As part of the 2015 budget, Governor Cuomo proposed and the Legislature passed a bill to extend and reform New York’s Brownfield Cleanup Program (“BCP” or the “Program”), and Governor Cuomo signed the bill into law on April 13, 2015.1 The Brownfield Bill2 (the “Bill”) provides for significant changes to the BCP in several respects. Since the creation of the BCP in 2003, there have been numerous calls for reform from the public sector, environmental groups and the business and development community. Some critics, including Governor Cuomo, were concerned that the Program’s generous tax credit scheme was more of a boon to developers than a vehicle for the remediation and redevelopment of sites that would remain fallow without the benefit of tax credits.3 Some critics opined that the Program had tended to benefit New York City projects at the expense of upstate development, and there was concern on the part of the development community that there was a lack of certainty in the Program’s administration. Moreover, the tax credit component of the Program would have expired on December 31, 2015.4 This article, which does not constitute tax advice or a detailed analysis of either all elements of the Bill or the New York Tax Law, describes the manner in which the Bill affects eligibility for the Program, and the availability and quantum of tax credits under the BCP. First, it significantly changes the definition of “brownfield sites” eligible for the BCP; particularly those located in “a city having a population of one million or more persons”—the legislative euphemism for New York City. Second, it changes the formulae for calculating certain elements of the credits. Third, it “grandfathers” certain sites that are in the Program, provided specified timeframes are met. Finally, it creates a new “BCP-EZ” program, allowing for sites to 1 S. 2006-B (N.Y. 2015), available at http://open.nysenate.gov/legislation/bill/s2006b-2015. 2 2015-16 NEW YORK STATE EXECUTIVE BUDGET, REVENUE ARTICLE VII LEGISLATION, PART R at 107-148, available at https://www.budget.ny.gov/pubs/executive/eBudget1516/fy1516artVIIbills/REVENUEArticleVII.pdf [hereinafter, EXECUTIVE BUDGET, PART R]; see also 2015 N.Y. Laws, ch. 56, part BB. 3 As noted by Governor Cuomo in his memorandum in support of his bill, a principal purpose of the reforms was to “prevent developments that would have gone forward without tax credits from taking advantage of the program.” 2015-16 NEW YORK STATE EXECUTIVE BUDGET, REVENUE ARTICLE VII LEGISLATION, MEMORANDUM IN SUPPORT, PART REXTEND AND REFORM THE BROWNFIELD CLEANUP PROGRAM [hereinafter, SUPPORT MEMO] at 21, available at http://publications.budget.ny.gov/eBudget1516/fy1516artVIIbills/REVENUE_ArticleVII_MS.pdf. 4 2012 N.Y. Laws, ch. 474, sec. 1, § 31. Fried Frank Client Memorandum 2 be entered in the Program to obtain a liability release, but without seeking tax credits.5 This presumably provides a more expeditious route to a Certificate of Completion and the issuance of a release. A. The Brownfield Cleanup Program The BCP was created by the Legislature at the end of the 2003 session.6 The Program was designed to foster two goals: encouraging and expediting the remediation of “brownfields,” or mildly contaminated sites; and economic development.7 To accomplish this goal, the BCP has two essential elements: the availability of a liability release from the State upon completion of a regulated cleanup;8 and a generous package of tax credits available to those who successfully complete those cleanups.9 Over the now almost 12-year history of the BCP, there has been little controversy over the cleanups themselves or the liability releases that have resulted from the completion of the remediation of brownfield sites. The controversial issues have arisen with respect to the tax credit portions of the BCP.10 B. BCP Tax Credits Under the statute, a “volunteer” or “participant” that completes a cleanup may claim five separate tax credits. They are: (a) the “site preparation tax credit”, based on costs of implementing a remediation;11 (b) the “groundwater remediation tax credit;”12 (c) a credit for real estate taxes;13 (d) the “environmental insurance tax credit;”14 and (e) the “tangible property tax credit,”15 based on the cost of the development of a brownfield site. The tangible property tax credit has, in the author’s view, created the most controversy and is the principal target of the reform as well, as reform efforts made in prior years.16 Site preparation tax credits under the law as it was originally formulated are calculated by multiplying qualified costs by an applicable percentage.17 Section 21(b)(2) of the New York Tax Law defined those costs as “all amounts properly chargeable to a capital account, (i) which are paid or incurred in connection with a site’s qualification for a certificate of completion [“CoC”], and (ii) all other site preparation costs paid or incurred in connection with preparing a site [for development].”18 This was a 5 2015 N.Y. Laws, ch. 56, part BB, sec. 15-a, § 27-1437. 