Re: [CPEO-BIF] Brownfield Subsidies

["Peter B Meyer" <pbmeyer@louisville.edu>]

I’m responding to Larry Schnapf’s last message, with an eye to the
rest of you … I’m repeating his notes here, inserting my comments in
[* starred brackets *] so that you all can see where he and I agree and
where we part company. 

I conclude with a recommendation for revising the NY State program that
yields all the argument to Larry’s claims, even where I have contested
them.

******** 

thanks all for your comments. Not being an economist, I was just
wondering if there was some formula that can be applied to figure out
the taxes that are likely to be thrown off by a project without going
into a detailed study if the project results in a "net" benefit to the
state as a whole. 
 
For example, if we know a developer will be building a $200 million
project, arent there multipliers are other metrics that can be used to
figure out the jobs created [* no, since even for a single use – say
retail – the type of store determines how many employees there are per
square foot of area … and the same applies to sales taxes from the
retain establishment. Obviously, housing developments produce fewer
future jobs than new business facilities. *]
, income taxes generated [* would first depend on construction payroll
which is not directly determinable, especially with regard to mitigation
activities, and post-construction would have the same problem relative
to facility use as above *]
, sales taxes from raw materials used and sale of condos, property
taxes from the development, etc. [* all these depend on the current tax
rates, which may change with new development – and very commonly are
waived or reduced as a development incentive, such as in most states’
”enterprise zones” *]
This might simplistic but at least it presents an estimate of some of
the benefits thrown off by a project that can offset the tax credit
liability generated by the project. [* the issue in the approach you are
pursuing, Larry, is not being “simplistic,” but failing to calculate
any of the indirect and not immediately monetizable effects of a
project. In failing to, for example, consider the benefit of reduced
health care costs to a community resulting from a site mitigation, you
may UNDER-subsidize. My argument is that the narrow direct monetary
impact calculation fails to allocate efficiently, not that subsidies are
too high. *]
 
I do not think that the creation of an environmental fund for use by
the state to acquire, remediate and then sell property to developers
makes any sense. First, the state cannot cleanup as many sites as
developers can and certainly not in the time frame required by the
market. The Wollman Rink in Central Park was a perfect example. The City
tried for years to get it reconstructed. Trump stepped in, hired
contractors that were incentivized to complete the work within certain
time periods (and without having to do the bidding procedures) and had
the rink built in a year. When the state gets involved, the low bids
frequently up with sloppy and sometimes tragic results like what
happened with the Boston Harbor tunnel. [* I agree that no state does
not now have an agency or mechanism to do what I suggested. But I
disagree that the state could not “cleanup as many sites as developers
can.”  If a special agency (not just “a fund”) were created, it
could be given the powers you ascribe to Trump relative to New York (the
City, for our non-New York City readers). All the requirements for bid
procedures by public agencies are a matter of state law, not
constitutional requirement, and could be modified if the will were
there.  You tell the story of the Boston Harbor Tunnel. I can tell
stories about arena roofs collapsing, terraces falling in hotels and
other shoddy private developments. Anecdotes do not guide us well.*}
 
Having done a numerous brownfield sites across the country either
representing developers or lenders, my experience is that tax credits
are the most efficient
and fastest way to redevelop contaminated
properties. Loans and grants may be ok for local governments to perform
assessments but tax credits work great for developers since they dont
have to deal with bureaucratic delays and inadequate staffing, and the
developers along with their contractors are incentivized to get the
project done quickly so they can then file for their financial benefits.
[* Your argument in favor of tax credits is 100% accurate for large
scale, well-financed developers with ready access to credit. The
majority of the brownfields in the US are under 1 acre in size. The
developers you work with are not likely to be interested in such small
properties, and the developers who are may need financial assistance
long before they earned the returns against which they would use their
tax credits. We thus need additional subsidy/financial incentive tools
for the smaller scale projects. One size does NOT fit all in
brownfields, as the discussion has already shown with respect to
brownfields in different real estate markets. *]
 
Also, there was a comment about subsidies and trivial level
contamination. Regulators and environmental professionals may view some
amounts of contamination as trivial but contamination still sends
shudders through the development and lending community because of the
cost and timing uncertainty. [* The uncertainty over cost and timing,
which can exist even when a site appears to have minimal contamination
was precisely the reason I suggested that the state take on the cleanup
role. Then the taxpayers would not have to compensate developers for
such risks and would, in effect, insure themselves from over-subsidizing
by spreading the risks of problems over far more sites than any one
developer would take on. *]
 
