.”
Changes: For better or for worse
The taxation issues unique to brownfield development haven’t changed dramatically in the past five years, according to Toronto consultant Tammy Lomas-Jylha, who specializes in sustainable brownfield redevelopment. “Some of the things the National Round Table wanted to see years ago have not happened.”
What has changed, according to Lomas-Jylha, is awareness about the issue of brownfields and barriers to development at the provincial and particularly, municipal level. “Municipalities that didn’t even know what a brownfield was are starting to look at them more closely and get their councils on board to get funding and develop strategies,” she says.
Municipal case study: BC city sets the brownfield bar
That said, according to Alterra’s Cooper, there’s no consistency. “It’s a bit of a patchwork,” he says, “and really, it’s based on the importance the town places on development.”
In Toronto, there really are no substantial incentives or property tax breaks for developing brownfield sites, mainly because property values are so high that development takes place without them, he explains.
Yet, the number of municipalities that have launched Community Improvement Plans (CIPs) that specifically recognize the value of facilitating brownfield rehabilitation and development has grown dramatically over the past decade, says Lomas-Jylha.
Even better, municipalities that want to encourage brownfield development often appoint a resource as the municipal brownfield coordinator to help facilitate the process and work closely with developers, she adds. Commonly used tax-related incentives to encourage redevelopment include:
- Tax increment financing: The municipality freezes the base property tax of a targeted development property or district and the anticipated increase in the property tax from redevelopment is used to provide grants or loans. Some of the communities using such incentives include Thorold, Kingston, Welland, Ottawa, Cornwall, Sudbury and London in Ontario.
- Tax assistance: Municipalities cancel or defer all or part of the municipal and/or education portions of property tax during the rehabilitation or development phases of a brownfield project, or both. Maple Ridge, BC provides a tax holiday of three years for approved projects and another three years if they meet designated environmental standards.
- Reduction of fees and charges: While not directly tax-related, fees for planning, building and development can by hefty, so many municipalities reduce or eliminate them for designated projects. Thorold, Ont., for example, offers a building, planning and development fee exemption for certain brownfield projects, while Kitchener, Ont. offers a rebate on building and planning fees.
Directions for the future
Since provinces set the tax policy related to property assessment, many stakeholders in the field, including the Ontario Real Estate Association and the Canadian Brownfields Network (CBN), have been pushing for a new tax class specifically for properties under remediation. “That would be really helpful,” says Kraft.
In addition, she points out, CIPs are best structured so the taxes are lower going into the process. “It’s a question of cash flow,” she explains. “If you’re getting the same amount of money over 10 years or over two years, you’re going to want the plan that gets the money to you over two years.”
In the end, adds Cooper, brownfield sites were never easy, and that hasn’t changed. But from his point of view that’s not necessarily a bad thing as it limits the number of companies vying to develop brownfield sites. “There are significant barriers to entry,” he says. “And that scares away the competition.”
Camilla Cornell is a Toronto-based environmental and business writer.
The preceding first appeared in Environmental Consultant on April 29, 2013.