We’ve all heard this story time and time again in post-industrial cities around the country.
A large, contaminated brownfield site has sat vacant for years, maybe decades. No one knows the full extent of the contamination, or what they’ll find if they start digging. Oftentimes it’s in a conspicuous location, or perhaps it’s one of the few large developable sites left in the city, and it’s been off the tax rolls since anyone can remember. It’s usually in a city that was once a center for manufacturing and commerce, but has since been all but abandoned for greener pastures where taxes are lower, barriers to development are fewer, and social ills are easier to ignore.
This is the case in the City of Newburgh, New York, population 28,480. Once an industrial powerhouse on the Hudson River, soon after World War II Newburgh underwent a series of unfortunate events that would seal its fate as a city plagued by disinvestment and economic distress. Manufacturers of products ranging from textiles and bricks to lawnmowers and boats abandoned the city to take advantage of cheaper wages in the South, leaving behind a social services-reliant workforce with limited options for employment. The opening of the New York Thruway in 1954, together with the construction of the Newburgh-Beacon Bridge and concomitant closure of the Newburgh Ferry, diverted traffic away from the city center and discouraged potential customers from patronizing the city’s businesses. Newburgh’s downtown took another hit with the opening of the regional Mid-Valley Mall in 1964, just outside the city limits. The city began to deteriorate, and anyone with money fled to the suburbs.
This brings us to the site that is the subject of this case study: Newburgh’s former city landfill. Beginning in the 1940s, the site was operated as an unregulated landfill for municipal waste until its closure in 1976. Hazardous waste from the adjacent state Superfund site—formerly occupied by DuPont and the Stauffer Chemical Company—was buried in the landfill, and investigations of the site over the years have uncovered drums containing toxic waste as well as released material and associated contaminated soil.
It goes without saying that developers were not lining up to invest in a site like this one, especially given the history of the City.
Fortunately, Hudson Valley Lighting, a local employer with a need to expand and a desire to remain committed to the Newburgh community, expressed interest in redeveloping a 15-acre, IDA-owned portion of the site, largely because it was the only sizeable parcel left for development in the city. The project would consist of a new company headquarters with a research, design, and distribution facility that would employ existing and new workers, the bulk of which would be city residents. The developer proposed a public-private partnership in which the City would assist with remediation and provide water, sewer, and stormwater that would serve the project as well as potential future adjacent development.
Even with the project being eligible for a number of incentives, including grants from the US EDA and NYS Empire State Development, NYS Brownfield Cleanup Program tax credits, and NYS Excelsior tax credits, the risk that comes with redeveloping a landfill obliged the developer to request a property tax abatement from the City. This would afford the developer a greater level of certainty going forward.
The City of Newburgh IDA hired Camoin Associates to determine whether the PILOT (payment-in-lieu-of-taxes) agreement proposed by the developer would ensure the financial feasibility of the project, while at the same time, not providing the developer with an excessive return. We developed a real estate pro forma that calculated the IRR for the project from the perspective of a developer leasing the project to a tenant. In creating the pro forma we used construction costs, financing terms, and anticipated incentive receipts provided by the developer and IDA. Our key assumption was regarding industrial triple net lease rates, which we determined from researching rates for comparable properties in the Newburgh region. We then were able to modify the pro forma to calculate IRR under different property tax abatement scenarios to help arrive at a PILOT schedule that was fair to both the developer and the City.
Despite so many of the pieces falling into place to turn this forlorn landfill into a driver of economic development in the city, the imminent expiration of the state’s brownfield program meant that HVL had to have tax-credit eligible work, including groundwork and tree clearing, done by the end of the year. This was a deadline that HVL felt it would be unable to meet, given repeated delays in getting the project off the ground. As a result, the project was scrapped—yet another tough break for Newburgh.
The lesson from this case is that, at the end of the day, no matter how much in government subsidy is provided to make a project happen, the developer still needs to be able to make a buck commensurate with the risks of the project. As in this case, if the terms of the subsidies are tentative or ambiguous, the developer may not be able to bear the risk. Private investment in the form of a committed developer is a city’s best bet to spur economic revitalization, and the public sector should do all that it can to minimize any uncertainty that is likely to arise. Now it’s back to square one, as Newburgh waits for another interested developer to come along.