6 2003 N.Y. Laws, ch. 1, sec. 1, § 27. 7 See N.Y. ENVTL. CONSERV. LAW §27-1403 (McKinney 2015). 8 N.Y. ENVTL. CONSERV. LAW §27-1421 (McKinney 2015). 9 N.Y. TAX LAW §§21–23 (McKinney 2015) (§ 21 amended Apr 13, 2015). 10 See, e.g., J. Alex Tarquinio, New Law Turns Brown Into Green for New York State, N.Y. TIMES, July 23, 2008, http://www.nytimes.com/2008/07/23/realestate/commercial/23brown.html?_r=0. 11 N.Y. TAX LAW § 21(a)(2) (McKinney 2015). 12 N.Y. TAX LAW § 21(a)(4) (McKinney 2015). 13 N.Y. TAX LAW § 22 (McKinney 2015). 14 N.Y. TAX LAW § 23 (McKinney 2015). 15 N.Y. TAX LAW § 21(a)(3) (McKinney 2015) (amended Apr 13, 2015). 16 SUPPORT MEMO, supra note 3, at 20-22. 17 N.Y. TAX LAW § 21(a)(2) (McKinney 2015). 18 N.Y. TAX LAW § 21(b)(2) (McKinney 2015) (amended Apr 13, 2015). Fried Frank Client Memorandum 3 broad category and included costs such as demolition, foundations, etc., which may or may not have been costs associated with remediation of contaminated sites, as well as “soft costs” such as developer’s fees, attorney’s fees, and the like.19 The “applicable percentage” varies with the level of cleanup achieved and continues to range from 50% for a cleanup allowing for unrestricted uses, 40% for residential uses, 33% for commercial use and 27% for industrial use.20 In each of these categories, the percentage is lower where there has been a cleanup to Track 4 levels; meaning a cleanup requiring institutional or engineering controls to prevent exposure to contaminants remaining on a site. As originally stated, the tangible property tax credit is calculated by multiplying what are essentially all the depreciable costs of development by an applicable percentage.21 Subject to certain enhancements for sites located in what are designated as Brownfield Opportunity Areas—areas specifically identified as being in need of remediation and redevelopment and which generated specified numbers of jobs—the applicable percentage is 12% for corporate taxpayers and 10% for individuals (or pass-through entities).22 The tangible property tax credit becomes available in the tax year in which the development is placed in service as defined by the Internal Revenue Code, and may be accessed any time within ten years of being placed in service. The tangible property tax credit has been controversial because, as originally created by the Legislature and signed into law in 2003 by then Governor Pataki, the credit was unlimited. Moreover, it is a “refundable” credit, meaning that a taxpayer who has no tax liability against which the credit is to be applied will receive payment from the State in an amount equal to the credit or the amount by which the credit exceeds the taxpayer’s tax liability.23 These costs to the State were unfunded. The initial response to this benefit and its costs to the State was an administrative attempt by the New York Department of Environmental Conservation (“DEC”) to limit the number of sites it admitted to the BCP.24 In a series of guidances, the DEC sought to eliminate sites that were contaminated because they were built on historic fill—thus eliminating much of the New York City waterfront—and other bases. Litigants challenging DEC determinations not admitting sites to the BCP on several occasions convinced courts that those guidances were contrary to the terms of the statute.25 19 N.Y. TAX LAW § 21(b)(2) (McKinney 2015) (amended Apr 13, 2015). 20 N.Y. ENVTL. CONSERV. LAW §27-1419(3) (McKinney’s 2015) (other portions of subdivision 3 amended Apr 13, 2015). 21 See N.Y. TAX LAW §§ 21(a)(3) and (b)(3) (McKinney 2015) (amended Apr 13, 2015). 22 N.Y. TAX LAW § 21(a)(5) (McKinney 2015) (amended Apr 13, 2015). 23 See, e.g., Sam Smith, Tax Slap for Times Tower, N.Y. POST, Apr. 3, 2005 (discussing the then-potential $170 million in tax credits for the New York Times Tower in Manhattan); Jennifer Steinhauer, A Clean up That’s Easier Legislated Than Done, N.Y. TIMES, Dec. 4, 2005, http://www.nytimes.com/2005/12/04/nyregion/04fields.html (mentioning the rejection of the New York Times Tower brownfield tax credit application); Julie Satow, Skeptics Charge Misuse of Tax Incentive Program, N.Y. SUN, Sept. 30, 2004 (discussing bid development projects “being developed on properties marginally impacted by environmental degradation”). 