Following the failure of the Legislature and Governor to reach agreement on comprehensive reform of the Brownfield Cleanup Program (BCP), the Brownfield Task Force (BTF) of the New York State Bar Association, which I co-chair with David Freeman, convened a cross-section of stakeholders to study the BCP. After a series of meetings and conference calls, the BTF issued a set of recommendations for reforming the BCP based on the valuable input of these participants. The executive committee of the Environmental Law Section unanimously approved the recommendations. A report discussing the BTF recommendations was issued in January and has been shared with the Governor and the Legislature.
Following is a summary of the BTF recommendations and how they compare with the BCP reforms that Governor Andrew Cuomo proposed in his 2015-20 budget. A copy of the report is available at the Environmental Law Section website.
Definition of Brownfield Site
The current statutory definition of a brownfield site is “any real property, the redevelopment or reuse of which may be complicated by the presence or potential presence of a hazardous waste….” This definition has proved to be problematic since there is no objective way to determine when contamination “may complicate” development. Indeed, despite the sweeping and broad language of the definition, NYSDEC adopted an unnaturally narrow interpretation of the definition shortly after the BCP became effective in an attempt to control the costs of the BCP. This interpretation was eventually overturned by the Court of Appeals in Lighthouse Pointe Property Associates LLC v. New York State Department of Environmental Conservation (14 N.Y.3d 161 2010).
The Governor’s proposal would simplify the definition so that a site would be considered a “brownfield” if it is contaminated at levels that exceed health-based or applicable environmental standards applicable based on the site’s expected use. The Governor also proposes that applicants “shall” submit an investigation report sufficient to demonstrate that the site requires remediation”. In other words, it appears that applicants would have to perform and enclose phase 2 reports with their applications. This could be a problem when the applicant does not own the property and does not have access to collect samples at the time of the application.
The proposed definition would also allow sites impacted from off-site contamination (e.g, groundwater plumes that might require installation of vapor mitigation systems or treatment during dewatering) to be accepted into the BCP. However, sites whose only contamination is due to off-site source would not be eligible for the brownfield tax credits.
The major difference between the BTF and the Governor’s proposal is that the determination of anticipated site use would be made by the BCP applicant rather than the New York State Department of Environmental Conservation (“DEC”).
Extending the Deadline for Obtaining COCs
The BCP tax credits (BTCs) are currently scheduled to sunset on December 31, 2015. Applicants will have to obtain a Certificate of Completion (COC) prior to that date to be able to claim the BTCs. The Governor’s proposal would extend the tax credits to December 31, 2022 though sites accepted prior to December 31, 2022 would have until December 31, 2025 to obtain a COC. Moreover, sites that have been accepted into the program as of April 1, 2015 and have a brownfield cleanup agreement (BCA) executed prior to that date would have only until December 31, 2017 to obtain COCs to maintain eligibility for the current tax credit framework. Such applicants that fail to obtain a COC by December 31, 2017 would remain in the BCP but would be treated as though they were accepted into the BCP after April 1, 2015 and would be subject to the new BTC limits on tax credits (discussed below).
The BTF recommends that the deadline for obtaining COCs for sites already in the BCP be extended until the earlier of ten years after admission to the BCP (as long as that date is no earlier than December 31, 2015) or December 31, 2025. It further recommends that (a) all sites in the BCP as of the effective date of the amendments would be grandfathered, and (b) on a going-forward basis, eligibility for BTCs would be based on the date the application is accepted into the BCP and not the date of issuance of the COC.
Changes to the Tangible Property Tax Credit–
Currently, BCP applicants may claim up to $35MM in tangible property tax credits (TPCC) for non-industrial projects (“hard cap”) or three times their Site Preparation costs (“soft cap”)whichever is less. The TPCC caps were added in 2008 to address concerns about the costs of the BCP. Despite two independent studies that suggested the TPCC costs had achieved the desired goal, the Governor’s has once again has proposed removing the TPCC as an “as of right” benefit for all applicants but instead, required applicants to satisfy a second test or “gate” to be able to claim the TPCC.
The three gates would be that the 50% of more of the site is located in an Environmental Zones, the project meets the definition of an affordable housing project or the site is “upside-down” (i.e., the projected cost of the investigation and remediation which is protective for the anticipated use of the site exceeds the certified appraised value of the property absent contamination).In addition, if a site is located within a Brownfield Opportunity Area (“BOA”), the project would have to conform to the plan for that BOA. NYSDEC would notify the applicant upon acceptance into the BCP if the project meets the criteria for qualifying for the TPCC.
In addition, the governor’s proposal would reduce the base percentage for all applicants to 10% but would award an extra 5% up to a total of 24% for meeting. Another restriction would be that sites are not eligible for the TPCC where the contamination is SOLELY from an off-site source or the on-site contamination was previously remediated and the cleanup is suitable for the proposed development.
This so-called two-gate approach generated considerable controversy when the Governor first proposed it in his 2014 budget. Developers are not only concerned about the particular criteria but also fear this approach would inject more complication, delays and uncertainty for sites that already fraught with challenges. Moreover, the subjectivity of the proposed criteria seemed likely to result in a repeat of litigation and confusion that occurred after NYSDEC adopted a narrow definition of what constituted a brownfield site.
