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How Dirty Is Dirty? Court of Appeals Says Even Minimally Contaminated Sites Can Qualify for New York Redevelopment Incentives



March 9, 2010

The tables were turned in a case decided by the New York Court of Appeals on February 18. In a reversal of their usual roles, an upstate developer argued that its properties were contaminated, while the Department of Environmental Conservation (DEC) argued that the sites did not require remediation. The court agreed with the developer, and the result could mean significant tax credits for potential redevelopers of contaminated sites throughout the state.

At issue in Lighthouse Pointe Property Associates LLC v. New York State Department of Environmental Conservation, No. 3 (N.Y. Feb. 18, 2010), was whether two parcels that Lighthouse hopes to turn into a $250 million mixed-use development qualify for various benefits under the DEC’s Brownfields Cleanup Program (BCP). The BCP was created by the Legislature in 2003 to spur redevelopment of sites where contamination has stood in the way by providing financial incentives and liability protection. It seeks to undo some of the unintended consequences of legal requirements that have been successful at forcing the cleanup of many dangerous sites but which discourage the redevelopment and reuse of many other sites. Liability regimes that impose strict, joint and several liability on landowners for cleanup costs, combined with uncertainty about the potential costs of such cleanups and fears about discovering additional contamination, make developers reluctant to purchase even slightly contaminated sites, and lenders reluctant to extend credit. The result: hundreds of thousands of abandoned, idled, or under-utilized properties across the country, especially in urban areas, which could generate jobs and tax revenues if they could be redeveloped.

As originally enacted, the BCP offered a redevelopment tax credit of up to 22% of covered costs. Because these covered costs included many site preparation and construction costs, sites with very small cleanup costs could qualify for very large tax credits. In 2008, amid concerns about exposure to BCP tax credits totaling over $3 billion, the Legislature established a brief moratorium on accepting new sites into the BCP, and amended the program by tying the level of financial incentives available to the thoroughness of the cleanup, and capping one component of the tax credits.

Even after the 2008 amendments, the BCP provides for significant financial incentives as well as liability protection in the form of a release and a covenant not to sue granted by DEC after it certifies that the cleanup is complete. These incentives are available to the developer of any brownfield site, defined in the statute as “any real property, the redevelopment or reuse of which may be complicated by the presence or potential presence of a contaminant.” (Sites that are on the state’s Registry of Inactive Waste Disposal Sites or on the federal National Priorities List are statutorily excluded from the BCP.) Participation in the program appears to have been hindered by DEC’s tendency to reject applications for sites that appeared to meet the statutory criteria but were not contaminated enough to warrant agency attention.

Lighthouse’s plans concern two parcels located along the Genesee River in Irondequoit, near Rochester, one formerly used as a city landfill and the other containing various waste and debris used as fill material. In requesting that the parcels be accepted into the BCP, Lighthouse cited exceedances of certain soil cleanup levels and elevated levels of contaminants in soil vapor on the two properties, and numerous difficulties related to the contamination. DEC rejected both requests, concluding that the contamination levels were not high enough to warrant any remediation, and that Lighthouse’s planned redevelopment was complicated by prior use as a solid waste landfill rather than the presence of contamination. Lighthouse filed suit to challenge DEC’s determination and won in the trial court, but the Appellate Division reversed, setting the stage for the Court of Appeals.

Finding that it did not owe DEC the deference usually shown an administrative agency because the question presented was one of “pure statutory reading,” the Court of Appeals held that DEC had acted arbitrarily and capriciously and contrary to law in rejecting Lighthouse’s requests. The statute, said, the Court, sets a very low threshold for BCP eligibility: a property is a “brownfield site” and thus eligible for the BCP as long as a contaminant is present and this presence makes the property’s redevelopment more difficult. Lighthouse’s parcels clearly satisfied both criteria, and DEC’s decision not to require remediation did not change that result. Indeed, the Court found, without a release from liability — one of the benefits of performing a cleanup under the BCP — neither Lighthouse nor any lender could be certain that DEC would not require a cleanup, or a more thorough cleanup, in the future.

There is more than a little irony in the Court of Appeals’ decision. Developers and landowners often find themselves in debates with regulators over “how clean is clean?” and arguing that contamination levels on their sites do not warrant remediation, or that past cleanup efforts were sufficient, only to be told that more, and more expensive, work is necessary. In Lighthouse Pointe Property Associates, the Court of Appeals has read the BCP legislation to say that what’s good for the goose is good for the gander. The decision should make it easier for developers to take advantage of the BCP and return blighted, abandoned properties to productive use, with obvious benefits for surrounding properties and the community as a whole.

For more information on New York’s Brownfields programs, click here.