24 See David J. Freeman and Lawrence P. Schnapf, Brownfield Cleanup Program’s Draft Eligibility Criteria, N.Y. L.J., Nov. 16, 2004; see also David J. Freeman and Lawrence P. Schnapf, Brownfield Cleanup Program’s Final Site Eligibility Criteria, N.Y. L. J, Apr. 20, 2005. 25 See, e.g., E. River Realty Co., LLC v. New York Dep’t of Envtl. Conservation, 866 N.Y.S.2d 537 (Sup. Ct. N.Y. Cnty. 2008) aff’d, 891 N.Y.S.2d 359 (1st Dep’t 2009) (challenging DEC’s imposition of an agency-created “butfor” test to determine eligibility of a site); and HLP Properties, LLC v. New York Dep’t of Envtl. Conservation, 864 footnote continued on next page Fried Frank Client Memorandum 4 Because of this controversy, in its 2008 Session, the Legislature passed Section 21(a)(3-a)(A) of the New York Tax Law, which established a cap on the tangible property tax credit for sites admitted to the BCP after June 23, 2008. The cap, which remains with a few changes in the Bill, is the lesser of three times the sum of eligible site preparation costs or $35 million.26 The creation of the cap decreased the cost of the BCP to the State,27 and has reduced some of the tension between the development community and the DEC regarding eligibility for the BCP. C. Definition of Eligible Sites The Bill makes two principal changes to the Program eligibility requirements. First, it replaces the original formulation that a site is eligible for the Program if redevelopment of the property “may be complicated by the presence or potential presence of a contaminant.”28 This formulation is somewhat subjective, and created a number of issues between applicants and the DEC in the application process. The Bill replaces this language by making the criteria for eligibility the presence of contaminants at levels exceeding DEC soil cleanup objectives or “other health-based or environmental standards, criteria or guidance adopted by [the DEC] that are applicable based on the reasonably anticipated use of the property…”29 Presumably, these standards will be more objective than the prior complication standard. The second and more impactful change relates to properties where the applicant is seeking tangible property tax credits under Section 21 of the New York Tax Law. In “cities having a population of more than one million persons,” i.e., New York City, the Bill limits the availability of these credits to sites: (a) where at least one-half of the site is in an environmental zone (as defined by the New York Tax Law); (b) where the property is “upside down” or “underutilized”; or (c) where the project is an affordable housing project.30 These new limitations do not apply to eligible sites outside of New York City. The meat of these limitations is, of course, in the definitions. “Upside down” is defined in new Section 27- 1405, Subdivision 31 of the New York Environmental Conservation Law as a property where the costs of cleanup (either incurred or projected) is equal to or greater than the appraised value of the site as if it were not contaminated.31 Meeting this test will require the submission of an appraisal that provides a hypothetical value of the property as “clean.” The term “underutilized,” as used in new Section 27-1405, Subdivision 30 of the New York Environmental Conservation Law, is in fact not defined.32 Rather, the Legislature and the Governor have delegated the N.Y.S.2d 285 (Sup. Ct. N.Y. Cnty. 2008) aff’d, 898 N.Y.S.2d 449 (1st Dep’t 2010) (challenging denial of eligibility based on DEC’s use of agency-created guidance documents); see also Christopher Rizzo, NY’s Department of Environmental Conservation sets tougher brownfields rules, LONG ISLAND BUS. NEWS, July 8, 2005. 26 N.Y. TAX LAW § 21(3-a)(A) (McKinney 2015) (amended Apr 13, 2015). 27 See generally NEW YORK STATE DEPARTMENT OF TAXATION AND FINANCE, BROWNFIELD CREDIT REPORTS 2008-2014. Prior to June 23, 2008, total credits amounted to roughly $845, 773,446. After that time and through the 2012 tax year, total credits amounted to roughly $31, 214, 661. REAL ESTATE BOARD OF NEW YORK, NYS Brownfield Development Program, Fall 2012 (on file with author) 28 N.Y. ENVTL. CONSERV. LAW § 27-1405(2) (amended on Apr 13, 2015). 29 2015 N.Y. Laws, ch. 56, part BB, sec. 2, § 24-1405(2). 30 2015 N.Y. Laws, ch. 56, part BB, sec. 3, § 27-1407(1). 31 2015 N.Y. Laws, ch. 56, part BB, sec. 2, § 24-1405(31). 