Embed Size (px)
Citation preview
Advanced Property Tax Seminar
Economic Development: Property Tax Incentives and PILOTS
Moderator: Charles J. Moll, III, Esq. Partner – Winston & Strawn LLP San Francisco, CA [email protected]
Janette M. Lohman, Esq. (and a bunch of letters) Partner – Thompson Coburn LLP St. Louis, Missouri [email protected]
Speakers:
Amanda J. Butler, Esq. Partner – Graffagnini L.C. New Orleans, Louisiana [email protected]
Joan Youngman, Esq. Senior Fellow/Chair, Department of Valuation and Taxation, Lincoln Institute of Land Policy Cambridge, Massachusetts [email protected]
2
Introduction
• Real and personal property tax incentives (“Property Tax Incentives”) are generally the most lucrative of all tax and financial incentives because they: • Are not contingent upon whether the Taxpayer makes a
profit; • Reduce payments the Taxpayer would otherwise have to
make; and • Tend to span a number of years.
• Property Tax Incentives are, however, easy to overlook during expansion or relocation analysis.
• The purpose of this presentation is to help ensure
that you do not overlook them!
3
Preliminary Considerations • Time is of the essence!
• Property Tax Incentives should be identified and negotiated before the Taxpayer decides upon the finalists for expansion and/or relocation.
• Failure to do so could prevent the Taxpayer from receiving them: • They might not pass a “but for” test; • They must qualify as “incentives”; i.e. if the
Taxpayer would implement the project without the incentives, they will fail constitutional/statutory restrictions against public uses of private funds;
• Many states require a notice/filing prior to commencement of construction.
4
Preliminary Considerations
• Planning Ideas: • No Competition? No Problem!
• Property Tax Incentives can be negotiated, even if there is no competition;
• The justification is that the Taxpayer cannot afford to implement the project without the incentives;
• Jumping the gun defeats this justification….
• Personal Property Can Also Qualify! • Large M&E purchases can also qualify for property tax exemption
or abatement if timely negotiated prior to purchase. • Be Proactive!
• Try to get involved with your Company’s or Clients’ Capital Investment or Site Selection Teams to ensure that they do not leave money on the table by overlooking Property Tax Incentives at the earliest possible opportunity!
5
Types of Property Tax Incentives
• Statutory/Entitlement Incentives • Expansion/relocation
• Generally based on set amounts of capital expenditures and jobs created
• Location-specific • E.g, Enterprise Zones, Brownfields
• Abatements tied to historic renovation • Statutory fictional restructuring • Tax Increment Financing (“TIFs”) • Naturally low assessment rates
• Discretionary Incentives • Non-statutory fictional legal structuring • “Let’s Make a Deal” incentives • Eminent domain • Preferential zoning, license tax rates and expedited
permitting
6
Types of Property Tax Incentives
• Planning Ideas: • Let’s Make a Deal.
• If the state and local governments do not offer what your company needs, request what you need during the negotiation process.
• If you don’t ask, you certainly won’t get! • Don’t assume the state or local government is offering
the best incentives available for the specific project. • Other Tax-Exempts.
• Sale/leaseback structuring can generally work with any type of otherwise tax-exempt organizations, so do not forget about partnering with the local colleges and universities, particularly with respect to research facilities, etc.
7
Where to Find Property Tax Incentives • Statutes, Ordinances and Secondary
Published Sources • Caution: Sometimes the best incentives are
hidden – don’t just rely on that which you can see. • Caution: Don’t forget to run the numbers on all of
the options – lower assessment ratios can sometimes trump large tax abatements, involve less compliance and last longer.
• Caution: Are the incentives taxable? • Local Offices of the State Departments of
Economic Development and Quasi-Public Economic Development Organizations • Caution: States will not get involved in
competitions between their own localities.
8
Where to Find Property Tax Incentives
• Local Chambers of Commerce • Planning Idea: Get to know these people well – they
can become your best friends and assist you with their existing relationships.
• Local Politicians and Bureaucrats • Caution: These are your future public partners and
will ultimately determine the amount and duration of the Property Tax Incentives that they offer.
• Also, you are going to be “married” to them for a long time.
• Local Consultants • Caution: Be careful how you structure the fee
agreements.
9
How to Calculate Property Tax Incentives
• Favorable Assessment Percentages Provided By Statute • Some states do not tax personal property.
• State Income Tax Credits for Property Taxes Paid • Caution: If your company is incurring losses and you
don’t have taxable income, you receive no benefit. • Straight Abatements or Exemptions
• Caution: It is generally better to have an abatement equal to a fixed percentage of the property taxes than a fixed amount of reduction to taxes otherwise payable!
