After years of unsuccessful stabs at reforming the state’s brownfield tax credit, both houses of the New York State Legislature (S 8717, A 11768, Gov. Program #74) passed, on June 24, 2008, amendments to the New York State General Municipal, Tax, and Environmental Conservation Laws that are awaiting signature by the governor. These revisions strive to balance the need to clean up sites and spur development with the need to provide fiscal controls that avoid unintended windfalls to project developers.
Background: Since being enacted in 2003, the Brownfield Cleanup Program Act (BCP; ECL 27-1401, et seq.) has been criticized for favoring downstate cleanup projects after a few New York City area developers qualified for hundreds of millions of dollars in tax credits for large commercial or residential projects that involved modest environmental cleanup work. The tax credit is “refundable” (meaning that unused tax credits will be treated as an overpayment of income tax for that taxable year, entitling the taxpayer to a tax refund, or check, from the state coffers) and, until now, it had no upper cap or limit. This resulted in a potential $3-billion liability, of which at least $1 billion is for guaranteed tax credits for 54 sites already in the program. Thus, it was widely regarded as the nation’s most generous programs and was a source of deep concern for the state agencies implementing the program in an era of huge budget shortfalls. Many argued that the program did not really achieve the chief aim of rebuilding crumbling factories with environmental barriers to redevelopment.
Following unsuccessful efforts to reform the law during the 2006 and 2007 legislative sessions, by proposing caps on the allowable credits and incentives linking higher amounts of credits to more extensive cleanups, the New York State Department of Environmental Conservation (DEC) was administratively addressing these issues by narrowly construing eligibility guidance and tightening its approval of projects for admission to the program. On June 10, 2008, the Supreme Court for Onondaga County rebuked DEC in a case involving the Destiny USA mall development in Syracuse for its use of “unfettered discretion” in applying the BCP eligibility criteria in such a way as to “severely cripple and limit a clear and unequivocal statutory intent and purpose….” In April 2008, when the legislative session seemed likely to close without agreement on amendments, the legislature imposed a 90-day moratorium (which expires on July 23) against DEC’s admitting new applications to the BCP. These factors created sufficient momentum to produce legislative change.
Revisions and analysis: The revisions apply only to projects accepted into the program by DEC on or after June 23, 2008, so projects in the pipeline before that date continue under the existing tax credit program. Although DEC has previously (in connection with the moratorium) interpreted “acceptance” into the program to relate to when the agency executes the Brownfield Cleannup Agreement (BCA), we think the legislature intends for this section to refer to an earlier point in the process, when the “request for participation,” pursuant to ECL section 27-1407, is “either accepted or rejected” pursuant to Section 27-1407(6) by DEC when it notifies the applicant in writing of its decision in that regard.
It helps to look at the three forms of available tax credits under the current BCP to better understand the impacts of these amendments.
(1) Brownfields Redevelopment Tax Credit (BRTC)
The BRTC is a one-time credit that was equal to at least 12 percent (for a corporate taxpayer) or 10 percent (for an individual taxpayer). This credit is increased by 8 percent if the site is located in an “environmental zone” and increased by 2 percent if the remediation is done to the highest environmental standard. Costs incurred after the DEC executes a BCA may be accrued until the Certificate of Completion (CoC) of the DEC-approved remedy is issued, at which point, the tax credit may be claimed. The BRTC applies to three categories of costs (these are mutually exclusive in that a cost claimed under one category may not be counted under another category).
- Site preparation costs: Covers remediation, demolition, excavation, fencing and security, wiring, scaffolding, and other capital account costs, to make the site usable for commercial, industrial, residential, and other purposes, and excludes site acquisition costs. These costs may be claimed for up to five years after the issuance of the CoC.
- Qualified tangible property (QTP) costs: Covers costs of buildings and improvements (including structural components of buildings) that are placed into service within 10 years after the CoC is issued, and must satisfy various pre-conditions.
- Onsite groundwater remediation costs: Covers costs that are incurred to implement a “remediation work plan” under the BCA, including interim remedial measures. This may be claimed in the year in which the CoC is issued, and cost incurred after the CoC may be claimed in the year incurred for up to five years after CoC.
How this has changed: The amendments now cap the amount of the tangible property tax credit to the lesser of $35 million or three times the cost of the cleanup and other site preparation costs (in the case of non-manufacturing properties) or $45 million or six times the cost of the cleanup and other site preparation costs (in the case of manufacturing projects). It also increased the tangible property tax by 2 percent for properties in a Brownfields Opportunity Area, and streamlines that program and transfers responsibility for it from DEC to the Department of State. These changes apply to properties for which DEC has issued a notice to the taxpayer accepting the site into the BCP after June 23, 2008 [earlier proposals had reached back as far as July 2007].
