As described in our previous blog post, this spring New York enacted amendments to its Brownfield Cleanup Program (BCP) to, among other things, make eligibility for the lucrative tangible property tax credit more stringent for properties located in New York City. Under the amended law, New York City-based developments will no longer be eligible for such credit unless the applicant meets at least one of the following eligibility requirements:
- at least 50% of the project site is located in an impoverished area known as an “Environmental Zone”;
- the site is “upside down”; i.e., it costs more to remediate than it would be worth as clean;
- the site is an “affordable housing project”; or
- the site is “underutilized.” The amendments made clear that the new eligibility criteria would take effect on the later of July 1, 2015 or the date on which the New York State Department of Environmental Conservation (NYSDEC) issues proposed regulations defining the terms “affordable housing project” and “underutilized.” Well, that date is now known because NYSDEC issued proposed regulations in early June, meaning that the new criteria will take effect on July 1st. As discussed below, NYSDEC has proposed to define “affordable housing project” mostly in terms of existing programs that will likely make this eligibility criterion easy to apply. By contrast, the agency has defined “underutilized” in such manner that will make it virtually impossible for any properties located in New York City eligible for the tangible property tax credit.
Affordable Housing Project
Under NYSDEC’s proposed regulations, the term “affordable housing project” is defined broadly to mean a residential use or mixed residential use project that must include “affordable residential units and/or affordable home ownership units.” To qualify as an “affordable” rental project or home ownership project the proposed development “must be subject to a federal, state or local government housing agency’s affordable housing program” or a legally binding agreement that defines a percentage of rental units to be dedicated to tenants “at a defined maximum percentage of the area median income.” “Area median income” is defined as the area median income for the primary metropolitan statistical area, as determined by U.S. Department of Housing and Urban Development (HUD). Thus, any proposed development project that includes a component of any government affordable housing program administered by HUD, the New York State Department of Housing and Community Renewal, or the New York City Department of Housing Preservation and Development would qualify as an “affordable housing project,” including market rate developments that participate in the so-called “80/20 program. Of note, although the proposed definition does not include a requirement related to the minimum number of units or square footage percentage dedicated to affordability, many of the incorporated programs, such as 80/20 mentioned above, do have such minimum requirements.
By contrast to its proposed “affordable housing project” definition, NYSDEC proposed an extremely restrictive definition of “underutilized” that would make eligibility under this criterion highly unlikely. Reflecting what can only be viewed as disagreement with the existence of any underutilized properties in New York City, the agency would limit eligibility to a proposed development that meets all of the following criteria: (1) the applicant must receive a certification from the City of New York that the development includes a building or buildings that , for at least five years prior to submission of the BCP application, used no more than fifty percent of the permissible zoning floor area for that site; (2) the proposed “sole” use of the Brownfield site must be something other than residential; (3) the applicant must receive a certification from the municipality that the site could not be developed without “substantial government assistance”; and (4) the applicant must receive a certification from the municipality that either tax payments have been in arrears for at least five years, that a building at the site is presently condemned or presents a public health or safety hazard, and/or the proposed use is in whole or in substantial part for industrial use. The proposed regulations go on to define “substantial government assistance” to mean a substantial loan, grant or land purchase cost exemption or subsidy; or for industrial properties, a low cost loan.
The proposed definition of “underutilized” is virtually unworkable for New York City-based developments. Under the plain language of the regulation, no residential or mixed-use developments would be eligible for the tangible property tax credit because the “sole” use must be non-residential. There are very few developments in New York City that are strictly commercial, and even fewer that could be developed as industrial. Indeed, the fourth criterion – requiring that the site be in tax arrears, present a public health or safety hazard, or propose a use that is substantially industrial – would appear aimed at ensuring that hotel and retail projects have trouble qualifying. To make matters worse, the proposed regulation does not offer any definition of what uses would be deemed “industrial” by reference to zoning categories or otherwise. Thus, not only is the definition of “underutilized” extremely limited, it creates uncertainly with respect to what appears to be the only available development category. Even if a developer believes it can meet the criteria for “underutilized,” the regulations assume a municipal process to “certify” the requisite conditions, and no such process exists at present in New York City for an applicant to obtain such certifications in New York City. Possible candidates for a certifying agency would be the Department of City Planning of the New York City Economic Development Corporation. Thus, not only would the criteria be virtually impossible to meet, the regulations envision an additional bureaucratic process that is likely to act as a further disincentive to developers.
At the very least, NYSDEC’s definition of “underutilized” appears to be contrary to the intent of the Legislature. Because the recent amendments do not define the term, a court would very likely examine its plain meaning by reference to its dictionary definition. For example, the term “underutilize” is defined under the Merrium-Webster Dictionary to mean “to utilize less than fully or below the potential use.” In other words, the concept of “underutilized” when used in the context of a development project is focused on a site’s “potential use,” which is typically determined by applicable zoning requirements. However, NYSDEC’s definition of “underutilized” bears no relationship to a site’s potential use in this regard. Instead, the agency has proposed to define the term with specific end uses in mind (mostly industrial) and would preclude mixed use developments, irrespective of applicable zoning requirements. In any event, if these regulations are adopted as written, and survive legal challenge, it is our view that there will be few, if any, projects that qualify as “underutilized” and thus eligible for tangible property credits in New York City.
 The amended law otherwise left unchanged the calculation of the tangible property tax credit, which equals the lesser of (i) 10% of development costs up to a ceiling of $35 million for residential projects ($45 million for industrial), or (ii) three times the cost of site preparation and environmental remediation.