NY Budget Deal Extends BCP But Sloppy Language May Hamper Use of BCP for Affordable Housing Projects

The New York State budget process is notorious for its murky and secretive process. Under the State Constitution, the Governor proposes a budget in mid-January that contains substantive policy legislation and can unilaterally amend the proposal within 30 days. After the 30-day period expires, amendments can only be made with consultation of the Senate and Assembly.

In early March, the legislature will issue their own one house bills that reflect their priorities. This then starts a Kabuki dance for the remainder of March Powerful interest and advocacy groups than press key legislators with their proposed requests which are then passed along to the negotiators in the “room.”  The final budget is negotiated in marathon talks that are out of public view. Controversial measures that would not be able to be passed on their own but are supported by key legislators or their favorite supporters are weaved into the budget The final text is then introduced in the two houses early the next morning. with the rank-and-file legislators given little to no opportunity to review the text. Instead of “aging” the bills for at least three days, the budget is then passed within a day of introduction via the Governor issuing “messages of necessity. This undemocratic process can lead one to sometimes wonder how differ this process is from that which occurred in the Soviet Union during the Cold War.

When Kathy Hochul ascended to the governorship this past August, she promised a new era of transparency in Albany. However, now that the state 2022 budget has been finalized, it appears the only change that happened was that there were two women in the “room” instead of three men. It may not have been the “Big Ugly” but this year’s budget negotiations were another nasty-looking sausage. (The term “Big Ugly” was popularized as a term for the state budget in the 1990s when the spending plan sometimes would not get done until August).

This dysfunctional process often results in error-prone legislation with unintended consequences. This appears to have happened with the extension of the Brownfield Cleanup Program (BCP). Because of sloppy drafting, the BCP revisions will likely hinder the ability of affordable housing developers to use the BCP, which by all accounts was not the intent of the Governor or the Legislature.

This is extremely unfortunate because a recent study by the NYU Schack Institute for Real Estate that was funded by the New York City Brownfield Partnership showed the 2015 amendments that created tangible property tax credit “gates” for NYC brownfield projects helped target BCP tax incentives towards affordable housing and environmental justice communities. In six years, the BCP facilitated  the construction of 6,400 units of affordable housing in NYC. Moreover, instead of being a drain on the state coffers, the study showed that every $1 of tax credits generated by the BCP result in $6.63 in private development. The report said that the tangible property tax credit alone produced a rate of return $7.81 of investment for every $1 of tax credit. Over the 18-year history of the BCP, the NYU study reported that there has been $17.61 billion in private investment and $2.77-Billion in Tax Credits.

First, the Good News.

  • The BCP was extended for ten years. This means that the New York State Department of Environmental Conservation (NYSDEC) may continue to receive new BCP applications through December 31, 2032. And instead of having to obtain a certificate of completion (COC) by March 31, 2026, applicants now have until December 31 2036.
  • There are now two new tangible property gates for NYC Brownfield Projects-Sites located within a disadvantaged community, (more on this later in the “bad news” section) as well as renewable energy projects.
  • More time for Claiming Tax Credits for On-Site Groundwater Costs- Applicants that obtained COCs from 7/1/15 to 7/24/21 now have 7 years instead of five years to claim this tax credit.
  • More Time to Claim Post-COC Site Prep Costs to Comply with Site Management Plans- Sites that were issued COCs issued from 7/1/15 to 7/24/21 now have 84 months (7 years) to claim these costs instead of 60 months (5 years)
  • More 5% “Bump-ups- Applicants may claim an additional 5% for tangible property tax credits for Disadvantaged Communities (if they are not claiming the 5% bump-up for Environmental Zone), conforming BOA sites for renewable energy facility sites accepted on and after 1/1/2023
  • More Time for Certain Projects to Put Buildings Into Service-For sites COCs that were issued COCs between March 20, 2010 and December 31, 2015, applicants will have 180 months instead of 120 months (an extra five years) to put their properties into service and qualify for the tangible property credit.
  • More Time for BCP Projects Impacted By Covid– For sites receiving COCs between March 20, 2010 and December 31, 2011, taxpayers will have 144 months from the date of the COC to put their building into service provided state Department of Taxation and Finance and the NYSDEC determine that the requirements for claiming the credit would have been met if not for the COVID restrictions imposed by former Governor Cuomo’s executive order.

And Now the Bad News for Affordable Housing Projects

The 2015 amendments creating the affordable housing tangible property tax gate providing that applicants have to provide documentation that the project qualifies as an affordable housing project any time prior to the issuance of Certificate of Completion (COC). NYSDEC was also tasked with developing a definition for affordable housing projects after consulting with the Division of Housing and Community Renewal. NYSDEC then issued a regulation providing that that a project will qualify as an “affordable housing project” when it receives a regulatory agreement regulatory agreement or legally binding restriction with a federal, state, or local government housing agency’s affordable housing program  defining the number of affordable housing units that must be dedicated to that project.

This was fine when housing authorities would issue the documentation at the construction loan closing. However, for certain types of projects, housing authorities are now waiting until a temporary certificate of occupancy to issue a certificate of compliance. until (i.e., after construction is complete) to which is typically well after NYSDEC issues COC. Because this put these projects at risk of losing their tangible tax credit eligibility, affordable housing developers turned to NYSDEC for help with this “timing” issue. However, the agency concluded it was bound by the statutory language and could only issue affordable housing determinations before the COC was issued.

