On June 23rd, Governor David A. Paterson signed into law amendments to New York’s Brownfield Cleanup Program (BCP).1 The BCP amendments changed two of the tax credits that are available to developers of brownfield sites and clarified the circumstances under which tax credits may be transferred. However, the BCP amendments did not alter the eligibility criteria for the BCP.
The administrations of Governor Paterson and former Governor Eliot Spitzer pushed for BCP reform legislation because they were concerned that the program was too costly and was either providing tax credits for projects that did not need the incentives or for which the incentives were disproportionate to the cleanup. In 2007, the Spitzer administration estimated that the first 52 BCP projects would generate approximately $1 billion in tax credit liability. Building on that analysis, the New York State Office of the Comptroller projected that the outstanding tax credit liability for all projects that had been admitted into the BCP could be as high as $3.1 billion.2 Both studies ignored an analysis performed by the New York City Economic Development Corporation which concluded that the economic benefits to the city flowing from its BCP sites averaged 4.6 times the costs of the tax credits on a present discounted value.
As part of the state’s FY2008 Budget Bill, the Spitzer administration proposed significant changes to the brownfield redevelopment tax credit, changed the definition of a “brownfield site” and added a “but for” site eligibility test to qualify for any of the BCP tax credits. The proposed eligibility changes were partially in response to adverse court decisions holding that the New York State Department of Environmental Conservation had improperly denied projects from entering into the BCP.3
With time running out for a budget agreement and to provide breathing room to work out a compromise on BCP reform, the state legislature enacted a 90-day moratorium prohibiting the NYSDEC from accepting new applications.4 During the post-budget moratorium, both the Senate and Assembly introduced ambitious BCP reform bills that not only proposed to amend the structure of the tax credits but also would have resolved certain other ambiguities involving the tax credits, such as specifying the circumstances when a taxpayer could place a building into service prior to receiving a certificate of completion (COC) from the NYSDEC.5 Both proposals would also have expanded the categories of sites eligible for the BCP. The Senate bill also would have authorized the City of New York to administer its own local cleanup program for certain categories of contaminated sites as part of the implementation for PlaNYC.
Unfortunately, the compromise legislation that emerged did not address eligibility or resolve other concerns raised by stakeholders. The final bill agreed upon by the governor and the legislature added a modest increase to the “site preparation” credit component6 and imposed a cap on the “tangible property” credit component. The changes to the tax credits are effective for all new applications and the estimated three dozen applications previously submitted to NYSDEC that had not received a written notice of a acceptance prior to June 23, 2008. However, all BCP applicants will be subject to the new tax credit reporting requirements discussed later in this article.
Changes to the Site Preparation Tax Credit
Under the prior law, a taxpayer who received a COC from NYSDEC could claim from 10% to 22% of their site preparation costs, depending on whether the taxpayer was an individual or corporation, the property was located in a New York State Environmental Zone, or En-Zone 7 or the cleanup qualified as a Track 1 (unrestricted residential) cleanup.8 Under the 2008 amendment, the applicant will now be able to claim up to 50% of its site-prep costs depending on the kind of cleanup that is performed.9 Applicants that implement a cleanup that allows for unrestricted use will be able to claim a tax credit for 50% of their site preparation costs. For projects that achieve the restricted residential soil cleanup objectives, the applicable percentage for the site prep costs will be 40% but will drop to 28% for Track 4 cleanups. For projects that achieve the soil cleanup objectives for commercial uses, the applicable percentage will be 33% but will drop to 25% if the cleanup only achieves the Track 4 cleanup soil objective. For soil cleanups that achieve soil cleanup objectives for industrial end-use, the applicable percentage will be 27% but will drop to 22% of the cleanup only achieves the Track 4 soil cleanup objective. The site prep cost percentage will be set forth in the COC issued by the NYSDEC.
Changes to the Qualified Tangible Tax Credit
For the qualified tangible property tax credit, the existing law provided that an applicant was able to qualify for 10% to 22% of the value of the improvements constructed on the brownfield site. Taxpayers were also allowed a credit under prior law of 10% to 22% of the value of certain depreciable assets (as well as residential condominiums) placed in service on a brownfield site for which a COC has been issued. Under the 2008 amendments, the tangible property credit component will be calculated as under prior law, but subject to a limit that is the lesser of $35 million or three times the amount of site prep costs and the on-site groundwater remediation credit component.10
To help reverse the loss of manufacturing jobs in Upstate and Western New York, as well as to attract investments in emerging technology, the legislation increases the qualified tangible property tax credit to the lesser of $45 million or six times the amount of site prep and on-site groundwater remediation credit components for sites that are used primarily for manufacturing activities.11
If the site is located in a brownfield opportunity area (BOA) and the project is consistent with the BOA goals and priorities established by the municipality where the BOA is located, the applicable percentage for the qualified tangible property component will be increased by 2%. It appears that projects admitted into the BCP prior to the 2008 amendments that are located in a BOA will be able to claim the two percent BOA bonus so long as the buildings have not been placed into service prior to June 23, 2008, and the development is consistent with the BOA.
