Brownfield and Renewable Energy Property Tax Credits for Real Estate Development

Amy, take it away.

Mimi Raygorodetsky: Great. Thanks so much for having me. I'll be providing an overview of the New York State Brownfield Cleanup program and I'm going to advance the slide. There we go. The Brownfield Cleanup Program. The goal of the New York State Brownfield cleanup program is to encourage private sector cleanup and redevelopment of brownfields as a mean to revitalize economically blighted communities. The program is overseen by both the New York State Department of Environmental Conservation and the New York State Department of Health. The program was started in 2003 and has had three iterations since that time. The BCP as we call it, is really not specifically meant for sites in New York City, which would otherwise be redeveloped absent the credits and incentives that are provided by the program, but it's more meant for sites outside of urban areas where developers can easily choose between brownfield and greenfields. So I'm going to start by explaining what is a brownfield?

A brownfield is a property that is underutilized or abandoned and where the potential or actual presence of pollution complicates its reuse, redevelopment or expansion. I think it's very helpful to look at the history of industry to understand where brownfield are located. Brownfield are really located where industrial operations are or were sighted, and prior to the advent, prior to the invention of cars and trucks and the construction of highways, manufactured goods were transported by barge. So industry was historically cited along rivers and other water bodies. Industry also needed to be cited proximate to urban areas because industry needs labor, so cities along waterways like New York City, Albany, Syracuse, and Buffalo have a very high concentration of Brownfield as you can see from this map. Another important thing to realize is that prior to the advent of environmental laws in the late 19 hundreds, industrial operators and manufacturers disposed of wastes as easily as possible, so they generally dumped excess waste into on land and in waterways, and that is really what created Brownfield in these areas. In addition, in urban areas, there are also brown fields such as dry cleaners, gas stations and auto repair facilities.

This is a picture of the Goana canal in the early 19 hundreds. It's located in Brooklyn and it was historically the most active waterway in the United States. As you can see, it is lined densely with historical industrial operations. All of those industrial operations fell into disrepair in the middle of the 19 hundreds, primarily because cars Andres were invented and the BQE, the Brooklyn Queens expressway was built transport goods inland. As a result, the Gowanus Canal was recently named a Superfund site because of all the historical dumping. Additionally, the city of New York chose to rezone the Gowanus area in order to effectively further incentivize the redevelopment of land along this water for higher and better uses, and that has resulted in a real boom of Brownfield's redevelopment along this waterway.

This I think is a really great picture of a brownfield and an urban area. Langan was working not too long ago for a high profile developer in the heart of New York City and we opened up the sidewalk and found this so brownfields can really be everywhere where there's a history of industry. Now, in order to qualify in order for a piece of property to qualify as a brownfield site, it must have contamination. So brownfield sites are any real property where a contaminant is present at levels exceeding soil cleanup objectives or other health-based or environmental standards, criteria or guidance adopted by DEC that are applicable based on the reasonably anticipated use of the property. There are some exceptions. If you have a site that you believe is a brownfield in New York state, the easiest way to really understand if you have an eligibility claim would be to do a phase one environmental site assessment to evaluate whether contamination exists or may exist.

And if you don't have analytical data to support the evidence of contamination, then you would need to do a phase two environmental site assessment where you actually put holes in the ground and test soil, groundwater and soil vapor. If the data identifies contamination, then you can apply your site to the Brownfield Cleanup program. The application process has quite a few steps. Basically it's completing an application, submitting it to the state where it undergoes a completeness review. Then there is a public notice period of 30 days and then an eligibility determination is made, and if the eligibility determination is positive, then the applicant would sign the brownfield cleanup agreement and send a $50,000 check into the state to cover their costs for administrating this program. The circle is really around the public notice period here just drawing to your attention that it is not a process that happens behind closed doors, it is a public process.

Now the Brownfield cleanup program process also has very many steps, but it really boils down to an investigation phase and a remedial phase. During the investigation phase, which is about the first half of this scrape flow chart, we have to do pretty extensive testing of soil, groundwater and soil vapor to determine the nature and extent of contamination on a site in soil, groundwater and soil vapor. Once we have that data, we can work with the development team to understand what is going to be built at and below grade and then we design the remedy. Our goal is to have maximum overlap between construction measures and remedial measures so that those construction measures then qualify for the brownfield tax credits.

