Ohio Environmental Law Blog : Ohio Environmental Lawyer & Attorney : Joseph Koncelik : Frantz Ward Law Firm : Environmental Regulation, Land Use, Compliance : Cleveland, Ohio

I was interviewed for a story on the local NPR station in Cleveland about a Northeast Ohio company that nearly went bankrupt because of confusion over Ohio's brownfield tax abatement law.  The title of the story was "How a Poorly Worded Tax Rule Nearly Bankrupted Ohio's Oldest Company." Listen to the whole story by clicking here.

After reviewing the issue in preparation for the interview, it became readily apparent this was a law in serious need of a re-write.  A company's future shouldn't hinge on a vague tax exemption law.  I also learned that it was probably time to revisit some of the policy decisions made when writing the brownfield tax exemption law.

Background: Taylor Companies was debating whether to move out of Ohio.  It decided to remain in Ohio, in part, due to incentives it would receive for building on a brownfield site.  The principle incentive being a 10 year tax exemption for the increase in value of the property post-clean up.  Here are some excerpts from the story on NPR: 

The abatement was 87% less than what he expected. See, Taylor’s lawyers interpreted the state statute to mean that the tax exemption would cover the increase in value from before they did any clean-up to the new value after the company built and moved into its nice new building on what had been a brownfield. But Shelley Wilson of the Ohio Department of Taxation says they were wrong...

Instead of comparing the value of the land from its polluted days to its clean state…which seems most logical, tax officials compare the value of the land from one year before the tax abatement to its value after the improvements were made. The problem is that cleaning up the land and constructing a building may take longer than that narrow one-year time-frame. In Taylor’s case, he had already made most of the improvements by the time the tax commissioner made his assessment of the change in the land’s value. Shelley Wilson of the office of taxation concedes Taylor’s reading of the statute was probably the intent of the law.

Basically, the Ohio Department of Taxation responded to the controversy by saying- it may be the intent of the law to compare value pre-clean up to post-clean up, but that is not how the Ohio Legislature wrote the law.

At issue is the statutory provision set forth in R.C. 5709.87 "Exempting increase in assessed value of realty cleaned of contamination."  The key language is as follows:

(C)(1)(a) Upon receipt by the tax commissioner of a certification for property under division (B) of this section, the commissioner shall issue an order granting an exemption from real property taxation of the increase in the assessed value of land constituting property that is described in the certification, and of the increase in the assessed value of improvements, buildings, fixtures, and structures situated on that land at the time the order is issued as indicated on the current tax lists.

The Ohio Department of Taxation looked at the bolded language and determined the valuation comes from when the tax exemption order was issued, rather than looking back at the value of prior to when clean up commenced.  Triggering the exemption based on when an order is issued by Taxation really puts the squeeze on businesses redeveloping brownfield properties. Unless they time everything perfectly, they can lose out on potentially millions in tax abatement. (see example below)

The Department states this interpretation is supported by a decision issued by the Ohio Supreme Court- Columbus City School District v. Wilkens.   Here is how Ohio EPA describes the process in its guidance document dealing with the brownfield tax exemption:

For example, if the covenant not to sue is issued by Ohio EPA in September, 2007, and the Tax Commissioner issues the tax exemption order in October, 2007, the property tax exemption granted will be for the increase in value of the land and buildings on the property from the value of the property as of January 1, 2006, the tax lien date for tax year 2006. Since real property taxes are collected a year in arrears (i.e., the 2006 taxes are based on a value as of January 1, 2006, but collected in 2007), the 2006 tax list would be the most current list available for the Tax Commissioner’s October 2007 exemption order. The tax exemption would begin for tax year 2007 which would affect taxes collected in 2008.

Even if businesses line up things in the right way, they are still dependent on two government agencies- Ohio EPA and the Ohio Department of Taxation- acting on a timely basis.  One Cincinnati company lost out on a potential tax exemption on a $4 million dollar increase in the value of its property simply because paperwork was not issued by the government agencies in a timely fashion.  See, Hamilton Brownfields Redevelopment LLC v. Zaino, Tax Commissioner of Ohio.  In that case the Board of Tax Appeals states: 

"The General Assembly has mandated the exemption period begin in the year in which the order is issued.  The statute provides no latitude to consider or later the commencement of the exemption."

It is time to fix the language in the tax exemption statute.  The entire purpose of the tax abatement law is to provide an incentive to clean up brownfield sites.  If we want to encourage redevelopment of brownfields versus building on greenfield sites, incentives must be significant and effective to overcome the increased costs of building on brownfield sites. 

