NY Brownfield redevelopment: more clarity and tax deductions.

2006 was an active year as New York's Brownfield Cleanup Program (BCP) continued to take shape.

New York created the BCP in 2003 to provide greater incentives for the reuse and redevelopment of brownfields, defined as "any real property, the redevelopment or reuse of which may be complicated by the presence or potential presence of a contaminant." (1)

Certificates of completion, certifying successful remediation and eligibility for the BCP's important liability protections, are the gateway to the program's very substantial tax credits for the costs of remediation and redevelopment. Not surprisingly, the N.Y. Department of Environmental Conservation (DEC) has acted as a vigorous gatekeeper for the program. Since its creation, 318 applications have been made to the BCP. The DEC has approved 217 applications and awarded just 15 certificates of completion. (2)

New BCP Regulations (3)

The 2003 BCP statute provides the essential framework for the program, including basic eligibility requirements. The statute did, however, provide considerable discretion to the DEC and called for the agency to issue regulations. The DEC's new BCP regulations, finalized in December 2006, provide needed structure by address ing: (i) when BCP applications may be terminated by the DEC, (ii) how cleanup levels will be determined, and (iii) how public participation in the BCP will be managed, including grants to community groups.

The regulations also update the standards for pre-purchase due diligence. To achieve substantial liability protection at the federal and state level, purchasers of real property should consider ASTM Standard 1527-05, based on the U.S. Environmental Protection Agency's "All Appropriate Inquires" standard. Remediation Stipulation Program Many owners and developers consider the BCP too complicated and its public participation procedures too onerous. Others simply do not meet the DEC's eligibility rules and eligibility guidance for the BCP. The proposed Remediation Stipulation Program (RSP) would offer owners and developers an important new path to remediating and redeveloping contaminated property without participating in the BCP, while still obtaining some liability protection from the state. The RSP's liability protections would fall short of those in the BCP and, of course, the program would not provide the BCP's substantial tax credits.

The RSP's future is uncertain at the moment. The DEC seems to have gone back to the drawing board for the RSP regulations in response to a welter of criticism from community organizations and advocacy organizations, which found the new voluntary program overly permissive and at odds with the legislative intent behind the BCR 

Eligibility Guidelines

In my April 2006 article for Real Estate Weekly, I noted that the DEC's eligibility guidelines for the BCP have been subject to harsh criticism by practitioners. The eligibility guidelines provide a framework for the DEC's evaluation of whether sites meet the definition of brownfield, provided above. The DEC considers such factors as whether contamination exceeds applicable standards and whether the site would be developed without participation in the BCP. One of the key goals of the guidelines is to keep sites whose development is not genuinely hindered by contamination out of the BCP and away from the tax credits. The DEC's guidelines withstood their first major court challenge in November 2006. (4)

The developer of a new hotel in Soho, Manhattan sued the DEC for denying its BCP application and relying on the eligibility guidelines. The developer noted the soil contamination on its property, the $1,000,000 soil removal action it undertook and attacked the legal status of the "guidelines."

The court comprehensively rejected the this challenge and upheld the legality of the eligibility guidelines. It also upheld the DEC's determinations about the site, which was mildly contaminated and was already well into the development process before the BCP application was made. This court decision clarifies many doubts about the DEC's ability to keep mildly-contaminated and highly-valuable sites out of the BCP

IRS Deduction 198

Section 198 of the IRS Code provides a tax deduction on federal income taxes for "qualified remediation expenditures" that are incurred in connection with the remediation of "hazardous substances at a qualified contaminated site." (5) The Tax Relief and Health Care Act of 2006 extends this tax deduction until December 31, 2007 and expands the definition of hazardous substance to include petroleum products, a very common source of contamination on brownfields.

Section 198 now offers enhanced opportunities for synergy with the BCP, which offers its own tax credits and has always covered petroleum remediation.

(1) N.Y Envtl. Conserv. Law [section] 27-1403 (the BCP statute).

(2) 32 applications are pending, 37 were rejected and 32 were withdrawn.

(3) 6 NYCRR Subparts 375-1 (General Remediation Program Requirements), 375-3 (Brownfield Cleanup Program). and 375-6 (Remedial Program Soil Cleanup Objectives).

(4) 377 Greenwich LLC v. DEC, 2006 N.Y. Slip. Op. 26453 (Sup. Ct. N.Y. County November 15. 2006).

(5) 26 U.S.C. [section] 198.

By Christopher Rizzo, associate,

Carter Ledyard & Milburn LLP