10
How to Calculate Property Tax Incentives
• Fictional Restructuring (Sale/Leaseback with Non-Profit (e.g., county, city, university, publicly owned corporation) • Some structures are authorized by statute and some are off
the books. • All structures involve transfer of legal title (only) of abated
property to non-taxable entity. • Abated property qualifies as a capital lease for financial
statement and federal/state income tax purposes, so the Taxpayer gets the economic benefit of ownership.
• Structures vary among jurisdictions, but the level of abatement can be established through “Payments in Lieu of Taxes” (“PILOTS”) equal to either fixed percentages of taxes otherwise due each year (which can vary by year) or fixed dollar amounts per year.
11
How to Calculate Property Tax Incentives
• Fictional Restructuring (Sale/Leaseback with Non-Profit (e.g., county, city, university, publicly owned corporation) • Example (100% abatement for 10 years):
• The Taxpayer builds a new facility and sells it (legal title only) to a public economic development agency (“PEDA”) for $10.
• The Taxpayer leases the facility back from the PEDA for $1 per year for 10 years, retaining the right to repurchase the facility at any time.
• At the conclusion of the lease, the facility reverts to the Taxpayer.
• Because the PEDA owns legal title to the facility and the PEDA is tax-exempt, there are no property taxes imposed on the facility during the 10 year period.
12
How to Calculate Property Tax Incentives
• Fictional Restructuring (Sale/Leaseback with Non-Profit (e.g., county, city, university, publicly owned corporation) • Example: Modification – 50% Abatement for 10 Years
• Taxpayer builds a new facility and sells it (legal title only) to a public economic development agency (“PEDA”) for $10.
• The Taxpayer leases the facility back from the PEDA for $1 per year for 10 years, retaining the right to repurchase the facility at any time.
• The PEDA computes the tax on the facility that would have applied and the Taxpayer makes PILOTS equal to 50% of the taxes otherwise due each year.
• Modification: Abatement percentages can start at 100% and be decreased by 10% each of the remaining nine years.
13
How to Calculate Property Tax Incentives
• Fictional Restructuring (Sale/Leaseback with Non-Profit (e.g., county, city, university, publicly owned corporation) • Example: Modification – Fixed Payments for 10 Years
• The Taxpayer builds a new facility and sells it to PEDA for $10. • The Taxpayer leases the facility back from the PEDA for $1 per
year for 10 years, retaining the right to repurchase the facility at any time.
• Assume that the taxes otherwise payable for the year the property is placed in service are $100,000.
• The Parties agree to a fixed PILOT payment of $50,000 per year for the ten year period.
• TRAP: Don’t let the officials talk you into a fixed dollar reduction off of the taxes that would otherwise be due during the abatement period! • There is nothing to stop the government from raising the
taxes and nullifying the abatement!
14
How to Calculate Property Tax Incentives
• Tax Increment Financing (“TIF”) Districts • Almost all states authorize TIF formation and use. • TIFs are designed to use the increased property
taxes (and sometimes the increased sales taxes) to develop infrastructure and other public improvements necessary for the proposed project.
• TIFs can be very unpopular – they are commonly used to put shopping centers near residential areas.
15
How to Calculate Property Tax Incentives
• Tax Increment Financing (“TIF”) Districts • Example:
• TIF District and TIF Commission are established pursuant to statute/ordinances.
• Amount of “base period” property/sales taxes is established for the period prior to commencement of the development.
• TIF District contracts with a developer to build public improvements or economic development expansions in the TIF District.
• TIF District issues bonds to pay the developer to build the agreed upon improvements (purchased by developer or its lenders).
• The TIF pays off the bonds with the new property and sales taxes collected in excess of the base amount.
16
Adverse Consequences Before, During and After the Negotiation Process
• Jumping the gun can kill the deal. • Making the decision to implement the project before
negotiating the incentives will probably destroy any chance of getting them.
• Do not break ground until the Property Tax Incentives Deal is inked!
• Bad publicity can be equally fatal. • Environmental disruption caused by the development • Stealing school books from children
• Planning Idea: Control the amount of the abatement through use of PILOTS or exclude the school taxes from the abatement.
• Corporate welfare – why help out the “new” person at the expense of our existing citizens?