The best fix would be to simply take the tax valuation of the property that was issued immediately before the clean up was commenced (at date identified in the papers filed with Ohio EPA) and compare it to the valuation after clean up is completed. 

New Construction- In or out?

The commencement of the tax exemption is not the only flaw in this law.  There is also confusion regarding the extent of the tax exemption as it applies to new construction.  As noted in Ohio EPA's guidance document:

The Department of Taxation interprets the exemption granted under ORC 5709.87 as limited to the increase in value of the land and the existing buildings on the NFA property, and not of new structures constructed at the NFA property.

Taxation has made it even a bit more complicated than simply limiting it to existing buildings at the property.  Taxation has gone on to limit improvements to existing buildings that were not features of the building prior to the clean up.  For example,

• If you replace an old swimming pool with a new swimming pool, the increased value attributable to the new pool is exempt.
• However, if the building never had a swimming pool, it would be considered a new improvement and not exempt.

(See, Seven Seventeen HB Philadelphia v. Franklin County Board of Revision)

Unfortunately, Ohio is blessed with thousands of brownfield sites.  If we are going direct development towards these sites, we need strong incentives.  Costs of cleaning up a brownfield can run into the millions of dollars. 

Is it really good policy to restrict the tax exemption in such a fashion?

We also need the law to be clear on its face.  Lets hope the last part of the NPR story is correct and the Ohio Legislature takes up fixing the brownfield tax exemption law soon. 

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There has been much discussion regarding the use of Land Banks to assist in addressing the aftermath of the foreclosure crisis.  Here is an excerpt from the Cleveland Plain Dealer discussing the County's recently launched non-profit corporate land bank:

Formally launched by the county in April, the new, nonprofit land bank is the first of its kind in Ohio.It could soon turn Cleveland into the nation's biggest urban laboratory on how a declining industrial city with a comatose real estate market can downsize gracefully -- and prepare to rebound in the future. The impact on the city as a whole could be far greater than individual projects such as the proposed medical mart and revamped convention center downtown.

Ohio recently passed Senate Bill 353 which allows a two year trial period for Counties to create a separate county land reutilization corporation for purposes of acquiring abandoned and tax delinquent properties.  By allowing creation of a separate corporation, the law addresses the issue of liability- a major short-coming of Ohio's existing land banking law set forth in Ohio Revised Code 5722.  The law also allows for an expedited foreclosure process. The Federal Reserve Bank of Cleveland released an good analysis of the new legislation titled "Understanding Ohio's Land Bank Legislation."

Why create a land bank?  Obviously, thousands of abandoned properties bring down property values across the board and create blight.  Abandoned properties also present other risks. Here is a quote from a University of Michigan study of its Land Bank program:

The U.S. Fire Administration reports that over 12,000 vacant structure fires are reported each year in the U.S., which results in $73 million in property damage annually.  In addition, abandoned properties tend to attract crime. A 1993 study of 59 abandoned properties in Austin, Texas, found that 34 percent were used for illegal activities and of the 41 percent that were unsecured, 83 percent were used for illegal activities.

While the focus of the recently enacted Land Bank Legislation has been as a tool for addressing abandoned residential properties, its utility should also be examined for application to brownfields. Land Banks can serve has effective means of addressing the complex legal and environmental issues that face brownfield properties. 

As an example, the Franklin County Land Bank was used successfully to address tax liens on the former Bedford Landfill which overcame a significant barrier to redevelopment.  The Bedford Landfill became a successful Clean Ohio project receiving a $3 million grant from the State of Ohio.

Today, I attended a presentation by members of the City of Cleveland's Economic Development Department on the City's Industrial Land Bank Program.  Nate Hoelzel and David Ebersole provided an interesting overview of this unique effort by the City to address large brownfield's for redevelopment.

The City of Cleveland's Industrial/Commercial Land Bank was launched in 2005.  The creation of the Cleveland Industrial Land Bank was preceded by an academic study by Cleveland State University.  The purpose of the bank is to try an assemble large tracks of abandoned property in areas identified by the City for priority commercial/industrial development.  Criteria include looking for properties of at least 20 acres in size and near key infrastructure.

In a relatively short time period (less than 4 years), the Land Bank has acquired 100 acres of brownfield property.  Thirty-seven (37) acres are currently on the market for industrial or commercial redevelopment.  The adjacent picture is from Economic Development Department's web page shows the location of 3 tracks currently held by the Land Bank.