Despite liability reforms, many developers are still nervous about
touching even slightly contaminated properties. I've been involved in
situations where I have spent more than a year explaining the benefits
of a state brownfield program before a client was willing to pull the
trigger on a project. These projects are viewed as risky and high risk
money demands high rewards. [* Precisely my point, Larry – that’s
why a state operation designed to accept and control  the risk would
cost taxpayers less than subsidizing private risk taking. *] 
With construction costs increasing 5-10% a month, any delays can have
devastating effects on the rate of return and make projects
uneconomical. [* 5-10% a MONTH? Come on, Larry, we’ve had occasional
spikes in construction costs but costs are not rising at 50+% a year.
Your concern about delay is valid even if construction costs rise 5-10%
a year, so why exaggerate? *]
 
And of course, it seems each year we become concerned about more types
of chemicals at ever lower levels of exposure. Thus, I would never
underestimate the impact of "trivial" amounts of contamination at a site
or the incentives needed to convince developers to take a risk on a
contaminated property instead of a nice undeveloped parcel or land with
a fairly benign use.   [* Again, I agree on the problem, and I have my
own horror stories about problems encountered in non-profit organization
redevelopment efforts than ran afoul of changing standards. However, I
do not have any evidence in hand to convince me that guaranteed
subsidies that may amount to many multiples of the predicted – or,
worse yet, actually experienced – cleanup costs are really needed to
subsidize brownfield redevelopment in strong real estate markets. *]

********

A PROPOSAL 

Granting all of Larry’s points, including his assumption that no
state could possibly be as efficient in handling risk as private
developers, we can derive a set of principles for a far more
cost-efficient and effective subsidy system using tax credits than now
exists in New York:

(1) Guarantee a maximum tax credit that is in proportion to total
project costs, since some of those costs (purchase price paid, for
example) may have to be carried for unexpect
edly long periods of time if
contamination results in unexpected delays.

(2) Tie the level of the guarantee to the strength of the local
property market, to allow for the difference in attractiveness of
development investments in the New York City area as compared to upstate
New York (and the equivalent differences exist in most other states);
the guarantee should be higher in weaker markets. 

(3) Make the actual tax credit that will be available a matter of
calculation after state approval of the completed site mitigation. The
credit would be based on factor such as (a) expected site mitigation
costs, (b) the ratio of the experienced site preparation costs to total
project costs, (c) the extent to which actual site mitigation costs
exceeded expected costs (including in the calculation costs associated
with delays, loss of any premiums available from intended users for
prompt delivery or penalties for delayed delivery of premises), (d) an
additional allowance for market conditions documented per state
specification in the initial application for a tax credit, thus
determined prior to project initiation, where such the allowance would
be a proportion of total project costs, (e) a further allowance
adjusting for the number of years the developer would have to file taxes
before collecting the full credit due (since the delay may be due to
site mitigation problems).   
Thus the minimum credit would be known to the developer from the
beginning, and the guarantees of additional credits to offset unexpected
costs would also be known and thus would compensate for the exceptional
uncertainty of a brownfield project. In the tax credit calculation under
item (3) above, elements (a), (b), and (c) would be designed to
compensate for the risks and uncertainties associated with brownfield
site preparation, element (d) is the economic development, not
brownfield, subsidy, and element (e) is basically an allowance for the
time value of money, that is, interest.

There is one piece of information the developer would have to provide
under this logic that is not now required to apply for the NY state
subsidy: documentation of actual site mitigation costs. Since the
recipients of the tax credits are requesting that they be paid monies
out of state coffers, it is not unreasonable to request that such
information be provided. Participation in the brownfield tax credit
program would always be voluntary, so there is no issue of a forced
invasion of business privacy in such a state request. My one qualm in
this scheme involves auditing and approving the claims about mitigation
costs – and I would recommend that those claims, with associated
documentation, be reviewed by both state employees and a private
auditing firm, selected competitively every 2-3 years, to assure
objectivity and conformance to private sector accounting standards.

The actual guarantees and subsidy levels that are appropriate will
always be a matter of political debate, and I won’t enter into that
discussion here. This proposal is a response to a particular NY State
scheme that is now under review, and it may not be appropriate for other
jurisdictions. 

The issue of how to support small scale brownfields (the under 1 acre
or even under 0.5 acre sites) remains unresolved under this scheme. 

Peter



Peter B. Meyer
Professor Emeritus of Urban Policy and Economics
Director, Center for Environmental Policy & Management
University of Louisville
WEB:  <http://cepm.louisville.edu>
- - - - -
Director of Applied Research
Center for Public Leadership and Public  Affairs
Northern Kentucky University
- - - - - - 
3205 Huntersridge Lane
Taylor Mill, KY 41015
502-45-3240 (cell)

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