Governor Eliot Spitzer's January 2008 budget bill proposes significant amendments to the Brownfield Cleanup Program Act (the "Act"). The budget bill proposes amendments to the Act in two stages. Interim amendments would become effective immediately and would expire upon enactment of permanent amendments.
One of the major goals of both amendments is to reduce the amount of tax credits available to developers that clean up and redevelop brownfields. The Act now allows developers to get large tax credits under the Brownfield Cleanup Program ("BCP") for the development costs of projects on brownfield sites that might have been developed even without such credits. This is in addition to credits for the costs of remediating the site. Under the amendments, the tangible property tax credit and the remediation tax credit will no longer be available for sites that, because of location and value, are likely to be cleaned up and redeveloped regardless of the availability of tax credits. The amendments also cap the amount of the tangible property tax credit available to eligible taxpayers.
The Tangible Property Tax Credit
The Act now includes a substantial tangible property tax credit for sites that have received a brownfield cleanup program certificate of completion of remediation ("COC") from the New York State Department of Environmental Conservation ("DEC"). The tangible property tax credit is 12 percent (or 10 percent in the case of an individual taxpayer) of the taxpayer's federal tax basis in qualified tangible property, which includes depreciable tangible personal property or real property such as buildings and structural components of buildings, that has a useful life of four or more years, was purchased by the taxpayer, is placed in service within three years of the issuance of the COC, and is principally used by the taxpayer for industrial or commercial (including the commercial development of residential housing) purposes. The tax credit may be increased two percentage points if the taxpayer remediates the site up to the DEC's highest remediation standards, and may be increased by an additional eight points if at least 50 percent of the site is located in an area designated by New York State as an "Environmental Zone," with high poverty and unemployment rates. This credit can be claimed for up to 10 taxable years after the date the COC is issued and may be claimed by a site lessee to which a COC has been transferred, as long as the lessee is not responsible for the contamination at the site.
Under the current Act, large tangible property tax credits have been claimed by developers that may have invested relatively little in the remediation of a site, or that may have otherwise redeveloped the site even in the absence of tax credits. In order to control costs associated with the tangible property tax credit, the interim and permanent amendments would cap the tangible property tax credit for eligible sites at ten million dollars and fifteen million dollars, respectively. In both cases, taxpayers accepted into the Brownfield Cleanup Program on or after July 1, 2007 or who have a COC transferred to them on or after that date would be subject to the cap.
Under the permanent amendments, subject to the fifteen million dollar cap, the tangible property tax credit would be 15 percent of the taxpayer's federal tax basis in qualified tangible property, but could be increased up to 50 percent depending on various factors, including the location of the site in an Environment Zone (an additional 10 percent), conformance to a local waterfront revitalization plan (an additional 10 percent), and utilization of "smart growth" practices (up to an additional 10 percent) such as green building construction, use or generation of renewable energy sources, and proximity to public transit.
In addition, the amendments would limit the transfer of tangible property tax credits. For taxable years beginning on or after January 1, 2008, a COC could be transferred to a taxpayer for purposes of eligibility for the tangible property tax credit only where no taxpayer has previously been eligible for that credit.
The Remediation Tax Credit
A remediation tax credit, consisting of a site preparation credit and an on-site groundwater remediation credit, is also available under the Act. The remediation tax credit currently is 12 percent (or 10 percent in the case of an individual taxpayer) of the combined (soil and groundwater) remediation costs and, like the tangible property tax credit, can be increased up to an additional 10 percent depending on the level of cleanup and the location of the site.
The interim amendments would not change the remediation tax credit. However, in an effort to encourage the best possible cleanup of a site, the permanent amendments would fix the percentage of remediation tax credits available. A site preparation credit for 25 to 75 percent of site cleanup and preparation (soil, surface water or sediment cleanup) costs would be available for eligible sites depending on the extent of the cleanup. An on-site groundwater remediation credit of 50 to 75 percent of cleanup costs also would be available, and could be increased by 10 percent for a cleanup that achieves the best possible remediation for the site, or by 25 percent where groundwater is remediated to unrestricted use standards. No cap would apply to the remediation tax credit.
