Earlier this year, as part of the New York State budget, the Legislature enacted New York State Real Property Tax Law Section 575-b (RPTL 575-b), which creates new requirements for the real property taxation of wind and solar energy projects that have a nameplate capacity of 1 megawatt (MW) or greater. These new requirements are applicable to projects that are not subject to a payment in lieu of taxes (PILOT) agreement and, notwithstanding these statutory changes, municipalities will continue to have the flexibility to enter into PILOT agreements with project proponents. Municipalities are likely, however, to look to the new requirements for guidance when negotiating such PILOT agreements.

For projects subject to assessment by the taxing jurisdiction, RPTL 575-b mandates that the assessed value of solar or wind energy systems be determined by using a discounted cash flow approach. This new statutory regime obviates the ability of municipalities to utilize other alternative approaches and methodologies for real property tax assessment of such facilities. It may also significantly impact the ability of owners of solar or wind energy systems to challenge the resulting valuations by municipalities through an RPTL Article 7 proceeding.

The discounted cash flow approach estimates the value of an investment based on its expected future cash flows taking into account how much income the investment may generate in the future and by applying a discount to arrive at an estimated current value for the investment. To this end, RPTL 575-b requires the New York State Department of Taxation and Finance (“Department”), in conjunction with the New York State Energy Research and Development Authority (NYSERDA) and the New York State Assessors Association, to develop an appraisal model and discount rate that can be used to uniformly apply the discounted cash flow approach.

In accordance with the requirements of RPTL 575-b, the Department recently published its preliminary appraisal model and preliminary discount rates. The Department is accepting public comments on its preliminary appraisal model and preliminary discount rates until October 1, 2021, and is expected to issue final versions thereafter.

The preliminary model is available on the Department’s website as an interactive spreadsheet that allows users to input project information into the model and obtain the assessed value of the project. The preliminary discount rates, which are used in the preliminary appraisal model and will be updated annually, are based on the weighted average cost of capital, considering the time value of money and investor risk and taking into account the expected rate of return that market participants require to attract funds to a particular investment. Because the discount rates are based, in part, on investor risk, the Department has developed different State-wide discount rates for different system types and sizes since each system type and size is associated with a different level of risk. The table below summarizes the various project types and applicable discount rates.

The new taxation methodology provided in RPTL 575-b changes how municipalities must approach the assessment of wind and solar projects of 1 MW or larger. Indeed the requirements of RPTL 575-b, as recently implemented by the Department, provide very specific guidance for taxing jurisdictions. Although this stringent approach may impact the economics of renewable energy projects being pursued throughout the State, it also provides a level of certainty and consistency across the State that may be useful in project planning and should be considered in early project development.

If you wish to submit comments on the preliminary appraisal model, or the preliminary discount rates, we encourage you to do so. Our attorneys are available to answer questions you may have or to assist in that process. In addition, we encourage you to engage with experienced counsel to discuss the potential implications of RPTL 575-b on projects already in development or anticipated to enter into development in the near future.