In addition to tax credits, a lot of our clients enter into the Brownfield Clea Nut program for another benefit, which are the liability releases for participants who are parties that did not put contamination into the ground and that participants are also owners that followed due care, meaning they didn't exacerbate contamination or they put a stop to contamination on their site. There is a release of liability or release of obligation to investigate or remediate off property. This can be very helpful for owners of land where contamination extends offsite in a groundwater plume that participant or that, sorry, that volunteer would not be obligated to remediate offsite. In addition, once the program is complete and the site is remediated, New York State offers a New York State would issue a certificate of completion, which offers a limitation of liability to the state of New York for contamination addressed under the Brownfield cleanup program. And I want to apologize. This slide should say for volunteers, not participants. So I apologize for that and now I will turn it over to Erin Rogers to talk further about the tax credit benefits.

Aaron C. Records: Thank you, Mimi. So I will be handling the Brownfield tax credits and then after that I will be passing to my colleague Kevin Sales. So Mimi just give you a good overview of all the environmental considerations in the Brownfield cleanup program process. Our firm really helps with the tax credit specifically, which kind of overlay that. So as Mimi mentioned, there are different generations of Brownfield cleanup tax credits. The program started back in 2003 and the current generation was a function of a major law change back in 2015 and is still going to this day. I think good thing to note is there was a 10 year extension that was done just a couple of years ago. So as it currently stands, in order to be eligible for brownfield redevelopment tax credits, you need to get accepted into the Brownfield Cleanup Program by December 31st, 2032. And in order to claim the credits, you also need to get the certificate of completion completing the cleanup by December 31st, 2036.

So very high level, what are the Brownfield redevelopment tax credits? They are a fundable New York State tax credit refundable meaning that the tax credits are first used to offset New York state income tax liability of the taxpayer that's claiming the credits and then after that it is treated as an overpayment of tax. It's treated as if you actually gave New York State more money than they actually needed, so they can refund that to you as actual cash. One thing to note about that is because it's an overpayment of cash, New York State doesn't have any tax implications for that refund. The federal government on the other hand has litigated this and the IRS will tax the refunded amount of the tax credit.

So the Brownfield redevelopment tax credit is actually comprised of three distinct components. There is the site preparation credit component, the onsite groundwater remediation credit component, and the tangible property credit component. Each of these credit components is a function of the formula you see here. There is a certain qualified costs kind of bucket, the basis for the credit multiplied by an applicable percentage as outlined in the tax loss section 21, and that creates a credit amount. That credit amount is subject to other limitations that we'll discuss. High level, we're going to talk about site preparation, credit component and tangible property credit component. Onsite groundwater we see less often but functions more or less. Very similarly to the site preparation credit component. So site preparation credit component is the remedial credit component. The work that Mimi was mentioning about the investigation, the remediation, everything done under all these different work plans to actually clean up the site and receive a certificate of completion from the Department of Environmental Conservation.

Those are the costs we're talking about for that. Eligible costs for the site preparation credit component include capitalized costs that are necessary to implement the site's investigation, remediation or qualification for a certificate of completion. So as Mimi mentioned, there's an investigation report. There is remedial action work plan. There's a bunch of different work plans and then there's the work that's needed to be done including a final engineering report in order to receive a certificate of completion. That's more or less what we're talking about here. There's also an enumerated list of certain costs that are pretty much they are included. This includes things like environmental consultants fees, environmental attorney's fees, demolition necessary for the site excavation and others post certificate of completion. Costs can also be included, but that is a separate definition. Those costs have to be necessary for compliance with a certificate of completion or a remedial program defined in a certificate of completion.

This typically means say you have a track foresight that is subject to a site management plan where there's engineering controls that need additional work or maybe additional testing is needed after the COC is completed. That's the kind of cost it's intended to capture. There are some limits on what costs may be eligible. For example, for cover systems, this is kind of an ongoing thing right now because the Department of Environmental Conservation has regulations that are currently pending. I believe they should be finalized early 2025, so there's a discussion there. One thing that's interesting to note is as Mimi mentioned, the ECP itself is A DEC and health kind of program. The credits themselves are run through the Department of Taxation and Finance, so this discussion about what costs are eligible or not, that's a discussion that's going to with the Department of Taxation and Finance.

In light of the remedial documentation, the applicable percentage for the site preparation component varies anywhere from 22% to 50%. It's based on what track is used and what the end use is or the site cleanup use. So the high end 50%, that's a track one unrestricted use. You clean up everything. It can be used for anything that's 50% and then on the low end you have a track four cleanup. For industrial standards, kind of the lowest standard, the site preparation credit component is cleaned in the tax year in which the COC is issued and then can be claimed for up to 60 months after the year in which the COC is issued.