Eligibility To Enter Into The BCP And Receive Tax Credits
Both the proposed interim and permanent amendments would require applicants for entry into the BCP to identify any other sites that may be associated with a singular reuse or redevelopment project, so that related sites are treated as one project for purposes of determining the amount of eligible tax credits.
The proposed interim amendments would also allow the DEC to prohibit sites from entry into the Brownfield Cleanup Program if the DEC has determined that the reuse or redevelopment of the site would likely occur without tax credits, based on factors such as the extent, difficulty and cost of on-site remediation, the anticipated impact of remediation on the value of the property, and local economic circumstances.
The permanent amendments would separate eligibility for participation in the Brownfield Cleanup Program from eligibility for tax credits. Persons not seeking tax credits would be eligible to participate in the program in connection with any type of site and would obtain a release of liability after performing a cleanup. However, eligibility for tax credits would be premised upon the need for tax credits to promote reuse or redevelopment of the site. Eligibility would be determined by the DEC in consultation with the New York State Department of Economic Development and the New York State Urban Development Corporation, i.e., the Empire State Development Corporation. The factors to be considered would include the extent and difficulty of remediating on-site contamination, the anticipated cost of on-site remediation, the anticipated impact of remediation on the value of the real property, and the economic circumstances of the community and municipality in which the real property is located. If, based on consideration of these factors, reuse and redevelopment are deemed to be likely without tax credits, no tax credits will be allowed.
The DEC has attempted to limit entry into the BCP under the current Act in an effort to ensure that only the most deserving cleanups and redevelopments receive potential tax credits. The DEC has issued site eligibility guidance and has in the past used that guidance as a basis for determining whether or not to admit sites into the BCP on a case by case basis. However, in December 2007, a decision of the New York Supreme Court in Monroe County, Lighthouse Pointe Property Associates LLC v. New York State Department of Environmental Conservation, et al. , Sup. Ct. Monroe Co., Index No. 2007/9731 (Ann Marie Taddeo, J.), sent the DEC into a panic when the court held essentially that the DEC was without discretion to deny an applicant entry into the BCP where contaminants in excess of DEC's soil cleanup objectives ("SCO") were present at a site. The court rejected the DEC's argument that the site did not belong in the BCP because the SCO exceedances were minimal and, thus, not likely to complicate development of the property. As a result of that decision, the DEC has been reluctant to act on any BCP applications. The explicit language of the interim amendments, allowing the DEC to prohibit sites from entry into the BCP program if reuse or redevelopment is not dependent on tax credits, and the permanent amendments, granting the DEC the express authority to allow entry into the BCP but deny eligibility for tax credits in certain situations,would break this logjam.
The amendments would shift the greater financial benefits of the BCP to remediation rather than redevelopment and construction activities by limiting eligibility for tax credits where the reuse and redevelopment of a site might occur regardless of the availability of tax credits, limiting the amount of the tangible property credit and increasing the amount of remediation tax credits available. The amendments would also make program entry easier, given that eligibility for tax credits would not be automatic for all program participants. At the same time, the State liability release would still be available to any participant that performs a cleanup to the satisfaction of the DEC.
Charles S. Warren is the Chairman of the Environmental Group at Kramer Levin Naftalis & Frankel LLP. His practice includes matters under the Clean Air Act, the Clean Water Act, the Toxic Substances Control Act, the Superfund law and other hazardous waste statutes as well as OSHA, environmental auditing, environmental impact review, corporate due diligence, permitting and enforcement procedures and litigation. Karen L. Mintzer is a Special Counsel to the firm. Her practice concentrates on matters arising under federal, state and local environmental laws and regulations. She advises clients subject to various environmental impact and land use review processes and litigates claims relating to the environmentalimpacts of development projects. She also counsels clients as to various permit and reporting obligations.