32 2015 N.Y. Laws, ch. 56, part BB, sec. 2, § 24-1405(30). Fried Frank Client Memorandum 5 task of creating the definition to the DEC, with a direction that it create such a definition no later than October 1, 2015, and that it do so in consultation with the business community and New York City.33 The statute provides a modicum of guidance to the DEC, directing it to “take into consideration the existing use of a property relative to allowable development under zoning, the need for substantial government assistance to redevelop and other relevant factors.”34 The Bill does not indicate how the new eligibility criteria will operate if the regulations are not enacted in a timely fashion. There is no set definition of an “affordable housing project” either.35 Here too, the statute kicks the proverbial can down the road, providing that a definition shall be established: “by the [DEC], after consultation with the division of housing and community renewal, which shall, at a minimum, establish the percentage of units in the project that must be below a defined percentage of the area median income.”36 The Bill instructs the DEC to publish proposed regulations no later than June 8, 2015.37 The delegation of this responsibility to the agencies was apparently due to an inability to agree on both the number of affordable units necessary for a project to qualify as an “affordable housing project” and what “affordable” means. The Governor’s original proposal defined an affordable housing project as a property subject to a regulatory agreement with a federal, state or local government housing authority for: (i) a rental building with 20% or more units reserved for persons with incomes not exceeding 90% of Area Mean Income (“AMI”) and an additional 30% reserved for persons whose annual income does not exceed 130% of AMI; (ii) a condominium or co-op with at least ten units, where 50% of the units are intended for buyers with incomes below 130% of AMI; or (iii) a single family project with not less than twenty feesimple properties, 50% of which are intended for buyers with incomes not exceeding 130% of AMI.38 During the negotiations for the budget, other formulae were discussed, including reducing the percentage of required affordable units to 35% and adjusting the AMI levels. It is this author’s opinion that the inability to agree may very well have been informed by the fact that the de Blasio administration has not yet made public its view on what the affordable housing requirements for new development in New York City will be. The overall effect of this proposed change would be to reduce significantly the number and types of New York City projects eligible for the tangible property tax credit. Finally, the Bill contains a specific provision excluding tangible property tax credits for sites where contamination from groundwater or soil vapor “is solely emanated from property other than the site subject to the present application…” and those that have previously been remediated under the BPC and other remediation programs, including State Superfund and the Navigation Law.39 Such sites would remain eligible for a liability release and for soil remediation credits. 33 2015 N.Y. Laws, ch. 56, part BB, sec. 2, § 24-1405(30). 34 2015 N.Y. Laws, ch. 56, part BB, sec. 2, § 24-1405(30). 35 2015 N.Y. Laws, ch. 56, part BB, sec. 2, § 24-1405(29). 36 2015 N.Y. Laws, ch. 56, part BB, sec. 2, § 24-1405(29). 37 2015 N.Y. Laws, ch. 56, part BB, sec. 2, § 24-1405(29). 38 EXECUTIVE BUDGET, PART R, supra note 2, at 109. 39 2015 N.Y. Laws, ch. 56, part BB, sec. 3, § 27-1407(1). Fried Frank Client Memorandum 6 D. Proposed Changes in the Calculation of the Credits The major changes resulting from the Bill that relate to tax credits pertain to the manner in which credits would be calculated for new entrants into the BCP. The Bill does not change the applicable percentages used to calculate the site preparation tax credit or the groundwater remediation credit. Those percentages remain at 50% of eligible costs for Track 1 (unrestricted use), 40% for Track 2 or 3 residential uses, 28% for Track 4 residential uses, 33% for Track 2 or 3 commercial uses and 25% for Track 4 commercial uses. With respect to the site preparation tax credit, the principal change as a result of the Bill is that it contains a more limited definition of “site preparation costs.” The Bill would limit foundation costs to only costs necessary for remediation and “shall not include the costs of foundation systems that exceed the cover system requirements in regulations applicable to the qualified site,”40 meaning essentially only the costs of covering or capping contamination, as opposed to full foundation costs. While such costs are to be eligible for inclusion in the tangible property tax credit, their