To fix this glitch, the NYSBA Environmental and Energy Law Section with support from the NYC Brownfield Partnership, The Brownfield Coalition of the Northeast (BCONE), and a coalition of affordable housing and environmental advocates urged the Legislature and the Governor to amend the law to clarify that projects that received affordable housing certification after the COC would be eligible to claim the tangible tax credit. The proposed change was to change the definition of “affordable housing project” and to add clarifying language section 1-a of 27-1401 of the BCP legislation that allows projects to qualify as affordable housing projects any time until the developer files for the tangible property tax credit (i.e., after the COC is issued).

The budget bill contains the suggested change to the affordable housing in the form of a new  subsection (b). However, the corresponding change to section 1-a of 27-1401 was omitted. So, although it appears that the Governor and the Legislature wanted to promote the use of the BCP to help incentivize affordable housing, the failure to include the proposed language to fix the timing problem will now prevent many affordable projects from qualifying for the tangible property tax credit.

But this not the only problem created by the budget. The legislation now includes language that authorizes NYSDEC to exclude certain benefits from qualifying for the affordable housing determination after consulting with HCR. Presumably, this is directed at certain affordable housing projects that have what might be considered high annual median income percentages. In other words, NYSDEC theoretically now has the power to limit eligibility for tangible property tax credits to those portions of an affordable housing project units that are reserved for say 50% or 80% AMI.

New Tangible Property Tax Credit Gate for Disadvantaged Communities

To help direct more brownfield projects to environmental justice communities, the 2015 amendments created the Environmental Zone (En-Zone) gate which were based on census tracts. Six years of experience has demonstrated that while the En-Zone concept helpful, it is drawn too narrow and many deserving communities fall outside these zones- often times just a block away.

The NYSBA proposed to broaden the En-Zone by amending the definition to include potential environmental justice areas that have been mapped by NYSDEC and sites located in Brownfield Opportunity Areas (BOA).

The budget bill did not expand the En-Zone but added a new Disadvantaged Community gate but attached so many strings to this gate that it essentially eviscerates the intent behind the proposal. To qualify for this new gate, applicants will have to leap through three-hoops-namely (1) the site must be in a disadvantaged community, (2) be in a BOA and (3) be BOA-conforming project. There are not as many approved BOAs as there are disadvantaged communities. Moreover, a project generally cannot get BOA conforming certification until have a remedial action workplan is approved and then get it usually takes the Department of State  a year to make a conforming determination.

New $50K Application Fee

When BCP extension conversations began in the fall, NYSDEC expressed concerns that brownfield program was drawing resources from the superfund program. Since NYSDEC directs many potential superfund sites to the BCP, the significance of this resource drain is unclear. However, to accommodate NYSDEC  resource concerns, the NYSBA proposed an application fee of $5K for volunteers and $10K for participants (many state brownfield programs have application fees). The concept was that these fees could be used to fund more full-time NYSDEC employees.

Unfortunately, the Governor’s budget proposal turned this modest proposal into a potential program-killing $50K application fee that would be payable upon receipt of a notice of acceptance. Brownfield and affordable housing advocates vigorously opposed the size of the fee and asked that the fee be payable in connection with the issuance of the COC when the applicant has funds from a construction loan to help defer the impact of this fee.

The $50K fee takes effect immediately when the budget is signed into law. Since it applies when sites receive notices of acceptance, the fee could not only apply to new applications submitted after the effective date of the budget but also applications that have ALREADY been submitted but have not yet received a notice of acceptance!

To ameliorate the impact of the fee, the budget provides for a fee waiver based on a demonstration of “financial hardship”. However, the applicant must demonstrate that “but for” the remediation “would not be economically viable.”   DEC is also tasked to promulgate regulations to identify hardship factors. These include:

  • whether applicant has waived rights to tax credits(not sure that a statutory right to a credit is waivable, but maybe now it is);
  • location of the site in a Disadvantaged Community;
  • whether site is an affordable housing project;
  • assets and income of the applications;
  • other factors deemed relevant

The NYSDEC has been criticized by several courts that is has not been tasked by the Legislature to function as the state fiscal watchdog. Yet the agency continues to think its job is to limit the tax credits that the Legislature has determined are necessary to incentivize brownfield development. Based on its implementation history and NYSDEC’s “underutilized” definition, the agency will likely promulgate regulations that will be so stringent wake make this essentially eliminate the hardship waiver or make it available in only the rarest of circumstances.

Is There A Fix?

The most logical and clear solution would be for the Legislature to issue technical amendments  to fix the omissions and sloppy text in the BCP budget language. Of course, this assumes the text represent errors and not deliberate legislative choices. It is unusual for the Legislature to pass legislative corrections in the same term but if there will be another significant bill negotiated before the Legislature recesses such as reviving the 421-a, it might be possible to include these fixes in a “baby ugly” end of term bill.

Short of a legislative fix, it is possible that NYSDEC might work out an arrangement with housing authorities to issue some sort of pre-COC documentation to allow the agency to make an affordable housing determination  though it is unclear if the housing authorities would be willing do so because of their own concerns that developers might not follow through on their commitments. Perhaps the NYSDEC might be willing to issue amended COCs to reflect regulatory agreements issued post-COC. However, the agency has been adamant that it was not in the COC amendment business. And the NYSDEC might also develop some grace period for the start of the application fee or at least confirm the fee will not be imposed for applications submitted before the effective date of the budget.

If the Governor is serious having the BCP incentivize affordable housing and directing development to environmental justice communities, she could presumably ensure that her agencies figure out a way to work around the legislative constraints. However, she is no Andrew Cuomo who was known to impose his will on government.

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