The BTF determined that the goals of the Governor’s two-gate approach to reduce the costs of the BCP while better targeting the tax credits could be achieved by retaining the “as-of-right” eligibility for the TPCC credits for all projects but lowering the $35MM cap. Increased TPCC percentages would be available, though, for certain categories of project based on the benefits such projects provide to the State and the communities where the sites are located (e.g., affordable housing, projects in areas with depressed economic activity, etc.)
Changes to Definition of Eligible Site Preparation Costs
Under existing law, site preparation costs are broadly defined. The Governor’s proposal would restrict eligible costs to those costs directly tied to remediation-related construction and would further limit eligible building foundation costs to the cost of a site cover. The costs would also have to be paid within six months after the expense is first incurred. However, the Governor also proposes to allow asbestos and lead-based paint abatement costs and expenses to address PCBs within buildings to be eligible for the site preparation tax credit cost where the work is done in accordance with state requirements.
The BTF recommends retaining the current broad definition but agrees with the concept of limiting eligibility for costs associated with constructing the foundation of a building.
BTC Eligibility of Expenditures Paid To Related Parties
It is not unusual in real estate development projects for work to be performed through entities that have common ownership with the developers and contractors whose services are critical to the organization, financing, and construction of the project. However, payments for such services may be deferred long after they are “incurred” for tax credit purposes, and they are sometimes waived entirely.
Federal tax law requires all direct and indirect project costs, including any costs payable to such affiliated developers and contractors to be charged to a capital account. The three components of the brownfield redevelopment tax credit are calculated based on properly capitalized costs under federal tax law, including costs for goods and services provided by affiliates. In some circumstances, service fees (such as development fees) may be properly capitalized under federal tax law when earned, even though payment may be deferred until after construction is complete
The Governor proposed eliminating all “related party” (10% or more common ownership) payments from the calculation of the BTCs regardless if those payments were properly chargeable to a capital account under federal tax law . Because this approach would run counter to well-established federal tax law and real estate development practices, the BTF recommends that the TPCC component attributable to deferred payment obligations for services by related parties would also be deferred, and be only allowed in the taxable year payment is actually made.
Class 2 Site Eligibility for BCP
The Governor’s proposal would allow Class 2 sites to be eligible for the BCP if the sites were “under contract to be transferred to a volunteer and the department has not identified any responsible parties for that property having the ability to pay for the investigation or cleanup of the property.”
The BTF recommends that the requirement that there by no financially viable party is too restrictive and may prove too difficult to establish for a variety of reasons. Instead, it we recommend including language, that site cleanup does not extinguish the right of the volunteer or the State to pursue responsible parties for cleanup costs, or for cleanup if the site is not remediated appropriately.
Non-Tax Credit, Voluntary Cleanup Program
The Governor proposes creating a liability-release-only cleanup program that would allow parties to waive tax credits in exchange for a more expedited cleanup process. Curiously, the Governor also proposes to allow NYSDEC to accept BCP applications from parties currently enrolled in the old administrative voluntary cleanup program (VCP). However, such applicants would not be eligible for any brownfield tax credits. It is unclear why the Governor or NYSDEC believes a second non-tax credit program is required.
The BTF agrees that there is value to creating a new, streamlined program but believes that further clarity is required on what specific procedural requirements would be waived. The BTF recommends that cleanup and review timeframes be reduced, greater reliance on report templates and presumptive remedies as well as elimination of an alternative analysis. The BTF also recognized that certain types of sites―e.g. significant threat sites―should not be eligible for the streamlined program.
State Oversight Costs-
State oversight costs sometimes represent a significant proportion of BCP project expenses and are often difficult to predict. The Governor’s proposal would eliminate oversight fees incurred after the effective date of the legislation for parties not responsible for the original contamination. It also provides authority to DEC to negotiate “a reasonable flat-fee” for oversight costs for other participants.
The Task Force endorsed the Governor’s proposal.
Hazardous Waste Fee Waiver
ECL §72-0402 imposes a program fee, and ECL §27-0923 imposes a special assessment on generators of hazardous waste. Statutory exemptions are provided for hazardous wastes generated as part of remedial actions performed under an order or agreement with DEC pursuant to title 13 or title 14 of the ECL. However, these exemptions do not extend to cleanups performed under local or other regulatory authority. The Governor’s proposal would have extended the statutory exemptions to projects that remediate sites under local government programs that either have been delegated authority to implement their remedial program by DEC or that have entered into a MOA with DEC. The Task Force endorses this approach.
Clarification on Municipal Access for Environmental Investigations at Tax Foreclosure Sites
Under ECL §56-0508(1), municipalities that foreclose on tax liens may enter foreclosed sites to perform environmental investigations without incurring cleanup liability. However, some municipalities do not directly foreclose on such properties but instead sell tax liens to third parties who then foreclosing on the property.
The Task Force recommends that ECL §56-0508(1) be amended to expressly allow municipalities to enter sites subject to foreclosure or tax lien sales to perform environmental investigations on those sites.
BOA Reform–
The Brownfield Opportunity Area (BOA) has great potential but has been hampered by structural and funding issues. The Governor’s proposal did not amend the BOA Program, and the budget did not fund it. The Task Force believes that the BOA process be streamlined. Incredibly, information about brownfield sites in BOAS is not available on public databases maintained by the NYSDEC or the Department of State. The Task Force recommends creation of a BOA databases so developers can learn of locations of BOAs and the pre-development amenities for sites located within the BOAs.