elimination from the scope of site preparation tax credits will inform the calculation of the maximum credit allowed. Costs must be incurred or paid within six months of the end of the tax year in which a certificate of completion is issued in order to qualify for the calculation of the credit. In addition to limiting eligibility for the tangible property tax credit for New York City sites to “upside down” and “underutilized” sites, affordable housing projects and sites in an Environmental Zone, the Bill changes the manner in which applicable tangible property tax credit percentages are calculated. An additional 5% is added to the applicable percentage for sites in Environmental Zones, Brownfield Opportunity Areas, manufacturing sites, sites remediated to a Track 1 (i.e., unrestricted use) level and for portions of the development costs attributed to affordable units in an affordable housing project.41 The overall percentage may not exceed 24%, meaning that a project that meets all of the criteria for the 5% augmentation is limited to 24% as the applicable percentage.42 The Bill retains the cap of the lesser of three times eligible site preparation credits or $35 million, even if the additional applicable percentage is employed.43 E. “Grandfathering” and Extension of the Program The Bill extends the tax credit provisions, in their modified term which, would otherwise expire and not be available to applicants who do not receive a CoC on or before December 31, 2015.44 This end date would be changed to December 31, 2025, with the caveat that applicants who are accepted into the program after December 31, 2022 would not be eligible for tax credits.45 40 2015 N.Y. Laws, ch. 56, part BB, sec. 13, § 21(b)(2). 41 2015 N.Y. Laws, ch. 56, part BB, sec. 21, § 21(a)(5)(B). 42 2015 N.Y. Laws, ch. 56, part BB, sec. 21, § 21(a)(5)(B). 43 2015 N.Y. Laws, ch. 56, part BB, sec. 21, § 21(a)(5)(B). 44 At the end of last year’s legislative session, when the two houses of the Legislature did not agree on a bill to revise and extend the BCP, they passed a bill that simply extended the December 31, 2015 deadline to December 31, 2017. The Governor vetoed that legislation, stating that his preference for Brownfield reform was via a new, complete package. GOVERNOR ANDREW CUOMO, VETO MESSAGE FOR ASSEMBLY BILL 10135, VETO NO. 578, Dec 29, 2014. 45 2015 N.Y. Laws, ch. 56, part BB, sec. 32, ch. 1, part H, § 31. Fried Frank Client Memorandum New York Washington, DC London Paris Frankfurt Hong Kong Shanghai friedfrank.com 7 Whenever there is a change in a government program, a question arises as to the applicability of those changes to projects or persons already in the program. With respect to the BCP, the question of grandfathering has always been the subject of discussion and concern. The 2008 amendment, which added the cap on tangible property tax credits, specified that the change did not apply to sites that were accepted into the BCP prior to July 23, 2008, the effective date of the amendment. Under the Bill, a site that receives notice that it has been accepted into the BCP before July 1, 2015, or the adoption of the regulations defining “underutilized” (whichever is later), is subject to the existing law, provided that a CoC is obtained by December 31, 2019.46 Sites accepted after July 1, 2015, or the date of the adoption of the regulations defining “underutilized” or those accepted prior to that date, but that do not obtain CoCs in a timely fashion, would be subject to the changes imposed by the Bill, including the eligibility limitations for the tangible property tax credit.47 F. Conclusion Like most legislation, the Bill provides some additional benefits, while at the same time limiting others. It was the subject of significant lobbying and compromise. The Bill provides some degree of clarity in the definition of eligible sites and continues the program without significantly changing the question of credits available on a per site basis. On the other hand, depending upon what the regulatory definitions of “affordable housing project” and “underutilized” ultimately are, the Bill could limit the availability of credits for NYC sites. * * * Author: Richard G. Leland This memorandum is not intended to provide legal advice, and no legal or business decision should be based on its contents. If you have any questions about the contents of this memorandum, please call your regular Fried Frank contact or the attorney listed below: Contact: New York Richard G. Leland +1.212.859.8978 email@example.com 46 2015 N.Y. Laws, ch. 56, part BB, sec. 33. 47 2015 N.Y. Laws, ch. 56, part BB, sec. 33.