A tiered approach was created for setting the amount of the site preparation tax credit, based upon the level of remediation performed, as follows:
- A maximum of 50 percent for soil cleanup to an unrestricted use;
- 40 percent for soil cleanup to residential use (28 percent for Track 4);
- 33 percent for soil cleanup for commercial use (25 percent for Track 4); and
- 27 percent for industrial use (22 percent for Track 4).
[The BCP has a cascading scale of four “tracks” of cleanup criteria ranging from the most highly conservative default cleanup criteria to be used as screening levels for unrestricted site use under Track 1, to Track 4, which refers to cleanups involving site-specific cleanup criteria that allow more residual levels to remain based upon significant restrictions on the use of sites.]
This structure increases the maximum percentage of cleanup costs that can be recovered in tax credits from the current level of 22 percent to a maximum of 50 percent There is no dollar cap on the site preparation tax credit. Also, it is likely that this structure will eliminate the need for DEC’s current practice of applying a “but for” test to eligibility for admission into the program (the environmentally impacted site would not be developed but for the availability of tax credits).
(2) Brownfields Real Property Tax Credit (BRPTC)
The BRPTC is an annual credit, which may be claimed for up to 10 years after the CoC is issued, based on number of jobs created, and includes credits for eligible real property taxes, as well as PILOTs. It is limited to owners of a contaminated property who obtained a CoC, but is transferable to subsequent purchasers of the site who take title within seven years of the CoC. There is a cap is imposed on the annual credit equal to $10,000, multiplied by the average number of full-time employees.
What has changed: This element of the program has not changed, but the amendments clarify that the “benefits and burdens” of CoCs run with the land and are transferable to successors or assigns upon the transfer or sale of an interest in the site. The amendments explicitly disallow any potential “double-dipping” that could result from more than one taxpayer claiming tangible property credits under the program (the calculation of the credit must exclude costs of items of property with respect to which a credit was allowed to another taxpayer).
(3) Insurance Credit
There is a credit available for environmental remediation insurance for the lesser of $30,000 or 50 percent of the premium paid after the date of a BCA for qualified sites, which is a one-time credit allowed in the year in which the CoC is issued.
What has changed: This element of the program has not changed.
Other changes: The amendments expand the reporting obligations of developers to include an annual report that identifies, among other things, the amount of state and local taxes generated by the redevelopment and how much has been paid in real property taxes. DEC is required to use this information in its own annual summary report. A Brownfield Advisory Board is to be comprised of 15 appointees to serve as a public forum to discuss the program.
What did not change: A number of other issues that have been raised with the program did not get resolved, including clarification of which sites are eligible for the program following the Destiny USA decision, and whether Class 2 sites, historic fills, and landfill sites will qualify for admission. Nor did the legislature reach agreement on the need for a streamlined program for sites not seeking tax credits, or for some local administration of approved remedial programs. In short, the “fix” to the Brownfield Cleanup Program is essentially a “money bill” that (a) caps the tax liability of the state to developers, (b) more closely links the tax credits to the cost of environmental remediation, and (c) strives to create a sense of greater accountability with increased reporting requirements, for the DEC as well as for developers, and an advisory board.
However, the legislation falls far short of resolving the problems that have, thus far, been barriers to accomplishing the real goals of the Brownfield Cleanup Program. To promote redevelopment of sites with environmental impacts, the process needs to be less, not more, burdensome; a simplified process needs to be created to create incentives for redevelopment of sites with more marginal economics (i.e., the costs of remediation could extinguish the redevelopment opportunities); and sites with limited environmental issues in the transactional context need to be able to be blessed quickly to provide greater certainty to the parties. There is a real risk here that additional reporting requirements will cause the program to suffer from even greater delays. Having fixed the tax liability exposure issue, it is less likely that the legislature will feel any urgency to address the remaining core issues that have undermined the promise of the Brownfield Cleanup Program.
This legislation also fails to address the tension between the legislative intent as an economic development/incentive program and the DEC’s expressed view that it is a “remedial” program that employs extremely rigid cleanup criteria and no relief from cumbersome State Superfund Site procedures at the technical level. Thus, the effect of the amendments is to reduce the tax benefits and increase the recordkeeping requirements, while providing no material improvements regarding implementation.
Finally, this bill offers no relief to those applicants who had submitted substantially complete applications over the past few years and whose applications have been “slow-walked” by the DEC while its efforts to amend the legislation were working their way through the legislative process. By applying the tax credit limitations to applications approved after June 23, 2008, the criticism of the Onondaga Supreme Court is ignored and applicants who have been stalled in the program are unfairly penalized by having applied under the current, more-expansive program, but being accepted and having the more limited tax credits be applicable to their projects.