The industrial/commercial land bank is designed to overcome the unique aspects of  contaminated urban property that prevents major development.  Representatives for the City of Cleveland estimated it cost approximately $300,000 per acre to address urban brownfield property.  Such a staggering costs often drives development to greenfields and promotes urban sprawl.  The factors that drive such staggering costs include:

• liability for contamination
• assessment costs for investigating the extent of contamination
• demolition costs for vacant buildings
• property title issues including tax liens

Land Bank's can overcome many of these barriers by providing public funds for costly environmental assessment, removing title issues and even potentially addressing liability through clean up of the property.  A property returned to the market may be free of tax liens and have received a full release from the State of Ohio for environmental contamination.

While successful for its relatively short existence, Cleveland's Industrial Land Bank could be improved if provided additional flexibility.  The Land Bank relies upon the traditional legal framework for its activities.  The legal authority for municipalities to purchase underutilized land exists at the State level in Ohio Revised Code 5722 and at authority for the Industrial Land Bank is located in Section 183.021 of the City of Cleveland Code. Under these authorities, no separate corporation can be created which means the City can face significant liability exposure under federal Superfund laws (CERCLA) for owning contaminated property. 

During the presentation, the presenters mentioned the City's effort to amend federal law during the effort in 2006 to reauthorize U.S. EPA's brownfield program.  While amendment of federal law to allow municipalities or counties to acquire property without fear of CERCLA liability makes sense, it may be an uphill climb.  It may be more practical to allow for expansion of Ohio's new Land Banking Legislation to specifically allow for political subdivisions to acquire brownfield properties through a separate corporation.  This would provide City's a layer of liability protection for being active in purchasing these complex properties.

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These are great times to investigating potential brownfield projects in Ohio.  The State has two pots of money available under its Clean Ohio brownfield program.  1)  the Clean Ohio Revitalization Fund (CORF); and 2) the Clean Ohio Assistance Fund (COAF).  CORF is a competitive grant process where applications are pooled into rounds and the top projects in that round receive funding.  Under COAF, projects are evaluated on an individual basis and decisions are made by the Director of the Department of Development.

COAF- Areas Eligible to Apply for Funding is Greatly Expanded

This month, the Ohio Department of Development announced a major change to COAF-greatly expanding areas eligible to submit COAF applications.  Properties eligible to request  COAF funding are those located in a "inner city area", a "labor surplus area" or a "situational distress area" as defined by O.R.C. 122.65(H).  Each year the Ohio Department of Development releases a map of the State that identifies which areas fall under one of the three categories and could apply. 

On May 1, 2009, the Ohio Priority Investment Area Map was modified to reflect the recent changes made to the Federal Labor Surplus map. Under the old map 41 counties and certain cities were designated "priority investment areas" based on one of the three categories.  The new map designates 83 counties in Ohio as Labor Surplus Areas. This includes all of Cuyahoga County and most of the surrounding Counties. 

All areas designated on the Priority Investment Map are therefore eligible to file applications for the Clean Ohio Assistance Fund for assessment grants of up to $300,000 and cleanup grants of up to $750,000. COAF will have approximately $12 million for new grants in the coming year. Applications can be submitted on a rolling basis (no deadline). 

The Ohio Department of Development also modified the policies governing COAF.  One notable change is the prioritization of Phase II Environmental Assessment projects.  Here is what the Department said about this change:

In order to maximize assistance to distressed communities during the economic crisis and meet a critical need to prepare sites for cleanup and redevelopment, the Clean Ohio Assistance Fund will now reserve 75% for funding Phase II Environmental Assessments grants and 25% for funding cleanup grants.

CORF's - Redevelopment Ready Track

If you are looking at a project with much higher clean up costs than $750,000, then CORF is still a great option.  The State recently provided more flexibility to the program.  Last summer, the Ohio Department of Development made a major change to the CORF program by adding the "redevelopment ready track." Before this change an applicant for CORF had to identify in its application a committed end user post clean up. Under the "redevelopment ready track" an applicant could qualify for up to $2 million in grant funds to pay for clean up costs even without an end user.

A significant amount of cleanup funding is available in the upcoming rounds of CORF. Funding for Round 7 (deadline July 25th) and Round 8 will total $48 million in the coming year ($24 million per round), which is the largest amount the program has experienced in its history.

Unlike other States, Ohio has a lot of funding available for brownfield investigation and clean up.  Over the last year the State has increased the flexibility in the program and expanded areas within the State eligible for funding.  While the economy is down, it is a great time to explore development options for brownfield sites.  As the economy comes back the competitiveness of these programs will increase. 

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