Infrastructure Incentives – Structure and Due Diligence Considerations | Alvarez & Marsal | Management consulting

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Insight

Billions of dollars in federal, state and local tax incentives are available each year for infrastructure projects. These incentives can significantly reduce the initial costs of greenfield projects and fund upgrades to existing infrastructure. Financial incentives can take many forms: rebates, cash grants, infrastructure upgrades, permit assistance, tax increase funding, and more. Obtaining these incentives before signing purchase contracts or incurring infrastructure costs can play an important role in valuations.

Examples of infrastructure incentives include:

  • Public infrastructure improvements for sewer, water, electricity, natural gas, telecommunications and fiber
  • Sewerage and water supply systems
  • Fire protection improvements
  • Assistance with zoning and rights
  • Expedited Permits 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 the improvement of retention ponds, lakes, dams and streams
  • Brownfield Environmental Remediation
  • Lighting renovation
  • Heating and cooling system upgrades
  • Repair and maintenance of energy infrastructure
  • Site preparation, grading, remediation and demolition
  • Free or reduced land prices from the state, municipalities or public/private economic development agencies
  • Transportation development of roads, bridges and railroad spur lines and other incentives to reduce emissions or to encourage electrification

Key Due Diligence Considerations

Accounting and treasury – Buyers should assess and consider accounting practices, GAAP compliance, and historical and projected cash flows associated with infrastructure incentives in its valuation model.

Clawback provisions – Clawback provisions should be reviewed and scrutinized as they could expose a buyer after the transaction. In addition, a buyer should assess performance risk and any implications on projected incentives.

Transferability – A buyer should consider portability and notification requirements in key contractual agreements to ensure that there are adequate closing conditions or other mechanisms to address the risks associated with a change of control.

Reputation risk – Acquirers should consider media coverage of incentive agreements and how these benefits may be perceived 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 corporate governance over sensitive information should be addressed as part of due diligence.

Regulatory – Historical performance against compliance requirements is critical to ensure benefits are not terminated and clawed back. The due diligence process should include timely filing review and comprehensive documentation and support.

Continuous operations – Incentive agreements often require operations to continue throughout the benefit period and possibly beyond. Downsizing and ceasing operations can result in clawbacks and negative public relations. Understanding the policies and procedures for monitoring these operational requirements should be addressed during due diligence.

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

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