The tangible property credit component is largely a function of depreciable property with a useful life of 15 years or more with Citus on the brownfield sites. This includes things such as non portable equipment and machinery regardless of what the useful life of those properties are, and it also can include costs for demolition, excavation and foundation that are in excess of the amount that are eligible for being claimed as part of the site preparation credit component related party service fees are only allowed in the year in which they're actually earned and paid related party service fees often come up such as the developer fee. Essentially it means if there's a related party meaning the Brownfield entity and another party that share 10% or more common ownership, you want to be thinking about this because it might not be eligible or the timing of its eligibility may be different.

The tangible property credit component is calculated a little different as far as the applicable percentage. There is a base of 10% and it can go up to a maximum of a 24% credit. There are various bump ups as we call them, a 5% bump up, which include 5% for being in what's called a brownfield opportunity area. Please note that if you are in a brownfield opportunity area that's not automatic, you have to submit an application with the Secretary of State and receive a certificate of conformance with the Brownfield Opportunity area plan in order to get that 5% bump up, there's another 5% for being developed with as an affordable housing project, 5% for manufacturing sites, 5% for being located within an end zone end zone being certain census tracks identified by the tax law, which obviously we can discuss and 5% precise remediated to track one, the kind of highest level of cleanup that we discussed before.

So for an example, if you're a Brownfield site and you have affordable housing, you're in an end zone and you're track one, you don't get 25%, you get 24% because of the limitation. The timing for this credit is based on the year in which the property, the so-called qualified tangible property is first placed into service and that is a federal tax term. Basically means when it starts depreciation often in residential buildings such this means TCO, you can continue to claim credits for up to 120 months after the COC is issued. So if you clean it up and you need a year or two or three, that can happen. There is a cap that you want to know. There is a limitation on the amount of credit you can actually claim. It is for non-manufacturing sites, the lesser of either $35 million or three times the site preparation costs. Please note this site preparation costs not the credit the costs. So for example, say you have a cleanup of $5 million, that means that if you're a residential site, you would have a $15 million cap on the amount of tangible property credit component that you can claim.

Another thing that's worth noting is the tangible property credit component is not really an automatic thing that you're eligible for under the Brownfield cleanup program. By and large, most sites that are not located in New York City are eligible so long as contamination is not emanating from property other than the site itself or has been remediated under another program as noted here on the slide. But for New York City sites, please note that you need some eligibility criteria. You need to get in through what we call a gateway. The gateways include being at least 50% within an environmental zone, being an upside down project, underutilized being developed as an affordable housing project as defined into EC regulations and some new gateways that were added include being located in a disadvantaged community and a brownfield opportunity area with that certificate of conformance from the Secretary of State and being a renewable energy facility site that is primarily used for generating renewable energy or for storing energy from a renewable energy system.

Please note that another limitation in addition to the three times kind of limitation for tangible that we discussed includes for affordable housing on a New York City site. If the eligibility for a New York City Brownfield site for tangible property credit component is solely the affordable housing, then there is a fraction that will apply to the cost just very generally very high level. It's the square footage of the amount of square footage dedicated to affordable housing occupancy over a denominator of the entire building. So say just generally if you have a 30% affordable building, then that means only 30% of the costs would be eligible as the basis for this credit. And I'm sure we have other things to discuss, but I'm going to turn it over now to my colleague Kevin Sales to talk about the IRA.

Kevin M. Sayles: Okay, thanks Aaron. Hi everyone. My name is Kevin Sales. I'm going to be switching over to the federal tax credits under the Inflation Reduction Act and discussing a broad overview, how they're calculated and then other factors that just come into play. So right out the gate eight from the Inflation Reduction Act, there was two preexisting credits, the section 45 production tax credit and the section 48 investment tax credit. Those have been extended to include renewable energy systems and for projects that are placed in this service through 2024, some property it's up through 2025, but ultimately they are replaced by the clean production investment tax credit and clean energy production tax credit. So those will come into play starting next year. They essentially mirror the RA existing investment tax credit and production tax credit framework, but they just haven't become eligible yet because their projects haven't been placed into service. The main difference between those two is that the later one is going to have a focus on the greenhouse gas emissions rate of zero so that any electricity that is being produced by those renewable energy systems have to show that they meet that threshold.