Clarification of Transferability of Tax Credits
The legislation also made an important clarification on the transferability of the tax credits to reflect modern real estate practice The existing law provided that COCs may be transferred if the site was sold. However, sophisticated and complex real estate development like brownfield projects usually involve an array of fractional ownership interests where individual sticks (or even twigs) of the infamous “bundle of rights” are conveyed. The legislation confirms that burdens and benefits of a COC run with the land and may be transferred or assigned where less than full title to a brownfield site is conveyed.12
New Reporting Requirements
The 2008 amendments also impose new reporting requirements on NYSDEC and BCP applicants. The NYSDEC is required to issue an annual report that will, inter alia, disclose the amount of the tax credits earned by the applicant. However, if the taxpayer is a member of a partnership, limited liability corporation or Subchapter S corporation, the report will only disclose the tax credit earned by the entity and will not provide any individual-specific information. Starting in 2009, all BCP applicants will be required to submit a Brownfield Credit Report to the NYSDEC annually for the 11 years following the execution of the brownfield cleanup agreement. The report must disclose the actual or estimated amounts of state and local taxes generated by the project, including the businesses and employees operating at the brownfield site as well as real estate taxes on behalf of the site.13
Impact on Brownfield Projects?
So what does this mean for developers? First, since the definition of brownfield site was not changed, do not expect the NYSDEC to relax its eligibility criteria. Governor Paterson recently declared that the State of New York is in a fiscal crisis, so the NYSDEC will likely still be under pressure to minimize the costs of the BCP. For those sites that are admitted into the BCP, the impact of tax credit changes will depend on project-specific factors, such as the size of the development, the ratio of cleanup costs to total project costs, and the applicable percentage that will be applied to the project for the qualified tangible property tax credit.
Conventional wisdom holds that the Spitzer and Paterson administrations wanted to limit the number of highrise condo projects that would be eligible for the BCP because the size of these projects generated enormous tax credits relative to the cleanup costs for the site. Consider, for example, a $200 million project in an enzone with $10 million in cleanup costs. Assume also that the cleanup was unrestricted so that a corporate taxpayer would have been eligible for the full 22%. Under the old law, the taxpayer would have been eligible for a $2.2 million site prep credit component (22% of $10 million) and a $44 million tangible property credit component (22% of $200 million). Under the new law, the taxpayer would be eligible for $5 million site preparation credit component (50% of $10 million). However, because of the cap (the lesser of $35 million or three times the $10 million site prep cost), the taxpayer would be limited to a $30 million tangible property credit. Therefore, the developer would be eligible for a total brownfield redevelopment credit of $35 million ($5 million site prep and $30 million QTP), a reduction of $11.2 million but still a significant incentive
But look at what happens with a smaller project, say a $50 million affordable housing or mixed-use project constructed on an old gas station site with estimated eligible site prep costs of $1 million. Under the old law, the developer would have been entitled to 22% of site prep costs ($220,000) and 22% of $50 million ($11 million) for a total tax credit of $11.22 million. Under the new law, the developer would be entitled to a site prep credit component of $500,000 (50% of $1 million). However, the tangible property credit component—$11 million under prior law—will be limited to $3 million, which is the lesser of $35 million or three times the $1 million in eligible site prep costs. Thus, the taxpayer’s tax credit would be reduced to $3.5 million from $11.22 million.
It is ironic that while the brownfield “reform” may have been intended to limit the number of high-rise luxury condo projects, the “reform” will also have a disproportionately harsh impact on smaller sites such as workforce housing located in En-Zones and BOAs where the maximum applicable percentage will be 24%. For these sites, the $35 million cap will be largely illusory or irrelevant. The “3X” multiplier will set the limit if the ratio of build-out to cleanup costs exceeds 12.5 to 1. In contrast, a project that is only eligible for the base corporate applicable percentage of 12% will not hit the cap until the build-out to cleanup cost ratio exceeds 30 to 1.
A possible reaction from developers of smaller sites would be to try to maximize the amount of eligible site prep costs. This is because the applicable percentage for site prep costs has been increased and because the site prep costs would serve as the base from which the “3X” (or “6X”) multiplier is applied. Under prior law, the applicable percentage was identical for all of the credit components, so the credit structure did not motivate taxpayers to re-characterize costs into one category or another. Now, taxpayers will have to identify costs that are remedial in nature and yet also result in the creation of a depreciable asset, and then determine whether those costs should be classified as site prep costs (assuming they meet the statutory definition) or as costs capitalized into the tax basis of qualified tangible property. These “dual use” costs could include soil vapor mitigation equipment, excavation, retaining walls, shoring, sheeting, and other engineering controls and otherwise depreciable land improvements. Categorizing costs as “site preparation” costs will likely preclude a taxpayer from expensing the cleanup costs under Section 198 of the Internal Revenue Code. We anticipate that tax counsel will be working alongside environmental counsel, consultants, and engineers in advising brownfield redevelopment clients as they plan their remedial actions.