The New York Fiscal Year 2024 budget was worth the wait for construction businesses thanks to over $23 billion for infrastructure and capital projects across the state. At the same time, the budget makes history with the most progressive legislation on building decarbonization, continuing to incentivize the move to sustainable buildings with climate-friendly, clean, and affordable energy and complimenting certain Inflation Reduction Act tax deductions and credits.

On May 2, New York’s Fiscal Year budget was approved. While a housing compact that would have resulted in 800,000 housing units being built didn’t make it across the finish line, the budget does include $23.2 billion for capital projects that touch a variety of industries and fields.

The New York Department of Transportation’s five-year plan enters its second year with more than $7 billion budgeted for road and bridge projects.

State and City University of New York (SUNY and CUNY) campuses will see $2.4 billion in transformations, preservation and upgrades including building envelope, interior, electrical, HVAC and utility projects.

Design options for a new Wadsworth Public Health Laboratory for research in Albany will be funded with $1.7 billion so lab operations currently handled in several locations can be consolidated into one.

In addition, $1 billion is budgeted for healthcare capital projects; $890 million for mental health housing; $500 million for clean water projects; $446 million for the third phase of the Hunts Point Interstate Access Improvement project; $224 million for a seawall project on the South Shore of Staten Island; $135 million for New York City Housing Authority projects; $105 million for State Emergency Operations Center upgrades; $100 million for a State Police satellite crime lab; $51 million for Hudson Valley bridge replacements and rehabilitations; $50 million for a Homeowner Stabilization Fund to finance home repairs in 10 communities; $17.5 million to design and construct the Mamaroneck and Sheldrake River Flood Risk Management project; and more.

The new budget also makes New York the first state to advance comprehensive legislation for zero-emissions for new buildings and homes seven stories and under starting December 31, 2025, and all new buildings by December 31, 2028 (there are some exceptions and exemptions).

What’s more, $200 million is allocated to the NYSERDA EmPower Plus Home Retrofits Program to help 20,000 low-income families retrofit homes with insulation, energy efficient appliances, and clean energy solutions. Another $200 million is set aside for critical infrastructure projects at New York Parks.

This comes on the heels of the Inflation Reduction Act’s January 1, 2023 effective date for 179D Commercial Buildings Energy Efficiency Tax Deduction enhancements and new 45L tax credits for homebuilders.

For 179D, when prevailing wage and apprenticeship requirements are met and a building reduces annual energy and power costs by at least 25%, there is a $2.50 square foot deduction. For each additional percentage that annual energy and power costs are reduced, the deduction increases by $.10, up to $5.00/square foot (up from $1.88/square foot in 2022). The deduction is available every three years for commercial buildings; every four for municipalities, tribal governments, and non-profits. What’s more, municipalities, tribal governments, and non-profits can allocate to the deduction to the person/people who create the energy-efficient commercial building property installation technical specifications.

For IRC Sec 45L, there are two tiers of credits – $1,000 or $5,000 – for eligible new or substantially reconstructed homes and dwelling units (that are part of a building) that meet certain ENERGY STAR and Department of Energy Zero Energy Ready Home (ZERH) program requirements. The credit is available for homes/dwellings acquired after December 31, 2022 through December 31, 2033. (For details, visit 45L Tax Credits for Zero Energy Ready Homes at Energy.gov.)

Between state and Federal efforts, one thing is clear: a lot of opportunities exist – and undoubtedly there will be more to come – for construction companies and builders that embrace clean energy and climate-friendly practices and materials.

Now that financial statements reflect ASC 842, construction companies need to understand the potential effects on bonding and business so they can plan accordingly.

Last year, private companies were focused on identifying and categorizing leases to ensure they were accurately reflected on financial statements to comply with the lease accounting standard ASC 842 (which replaced ASC 840). Financial statements for year-end December 31, 2022 and beyond reflect the new standard. (Public companies adopted the standard for reporting periods starting January 1, 2019.)

Impact on Bonding

To work on certain projects, you may need a bond from a surety company to guarantee the terms of a contract will be fulfilled, as well as a certain bonding capacity (the maximum amount of coverage a surety company will provide). Sometimes a project owner may not require bonding, but instead uses bonding capacity as a prerequisite for being able to bid on a project.

Having a high bonding capacity shows a project owner that your business can meet its contractual obligations. It also allows you to bid on larger projects, enhancing your business’ ability to grow. There are even times that bonding capacity can mean the difference between winning and losing a contract.

ASC 842 impacts bonding and bonding capacity because financial performance is one of the primary factors a surety company will review when determining whether to issue a bond and for how much (they may also look at your work portfolio, experiences, references, business practices, and more). ASC 842 requirements can significantly impact financial performance reporting, potentially increasing challenges in obtaining bonding approvals or leading to higher bonding costs.

Impact on Financial Statements

Before ASC 842 took effect, operating leases simply had to be disclosed in a footnote on financial statements. With ASC 842, all leases – financing and operating – are recognized as assets and liabilities on the balance sheet. There is one exception: short-term leases, defined as leases with terms of 12 months or less at the lease commencement date, are not included.

The change enhances transparency and enables a more apples-to-apples comparison of companies’ debt related to leases and overall finances. At the same time, it can also impact key metrics on your financial statement and ultimately your ability to secure bonds (or loans), your bonding capacity, and more.

For example:

• Debt-Service Coverage Ratio (DSCR) measures a company’s available cash flow to pay current debt obligations (principal and interest). As a result of ASC 842, DSCR may decrease, putting your ability to service existing debts into question and impacting perception about your business’ financial stability.

• Working capital shows a company’s ability to pay current liabilities with current assets. It’s calculated by subtracting liabilities from assets. ASC 842 reporting requirements may result in a decrease in working capital, impacting perception about your business’ health and operational efficiency.
• Debt to equity ratio (D/E) compares total debt to shareholder equity, revealing how much your business relies on borrowed funds to operate. A lower D/E is favored because it means your business has a lower risk of defaulting on a loan. However, a ratio that’s too low may be interpreted to mean a business isn’t using debt effectively for expansion. ASC 842 can increase liabilities and ultimately D/E, signaling potential issues with your company’s financial leverage.

The changes resulting from ASC 842 can affect a number of other metrics as well (i.e., interest coverage, return on assets, debt coverage ratio, and more).

Managing the Impact

Nobody likes surprises, especially when it comes to finances. Considering the broad impact of ASC 842, no doubt your stakeholders – including banks, surety companies and others – are aware of the new disclosure requirements for leases. Proactively communicating the impact ASC 842 has on your financial statement may help manage perceptions. (If you need assistance, you may want to consider speaking with your accountant.)

This may also be a good time to re-evaluate your leasing strategy. Is leasing still a better option than ownership? Is there any benefit to moving to shorter-term leases (i.e., 12 months or less) to minimize potential impact on financial reporting?

Finally, consider the longer-term. Based on how ASC 842 impacts your balance sheet and financial statement, are there business or operating changes you should consider to bring financial metrics back to where you want them to be?