But for today's talk we're going to be focusing on the section 48 investment tax credits. Listed in the statute are different renewable energy systems and property that are eligible for tax credits. You see the more normal and frequent ones with the solar energy, wind, geothermal, and then now battery storage as well. Those are the ones that we've been getting most questions on, but there's a wide list of types of systems that can be claimed under Section 48 getting into the calculation. The ITC is calculated in a similar manner to what Aaron outlined for the Brownfield tax credits. Essentially it's a product of the eligible cost basis of the energy system times a corresponding energy percentage. That is determined based on a variety of characteristics for the system and projects at a base. The energy percentage is a 6% calculation, however, that base can be increased up to 30% for a five times multiplier.

If one of three criteria are met, one of them being is that the project began construction before January 29th, 2023. The other one is for smaller projects that have a maximum net output of less than one megawatts and then if you don't satisfy either the timing or small project requirements, then in order to get this base of 30%, the project would have to meet the prevailing wage and apprenticeship requirements. So your options for a base percent are either going to be 6% if none of those are met or 30% if any one of those criteria is met.

Additionally, that base percentage can be increased by potential adders. Those adders depend on whether you meet that five times multiplier requirement or not. If you do satisfy that one of those criteria and you're at a base of 30%, these potential adders are 10% each, so you go up to either 40% or 50%, whereas if you don't satisfy any of those criteria and you're at a base of 6%, these potential adders are only 2% each. So you would jump from 6% to 8% to 10%. The two adders potential adders, one of them is the domestic content requirement where any steel, iron or manufacturer project that is used in the construction of the energy system was produced domestically in the United States. The other option or adder is the energy community adder. There's three criteria that can be met for that in order to be qualified for that 10% bump up.

The first one is that it is the project is located on a brownfield site and that is a circular definition. I'll dive more into that in a second. And the other two are what's called a metropolitan statistic area. Basically it's census tracks that meet certain unemployment metrics and satisfy those requirements. The other one are for former coal mining areas, which there are maps available online to see whether a project is located within either one of those areas. With respect to the Brownfield site, it is slightly different than the New York State program, so this is a federal determination under C, but the IRS has issued some guidance and safe harbor rules as to what qualifies for a brownfield site for the purposes of the energy community bump up one of those safe harbors is that for a project that is less than five megawatts in nameplate capacity, a phase one has been completed at the site and it reveals the presence or potential presence of a hazardous substance as defined by C.

The other option is if you're greater than five megawatts, you would have a phase two as Mimi outlined for the brownfield cleanup program. Typically that's required anyway, but a phase two that does reveal and confirm the presence of a hazardous substance as defined by circla. For the most part, if you qualify for a brownfield under the New York State Program, you likely would qualify as a brownfield for the purposes of this adder. How are there? The main distinction is that sites that are solely contaminated due to petroleum petroleum, those do not fall within the C definition of a brownfield site and doesn't necessarily mean that you would be eligible for that adder. So there would have to be some other contamination that is present at the site outside of petroleum for this adder. Additionally, there is for solar and wind projects specifically, there's additional adds of 10% or 20%.

If you're located in a low income community, that's the 10% bump up. But if you also are a qualified low income residential project or a qualified low income economic benefit project, essentially you are providing the clean electricity under federal programs, including litech programs and low income programs like that, and the benefits of the efficiency of those systems is allocated equitably among the occupants of the building. So this is not an as of right at or you do have to go through an application process with the Department of Energy in order to qualify for that and depending on the results of that application, that bump up may be limited based on the determination by the Department of Energy.

One thing to note for this as well is that there is a reduction for tax exempt bonds if the energy system is financed with that. With tax exempt bonds, there is a reduction in the credit based on the percentage of the cost that was financed by tax exempt bonds. So there's a cap on this reduction of 15%, so 10% of the system was financed by tax exempt bonds. You'd have a 10% reduction. If it was 50%, you would be capped at the 15% reduction. So it's just something to keep in mind as you're going through your financing and planning.

Going back to the basis definition, so in order to be eligible for these tax credits, it has to be depreciable property with a useful life of at least three years. The IRS has issued some proposed regulation last year as to the definition of energy's properties and the different systems that were outlined in the second slide and what components are eligible to be included in the calculation of the tax credits and depending on which systems you are using and implementing at a site, the regulations also provide for a few tests that can be used to determine if a component should be included or not. There is the functional interdependence test as well as whether the component is an integral part of the system and that determines whether those costs can be included in the calculation of the investment tax credit.

