Last week, New York Governor Andrew Cuomo vetoed a bill that would have extended the current Brownfield tax credit program for fifteen months beyond its expiration at the end of this year.  The Governor apparently wishes to use the possibility that the tax credits will expire as an impetus for broader and longer-term reform that his Administration seeks.  That proposed reform has its own problems, however, and where this will all come out is unclear, which is not optimal for Brownfield redevelopment.

New York State has one of the most successful Brownfield redevelopment programs in the nation and there is little doubt that the very generous tax credits provided to redevelopers of these former contaminated sites is a big reason for this success. Those credits expire at the end of 2015. Critics of the program, however, have argued that the credits are overly generous and include too many projects that would have been developed and remediated even absent the tax credits.  It is challenging to say the least to figure out which Brownfield sites would not have been developed “but for” the credits.

Last year, in the face of this criticism – and with the cost of the program undoubtedly in mind – New York Governor Andrew Cuomo proposed a reform of the Brownfield credits in conjunction with a ten year extension of the program.  That effort failed due to an inability to agree on the elements of the proposed reform and because of a demand by the New York State Assembly that any extension of the tax credit program be adopted in conjunction with a similar extension of debt authorization for New York’s enforcement-oriented Superfund cleanup program.  Given the logjam and the imminent expiration of the tax credits, the legislature adopted a fifteen- month extension of the current tax credit program as a temporary fix that would avoid uncertainty for current participants in the program – where cleanups often take two or more years – while a longer term solution was worked out in 2015.  Last week, Governor Cuomo vetoed the short-term extension.

Last year, the Administration sought reforms that included a proposal to create a “two-gate” approach to Brownfield redevelopment, where entry to the program would be relatively easy, but entitlement to the lucrative Brownfield Redevelopment Credit would not be automatic and subject to additional criteria.  The Brownfield Redevelopment Credit allows developers to recoup ten percent of overall development costs to a maximum of $35 million for residential or commercial projects ($45 million for industrial projects) or three times the site preparation and cleanup costs, whichever is less.  The cap was added to the program in a reform adopted in 2008 in order to ensure that the redevelopment credit was not open-ended.

Under the two-gate approach proposed by the Cuomo Administration last year, an applicant would not be entitled to the redevelopment tax credit unless it could show that the Brownfield site had been vacant for 15 years, tax delinquent and vacant for ten years, or had a negative value due to the contamination. A site could also be eligible for tax credits if it could be shown to be a priority economic development project that would create a specified number of jobs depending on the end use. The specifics of that proposal were previously described in our blog post last year.

There are numerous problems with the Administration’s suggested reform that would likely lead to a substantial reduction in the number of sites that enter the program.  The very high vacancy threshold, or the requirement that a property’s valuation is “upside-down,” would essentially eliminate most sites from eligibility for the tangible property credit.  The current Brownfield program administered by the New York State Department of Environmental Conservation (DEC) results in substantial additional costs and, more importantly, delay in a project redevelopment timeline, compared to performing a cleanup without DEC oversight outside of the voluntary Brownfield program. Without the prospect of the redevelopment credits it is extremely unlikely that many applicants would self-impose the extra cost and time delay. Furthermore, the reform adds uncertainty to the program and the prospect of litigation over undefined terms such as the meaning of “vacant” or the value of an “upside-down” property. Finally, the Brownfield redevelopment environment in 2015 is far different than 2003, when the program was first adopted.  Back then there was a perceived need for a program that would result in a governmental sign off to enable a developer to obtain financing to develop a former contaminated site.  Today, a robust environmental insurance market often obviates the need for a developer to obtain a governmental release as a requirement of financing. Thus, the prospect of a Certificate of Completion under the Brownfields Program is unlikely, standing alone, to be a necessary impetus to enter the program.

It remains to be seen how this year’s legislative session will play out with regard to Brownfields reform.  The imminent expiration of the redevelopment tax credit plainly creates an impetus to do something, but the problems with the two-gate approach and the potential continued insistence on linking Brownfields reform with additional borrowing for Superfund cleanups create substantial challenges to achieving extension of the tax credit.  The Republican-controlled State Senate has been more supportive of the current program, while the Democrat-controlled State Assembly remains a question mark. It also remains to be seen whether the Cuomo Administration modifies last year’s proposal to provide less uncertainty and greater access to the redevelopment credit.  A competing reform proposal proposed by a number of stakeholders seeks to simply reduce the $35 million cap, while permitting higher tax credits for sites in high poverty areas or for priority economic development sites.  The only thing that is certain is that there will be a great deal of attention paid to the New York Brownfield Program in 2015.