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Debt & Equity

Tax credits scaled back, new opportunities in Brownfield sector

By Victor J. Gallo, Christopher Rizzo
and Christine A. Fazio,
Carter Ledyard & Milburn LLP

Time is running out for developers to take advantage of tax credits under New York State’s existing Brownfield Cleanup Program (BCP).

Newly enacted restrictions will cut off many New York City sites from receiving the BCP’s generous redevelopment tax credit.

Developers whose sites are accepted into the BCP before the new law takes effect (which could be as soon as July 1, 2015), will be grandfathered and remain eligible to receive the redevelopment tax credit under the current law.

Changes to the tax credit structure are just one of several reforms to the BCP that were approved by Governor Cuomo and the Legislature as part of the State’s 2015-2016 budget.

This new legislation, which extends the BCP tax credits until 2025, also provides fast track liability protection for applicants who forego tax credits; changes the definition of a qualifying “Brownfield site”; improves incentives to redevelop sites in economically disadvantaged locations; and provides incentives to developers of affordable housing.

Developers of Brownfield sites who want a liability release from the State to obtain project financing will now have the option for streamlined review of their applications and cleanup plans so long as they waive receiving BCP tax credits.

The Department of Environmental Conservation (DEC) will promulgate regulations detailing how it intends to implement this program, called the BCP-EZ Program, which may include elimination of the public comment periods on applications and remedial work plans.

Brownfield sites are best described as derelict and disused industrial or commercial land
Brownfield sites are best described as derelict and disused industrial or commercial land

Depending on how DEC structures the review process, the BCP-EZ option may ultimately reduce the need for New York City to have its own local brownfield program. The BCP-EZ option will not be available for sites that pose a significant threat under the State’s inactive hazardous waste disposal site program.

Under the new law, the definition of “Brownfield site” is any real property where a contaminant is present “at levels exceeding the soil cleanup objectives or other health-based or environmental standards, criteria or guidance” that are applicable based on the reasonably anticipated use of the property.

Applications to DEC for admission into the program will now need to include a site investigation report demonstrating that the property exceeds these standards.

The new law removes the ambiguities of the prior definition, which had vaguely defined a Brownfield site to be any property whose redevelopment was “complicated by the presence or potential presence of a contaminant.” DEC’s efforts to narrowly interpret when redevelopment was “complicated” by contamination had been thwarted by New York State’s highest court.

In response to concerns that BCP tax credits were being squandered on high value properties which could easily be redeveloped without them, the new law prohibits New York City sites from claiming the redevelopment tax credit unless they meet one of the following three criteria:

• At least half the site is within a designated “Environmental Zone”;
• The site is otherwise “underutilized” (a term to be defined by DEC by October 1, 2015) and • The cost to remediate the site is 75% or more of the appraised value of an uncontaminated property for the same proposed use; or
• The site is being redeveloped as part of an “affordable housing project” (to be defined by DEC by June 8, 2015).

Under the new law, costs that can be included in calculating the redevelopment tax credit will need to be more closely tied to the long-term use of the property, such as property having a useful life of at least 15 years and “non-portable” equipment used exclusively on the site.

Ten percent of eligible redevelopment costs are counted toward the credit.

Up to an additional five percent can be added to the 10 percent baseline for sites located in an Environmental Zone (areas identified by the State as having high poverty and unemployment rates).

Additional five percent increments are also available for manufacturing sites, affordable housing projects, sites that are cleaned up to unrestricted use standards, and developments that advance the goals of a designated Brownfield Opportunity Area.

However, the percentage of redevelopment costs that can be used to calculate the tax credit cannot exceed 24 percent (no change from the prior law).

For manufacturing facilities, the amount of the credit continues to be capped at six times site preparation costs up to $45 million.

For all other facilities (including residential), the credit is capped at three times site preparation costs up to $35 million.

The new law cuts back on the types of costs that can be counted toward the BCP site preparation tax credit.

Previously, developers could include foundation and other costs in calculating the site preparation credit.

Under the new law, only costs necessary to implement the site’s investigation and remediation will count toward the credit; foundation costs unrelated to remediation requirements can no longer be included.

However, the new law allows the site preparation credit to include attorney and consultant fees associated with environmental remediation, as well as costs to remove lead-based, asbestos and PCBs from structures that will remain on the site.

For the first time, Class 2 inactive hazardous waste sites and “interim status” hazardous waste treatment/storage/disposal facilities will be eligible to participate in the BCP, subject to three conditions: (1) the applicant/owner of the site acquired the site after the property was contaminated, (2) the current owner did not make the contamination worse, and (3) none of the prior owners who were responsible for the contamination are able to fund the cleanup.

The new law is not scheduled to take effect until DEC proposes a definition of the term “underutilized,” which could occur as early as July 1, but must occur no later than October 1, 2015.

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