Generally speaking, buildings and components of the buildings are not going to be eligible to be included in the basis calculation for the ITC except there are always exceptions in this case when the building and components thereof are essentially a part of the machinery equipment of the system itself. For example, the curtain walls for dual purpose that generate electricity and to inflow the building. So there are instances where you can get that included in there. One of the unique characteristics about these credits, unlike the Brownfield tax credits in New York, these can actually be sold or transferred. You have to make that election to transfer the credits before the filing of the tax return in the year in which the credits arise. So the investment tax credits similar to the tangible property credit component, they arise in the year that the system is placed into service and claimed on that year's tax return.

So these transfers or sales have to be between unrelated parties and must be done in exchange for cash. That cash is then not included in the seller or transfer's income and it's not deducted from the transferee or purchaser. One thing to note is that there is a single transfer rule, so once the credits are transferred once the transferee can't then further transfer or sell the credits to another party. Certain applicable entities essentially tax exempt entities or municipalities, they are not eligible to transfer or sell the credits, but that is because there is a direct pay option that I'll get it into more detail on the next. So they aren't eligible to transfer under the section of the code.

As I said, this election must be made as of the due date of the tax return for the taxable year in which the credits are determined. So you do have to do it prior to filing. You can't do it on an amended return. And it is important to note that the entity that can actually, or taxpayer that can actually make this transfer election must be the direct owner of the property. So if a partner in a partnership that owns the property cannot be the one that transfers or sells their credits, they can't sell their portion, it has to be done at the project level entity and then from there the proceeds of the sale will go up to the partners in accordance with the same way that the credits would have gone if they were not sold.

As I said, there's also a direct pay option, so for tax exempt entities and municipalities, this is an option where they can essentially sell the credits. It is being treated as a payment and a refund amount, so they would calculate the credits in the same manner that any other project would, but instead of claiming any or transferring some, they go through this direct pay option where they can get the amount of the credit issued to them as a refund. Now it is non revocable and the timing of it is the same as the transfer. It must be done on the tax return in the subsequent year in which the credits arise.

One thing to note here is that there is an x no access benefit rule that is applied. So if a tax exempt or entity or municipality is using any sort of grant or forgivable loan or other tax exempt income to fund the construction of this property, they can't then turn around and claim the full amount of credit associated with that depending on how much was funded. So there's just a rule in there to prevent any sort of excess benefit that's bestowed upon these tax exempt identities. And lastly, there are some limitations to the credits based on other provisions of the tax code that need to be considered when you're looking at either structuring, selling or using these tax credits. That includes the at risk rules and passive activity rules and the Eisner ER team is going to can advise on that and I think they're going to dive into that in more detail now. So I'm going to turn it over to Steve.

Steven Barranca: Okay, thank you Kyle. I have a few slides that to some extent sort of overlap with the prior discussion, so I pass over those and get to the main issues. Just a few slides regarding the IRA and its impact on real estate. One of the things I just want to emphasize here is that with respect to the IRA and energy property really falls into two classes for tax purposes. You've got clean energy property and then you have energy efficient improvements. And what we mean there is energy efficient improvements is really improvements made to property, let's say the building envelope, which usually encompasses the walls and windows and roof improvements that are designed to improve the ability to retain heat and to retain air conditioning and to reduce energy costs. Whereas clean energy property is a reference to the creation of property that actually generates clean energy. And those are two baskets for tax purposes that I just want to emphasize. The act itself had an impact on quite a few of the credits, but the emphasis here is going to be on the section 48 energy credit here. This slide just basically categorizes the credits by the nature of the energy issue in of itself. The first group there refers to energy manufacturing. Then the next group, their renewable energy, which is what we're going to focus on, there's another group that address clean fuels and then vehicles, automobiles and such.

And then something else that also was enhanced by the act or impacted was the section 1 79 deductions, not a credit but it's deduction that focuses on making energy efficient improvements to buildings. But now I want to, and there's two other slides, I'm sorry that sort of summarize the computation of the credit. This is section 45, this is the PTC production tax credit, just a little slide and another for the investment credit as well summary here, but I want to get to the tax compliance aspects. So now just in general, we use the term ITC, the acronym or investment tax credit somewhat loosely, but the investment tax credit technically is comprised of six credits and it's reported on federal form 34 68 and you'll see by the reference to the portion of the form itself. And the code sections there is section 48 and then there's also says 48 cap a, cap BC, I'll be referring to 48 in and of itself, which is the energy credit.