17
Adverse Consequences Before, During and After the Negotiation Process
• Confidentiality Issues • Your business might miss incentives because the project is
so confidential that even you don’t know about it! • Public announcements prior to inking the incentives deal
can preclude the business from meeting the “but for” standard. • Planning Idea: Make all parties involved in the
negotiations sign confidentiality agreements. • Offending Politicians and Bureaucrats • Failure to Appoint a Lead Negotiator so that the Taxpayer
can Speak With One Voice • Failure to Realize that Everything Is Negotiable!
• This even applies to mandatory state-provided contracts • Don’t just sign them if you know they are too restrictive or
burdensome!
18
Adverse Consequences Before, During and After the Negotiation Process
• Make Sure You Qualify BEFORE You Make Any Deals! • You should know the answers to these questions before the
Property Tax Incentives Deal is inked: • How much money is involved? • Did you structure a bad deal? • Is the project located within the Enterprise Zone? • Does your business qualify as “manufacturing”? (NAICS Code)
• How complicated are the compliance provisions, and who is going to monitor such compliance after the ribbon cutting ceremony? • Did the company meet its goals in terms of jobs created and
capital spent? Many agreements will have claw backs for projects/deals that do not perform.
• Did the company file all of the necessary compliance documents? Comply with all of the statutory requirements?
19
Adverse Consequences Before, During and After the Negotiation Process
• Broken Promises • The public officials who make the deals are generally not
the public officials who enforce them! • Is the assessor on board with this deal? • Is the assessor precluded from assessing a taxable property
tax valuation on the leasehold in your sale/leaseback arrangement?
• Recapture (Plus Interest and Penalties) • Don’t agree to onerous recapture provisions in the first
place – negotiate flexibility into the deal terms to let you off the hook for mishaps that are beyond your control.
• Potential Post-Mortem Constitutional Challenges • Even if the incentives have been properly negotiated and
documented, there is always a risk that some public interest group might challenge your negotiated abatement.
Advanced Property Tax Seminar
Property Tax Incentive: Policy Debate and Political Issues
Speaker:
Joan Youngman, Senior Fellow, Lincoln Institute of Land Policy Cambridge, Massachusetts Email: [email protected]
Property Tax Incentives: Policy Debate and Political Issues
21
ABA-IPT Advanced Property Tax Seminar March 3, 2016
Joan Youngman
Lincoln Institute of Land Policy
22
Current Controversy • Criticism of cost, effectiveness, equity
- Inability to prove role of taxes in business location
• Continued pressure to promote economic development and increase employment
• Reform efforts turning to transparency, publicity, oversight, stronger conditions, enforcement - Public databases
- GASB Statement No. 77
23
24
Illinois businesses get lucrative EDGE tax breaks, fall short of job goals
Jim Schultz, director of the Illinois Department of Commerce and Economic Opportunity, called dozens of the EDGE tax break deals “very distasteful.” (Nancy Stone / Chicago Tribune) Michael J. Berens and Ray LongContact Reporter Chicago Tribune
October 2, 2015
Illinois' flagship job program has awarded millions of dollars to companies that never hired an additional employee.
It's doled out millions more in tax breaks for corporations that eliminated jobs and became smaller.
And it's allowed companies to reap lucrative rewards and then relocate to other states without penalty or repayment.
25
26
The gamble on Tesla’s gigafactory in the Nevada desert By Jonathan O'Connell April 10, 2015
Construction on the Tesla Motors gigafactory east of Reno, Nevada, is seen on March 25, 2015. (David Calvert/For The Washington Post)
RENO — For months, Randy Walden peddled a 30-week course in
manufacturing at Truckee Meadows Community College, in its warehouse
campus by Reno-Tahoe International Airport.
27
California courts 'Mistresses' with new state film tax credits
"Mistresses" stars, among others, Rochelle Aytes as April and Jes Macallan as Josslyn. (Danny Feld / ABC)
Richard Verrier DECEMBER 21, 2015
California has lured "Mistresses" from British Columbia, Canada.
The ABC drama is relocating from Vancouver to film its fourth season in California to take advantage of the state's expanded film and TV tax credit program. The drama was approved for a $5.7 million tax credit, the California Film Commission said Monday.
28
29
“To unilaterally disarm yourself of incentives will immediately
put you at a disadvantage in the marketplace.”
Bryan Daniel, Executive Director, Texas Governor’s Office of Economic
Development and Tourism
Good Jobs First “Subsidy Tracker”
30
Discover Where Corporations are Getting Taxpayer Assistance Across the United States
SUBSIDY TRACKER 3.0 is the first national search engine for economic
development subsidies and other forms of government financial assistance to business.
http://www.goodjobsfirst.org/subsidy-tracker
31
32
Thank you!
33
