Overview

Billions of dollars in federal, state and local tax incentives are available for infrastructure projects annually. These incentives can reduce significant upfront greenfield project costs and fund improvements to existing infrastructure. Financial incentives can be in several forms – rebates, cash grants, infrastructure upgrades, permitting assistance, tax increment financing and more. Securing these incentives prior to executing purchase agreements or incurring infrastructure costs can play a significant factor in valuations.

Examples of infrastructure incentives include:

• Public infrastructure improvements to sewer, water, electricity, natural gas, telecommunications and fiber
• Sewer and water supply systems
• Improvements in fire protection
• Zoning and entitlement assistance
• Expedited permitting and permit fee waivers
• Improvements to sidewalks, streets, bridges, traffic signs and signals, and utilities 
• Improvements to parking lots, garages or other facilities
• Assistance in improving detention ponds, lakes, dams and waterways
• Environmental remediation of brownfield sites
• Lighting retrofitting
• Heating and cooling system upgrades
• Repair and maintenance of energy infrastructure
• Site preparation, grading, remediation and demolition    
• Free or discounted land prices from state, municipalities or public/private economic development agencies
• Transportation development of roads, bridges and rail spurs and other incentives to reduce emissions or to encourage electrification

Key due diligence considerations

Accounting and cash flow – Buyers should evaluate and consider accounting practices, GAAP compliance and historical and forecast cash flows associated with infrastructure incentives in its valuation model.

Claw back provisions – Claw back provisions should be reviewed and examined closely since they could expose a buyer post-transaction.  In addition, a buyer should evaluate performance risk and any implications on projected incentives.

Transferability – A buyer should consider transferability and notice requirements in key contractual arrangements to ensure there are adequate closing conditions or other mechanisms to address risks associated with a change in control.

Reputational Risk – Acquirers should consider media coverage of incentive arrangements and how these benefits may be viewed after a change in ownership.

Data privacy law compliance – Incentive reporting requirements may include sensitive information, such as personally identifiable information. Understanding what information is made public and Company governance over sensitive information should be addressed in due diligence.

Regulatory – Historical performance relative to compliance requirements is critical to ensuring benefits are not terminated and recaptured.  The due diligence process should include a review of timely filings and comprehensive documentation and support.   

Continuing Operations – Incentive agreements often require continued operations throughout the benefit period and potentially beyond. Workforce reductions and ceasing operations may result in recapture of benefits and negative public relations.  Understanding policies and procedures for monitoring these operational requirements should be covered during due diligence.

Changes in Government Personnel – Changes in local personnel may impact administrative oversight, established relationships, compliance requirements and policies (such as diversity and inclusion initiatives).  This risk can vary by jurisdiction and should be considered during due diligence.