You also notice that the rehab credit is also a part of this group. When added together, it makes up what's called the investment tax credit and it's for that reason why the energy credit is referred to as the ITC, but technically the ITC can be a combination of any one of those six credits. There's another federal form 3,800, the general business credit and that you could think of as a cover sheet if you have a look at that actual form, it basically makes reference to somewhere between 30 and 40 different business type credits in and out of the energy arena. So if a taxpayer is entitled to credits from any one of those, they group together on that form and become collectively referred to as the general business credit. So with respect to the energy credit, we'll speak in terms of a taxpayer who has nothing but the section 48 energy credit and the limitations that may apply incidentally, again, if you're looking at the form 34 68 and you can see with respect to the section 48 energy credit of the various tips of different types of energy that are separately addressed.

You've got geothermal, which is common, the solar energy as a previous speaker mentioned, and this slide here is just a reference to specific items that are included in the credit base. So the first step from a tax perspective is to determine the credit base against which, and let's assume we're using a 30% ITC rate to determine the credit taxpayer spends a million dollars on purchasing and installing solar panels, let's say on the roof of the manufacturing building, and you'd have to look into all the specific costs to determine what gets included in the credit base. That's the first key piece. With respect to eligible property, I'm not going to go through this laundry list, but this essentially comes out of the section 48 regulations. It specifies by category those types of costs that are included in the credit base. Now one might think, well, I've spent a million dollars, we've done our qualified cost study and identified these, but another aspect to the credit base is how it was financed.

There's this code section 49 I think for most of you tax folks out there were familiar with the at-risk loss limitation rules relating to you got a K one from a partnership and there's a loss and there's various loss limitations that have to be addressed of one of which is at risk and that comes under section 4 65, but this section 49 is a companion at risk rule to that one and it addresses credits. And if the financing of the property is done with non-recourse finding, non-qualified non-recourse financing, that portion of the cost is excluded from the base. So for example, you spend a million dollars, 150,000 came from capital contributions and 850,000 was financed with a non-qualified non-recourse financing. One would think intuitively that the million dollars that that's my credit base and I apply 30%, I get a credit of 300,000. But if it's qualified non-recourse financing, that 850,000 is excluded from the base and the credit is only based on the 150,000.

This doesn't apply if you have what's called qualified commercial financing. And basically what that means is by definition is property that was not acquired from a related party. The money it was borrowed from a qualified person, which is essentially a party that's in the business of lending and is not related to the taxpayer and the amount that was borrowed does not exceed 80%. So if that loan, for example, fell below 800,000, then the debt in its entirety would not be categorized as non-qualified non-recourse and you'd have your credit base would be a million dollars. So the way in which the property acquisition is financed is a key component and impact may impact adversely the credit base, the determination of the credit base. It should be mentioned though that as payments are made on that loan, let's say let's go back to the fact pattern where you borrowed 850,000 as principal payments begin to be made on that loan, increases to the credit base will also correspondingly arise presumably in subsequent years generating credits at that time.

So the first step is the credit base then to look at limitations to what other limitations may apply to the utility of the credit. So again, the energy credit is part of the investment tax credit, the ITC and it's going to roll up onto the form that outlines and summarizes the total general business credit for the taxpayer. And there are limitations as like a ceiling, and if you look at that middle box, the GBC, that is generally limited to the taxpayer's net regular tax. Let me, I'll give you the English translation. You have a regular tax and an A MT tax. As a general rule, a taxpayer's tax should generally never drop below the tentative minimum tax or the A MT. So for example, if you have a regular tax of a hundred thousand and your tentative minimum tax happens to be 90,000 as a general rule, the tax liability for that taxpayer never drops, generally doesn't drop below the 90,000, but there's a special rule and a special category of credits called specified credits.

If you look at that form, the 3,800 and you look at code section, code section 38, there's this group of credits, I think it's 10 or 12 credits for which the A MT can be reduced. So in that circumstance where a taxpayer has regular tax of a hundred thousand but there's tentative of minimum tax is 90,001 is thinking, well, I'm stuck with at least having to pay the 90,000. It turns out that certain credits called that fall within the category of specified credits. You could reduce even your A MT with a tentative minimum tax and those credits include as an odd mix. But among those 10 or 12 specified credits includes the section 42, low income housing credit, the section 47 rehab credit and the section 48 energy credit. So the energy credit itself can reduce a taxpayer's tentative minimum tax, which is a major, major benefit.

Oh, here's the list. I forgot that I put this slide. This is the list of the specified credits. As I mentioned, it's sort of an odd mix of things, but section 48 is included in this group of specified credits. So there is a significant benefit for those individual investors who find themselves in the A MT. Also, there's some limitations with regard to passive activities. We had a client that spent a significant amount of money of putting solar panels on the roof and they were all excited about all the work that was done and we categorized the cost, computed the credit, the credits passed through to the investors and the partnership only defined that every particular investor had no other activities that were passive on their personal fronts. And what that meant was they couldn't use the credit credits that are considered to be generated that are passive with respect to a taxpayer can only be taken against tax liabilities arising from other passive activities.

So if you have an individual has one investment and gets that investment tax credit passed through to them, it's going to sit there dormant. And then at the backend, the credit itself, let's say that the underlying activity is ultimately sold, the taxpayer's credit doesn't free up to be offset against other credits but rather gets added to the basis of the underlying property that is solar essentially reduces the gain. So you could go through all that work and create a tax credit that somewhat sits dormant. So something to keep in mind with respect to looking beyond the activity of the partnership or the entity that's doing the improvements or purchasing the solar property and look to see what the ultimate impact's going to be on the ultimate investors in such deals. The carryback rules were also enhanced a little bit by the IRA that there's now a three year carryback and a 22 year carry forward with respect to energy credits.

I just want to touch a little bit on this issue. This comes up from time to time. The subject of monetizing federal energy credits and monetizing really is a reference to a sophisticated term for use of raising capital to finance the acquisition of purchase or production of energy property. Before the transferability rules came into play, there were these old approaches, something called the partnership flip, the lease pass through, which is oftentimes referred to as the inverted lease and then the sale lease back. I just want to focus on the partnership flip because this thing is still out there. What this really involves is I'm going to go to the next slide and show you this is what this really looks like and you still see these things and these came about in 2005 and became very popular between that time in 2011 when these things really began to arise.

And basically what it is, there's a way of raising capital from investors who are looking for tax credits, so offset liabilities and to purchase those credits at a discount. And so you have this project entity, let's say is a partnership and you have a developer, this revenue procedure essentially sanctioned this type of structure where the credit, let's say we're talking about an ITC, which has essentially earned over a five year period. The deal would be that in attempt to raise cash from the equity investors, they would be entitled to 99% of the credits in the past through taxable income and loss for the first five years. And after the credit is fully earned and you're outside of the five year recapture period, it would reverse, it would flip, and oftentimes the arrangement would be such that the developer would buy out the equity investors at fair market value and then whatever cash and whatnot beyond that from the deal would then flow up to the developer.

It's interesting to note that one of the reasons why this worked, at least at the time from the IRS's perspective is because of the nature of the credit itself. When you go into this revenue procedure, this addressed section 45 production tax credits, the production tax credit by nature is a little bit different than the ITC because the PTC is really a dollar amount multiplied by the number of kilowatt hours. You really can't project with great accuracy what your energy tax credit's going to be because solar, for example, is based on sunlight. You might have a couple of months with very cloudy days that does affect the impact you might have a month or a day or two with no wind. So the point being is that the view was that even the pursuit from a business perspective of credits had some sort of a non-tax entrepreneurial feel as opposed to the ITC, which is an exact calculation.

I spent a million dollars on qualified costs, I'm going to get a 30% credit. It doesn't rise to the level of an entrepreneurial pursuit in and of itself. That being said, tax advisor, tax advisors still ignored that difference and still applied. I guess the approach or the theory of this RevPro to ITC deals. And it's interesting because there is an actual IRS pronouncement where the IRS said that this particular RevPro should not apply to the it. They come out and explicitly say it, but it's still done. But anyway, I mentioned all this against the backdrop of the transferability rules because that's the new approach to raising capital. You may have a partnership that generates credits and you have investors that can't use a credit to. You could literally sell those credits, but from a tax compliance perspective, there's one thing to keep in mind.

This is another slide that gets into the different types of flips. I'm going to skip beyond this and maybe a good reference, but I want to get to the transferability issue from a tax perspective. We're running short on time. These are the credits for which you can do transferability. I wanted to get to two things. The last two things is that the credits when they are purchased are automatically as passive, and I don't think the guidance is clear as to what happens in the year when an underlying property is disposed of because if I as a taxpayer purchase these credits, I'm not an investor or owner in the underlying activity, I simply purchase credits, so I can't possibly experience a disposition event. So these credits, they can go off into oblivion and I should mention that because they're automatically passive. It turns out that the C corporation market is make up the primary buyers of these tax credits and there's a whole host of restrictions and limitations on the ability to use these credits to sell them and whatnot.

But for those that are interested in this thing, one thing to keep in mind, there's a final point here from a tax compliance perspective is that these credits have to be registered with the IRS and that is done on the I on an IRS portal, and that happens to be this very, very thick, I have a hard copy of this, of the IRS publication 5 8 8 4, which actually reads very well, I have to say, and it actually has screenshots and shows you what it looks like as you go through the registration process on the portal. So that's the last nugget that I would just want to throw out there with respect to transferability from an IRS tax compliance perspective. With that being said, I don't think there's anything else beyond this slide. Nope, that's it. I'm going to hand this back to

Jennifer DeMasi: Thank you, Steve.

Steven Barranca: Thank you very much.

Jennifer DeMasi: We probably have just enough time for a question or two. Can an example be given of the difference of costs in a track one versus a track four cleanup? Mimi, can you feel that one?

Mimi Raygorodetsky: Sure, I'm happy to. So just to review a track, one cleanup would remediate a site to unrestricted use and the site would not have any long-term institutional or engineering controls. So it's really a complete cleanup. A track four cleanup allows for a developer to leave some contamination in the ground and to cap it at the surface. Really, you can also have institutional and engineering controls on a track four site. So the difference in cost really depends on the nature of contamination and the type of remedy that is implemented, but it can be very significant. In addition, there are certain sites where a track one cleanup just isn't feasible. For example, along the Gowanus canal, there is a bank stored coal tar that exists at up to a hundred feet below grade, and in order to achieve a track one or unrestricted use cleanup, you would have to remove all of that coal tar, which just isn't practical or cost effective. But the difference can be millions of dollars between a track one and a track four.

Jennifer DeMasi: Thank you. Oh, this is a good one. Aaron, do these credits get audited and if so, what is the audit like and how long does it usually take?

Aaron C. Records: Yeah, that is a good one. So the Brownfield tax credits are pretty much routinely audited by the Department of Taxation in Finance, which is really fun because like I said, they have nothing to do with the cleanup program, so they're coming in much later. Take the example of you do a site prep claim. Say you got a certificate of completion this year, so you get it, say December, 2024. You're not claiming the site preparation credit component until you file the New York State tax returns, which on extension might not be until September or October of 2025, and then a couple months later you get the audit going. So there's a little bit of kind of a time lag and then having to explain to these auditors as part of the desk audit, desk audit, meaning that it's all done remotely, nobody comes to your office and starts hounding you.

And that process typically takes anywhere from 12 to 24 months. It really varies for a few different reasons. Depending on the cleanup and the size of the site, it might just take them a while to get through it. Also, in recent years, the department that does this review with taxation and finance, they've been very understaffed, so there's just been a little bit of a backlog. These auditors have way too many cases, so it can take a little bit. But yeah, so anywhere from 12 to 24 months is typically what we would say. And pretty much the same for tangible.

Jennifer DeMasi: One more, Kevin. When credits are transferred, who bears the financial responsibility for a subsequent recapture event?

Kevin M. Sayles: So in an instance where there is a recapture event, it's actually on the purchaser. The liability there, it's the recapture responsibility is on the purchaser or transferee of the credit. Since they are the entity that ultimately uses them themselves, they're the ones that have that burden.

Jennifer DeMasi: Great, thank you. And we're just about out of time. Steve, do you have any closing thoughts?

Steven Barranca: No, I've very happy to have participated. I should. If I can add something to Kevin's comment, I think there may be some differences with regard to recapture, depending upon whether it was in terms of responsibility, whether there's a direct or indirect disposition. I know this, so for example, the sale of property before the recapture period results in a liability issue on the buyer's side. But if an investor in the original partnership sells more than two thirds of its interest, that's an indirect disposition. I think the seller may be responsible for the liabilities of the rules are somewhat convoluted. So just wanted to add that piece to it.

Jennifer DeMasi: Great. Thank you.

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