PROPERTY TAX RELIEF VIA INCENTIVES AND ABATEMENT PROGRAMS. COST Property Tax Workshop. Dallas January 2015

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1 PROPERTY TAX RELIEF VIA INCENTIVES AND ABATEMENT PROGRAMS COST Property Tax Workshop Dallas January 2015 Thomas T. Dubel, Jr., CPA Director, State & Local Tax and Advisory Altus Group US Inc. 910 Ridgebrook Road, Suite 200 Sparks, MD Susan A. Feeney, Esq. Partner, McCarter & English, LLP Four Gateway Center 100 Mulberry Street Newark, NJ Learning Outcome You will learn the various types of tax credit/incentive/abatement programs that exist in the states You will gain knowledge as to what types of credit/incentive/abatements may work for your business You will learn what a clawback is and when it can be imposed You will learn how to avoid or minimize clawbacks 2 1

2 Property Tax Relief Vehicles Payment in Lieu of Taxes (PILOT) Tax Increment Financing (TIF) Industrial Revenue Bond (IRB) Abatement Economic Development Grant Agreement 3 Payment in Lieu of Taxes Why Payments in Lieu of Taxes (PILOTs)? Certain states do not allow full abatement of property taxes, therefore the PILOT is a method to negotiate an agreed upon annual fixed payment. 4 2

3 Payment in Lieu of Taxes How do PILOTs Work? An agreement as negotiated or jurisdictionally governed is entered into with all applicable taxing authorities and ratified. 5 Payment in Lieu of Taxes What are the Challenges of PILOTSs? Typically requires public approval May require a minimum amount of investment Reconciling to baseline assessment Restrictions on appeal rights may apply Pay attention to your assessments to ensure you are not paying excessive taxes at the end of the PILOT agreement period Subject to clawback provisions 6 3

4 Tax Increment Financing Why Tax Increment Financing (TIFs)? In many states Tax Increment Financing (TIF) provides a means of encouraging private investment in certain areas by allowing local governments to use future property tax revenues to finance the current infrastructure costs needed to attract development. A TIF is a method of financing the public costs associated with a private development project. Essentially, the property tax increases resulting from development are targeted to repay the public infrastructure investment required by a project. 7 Tax Increment Financing How do TIFs Work? Typical TIF process includes: 1. Define TIF District/Area 2. Establish base assessed value 3. Specify funded improvements 4. Issue non recourse bonds 5. Make public purpose improvements 6. Development increases values 7. TIF revenues to special fund 8. Bonds repaid and all taxes go to jurisdiction Alternative approaches may include: Developer funds the improvements and is repaid through TIF revenues Pay as you go funding or improvements from current incremental tax revenues without bond issuance 8 4

5 Tax Increment Financing What are the Challenges of TIFs? Typically requires public approval Limited Expertise Due the complexities of the transaction, internal expertise may be limited as well as jurisdictional expertise Typically up front application fees are required to cover third party and administrative costs for the local government to implement Although authorized by most states, not authorized by all and implemented by local government at its discretion Details vary state to state Taxes devoted Eligible uses 9 Industrial Revenue Bond Why Industrial Revenue Bonds (IRBs)? In many states and local communities, Industrial Revenue Bonds (IRBs) are used to encourage business expansions and relocations. An IRB is essentially a loan to a company for its capital expenditure needs. Due to certain state legislative restrictions, IRBs are a tool often utilized to provide property tax savings in lieu of direct tax abatement or tax exemption. 10 5

6 Industrial Revenue Bond How do IRBs Work? A community will issue the bonds to support the project. It is important to note that the community is not making the loan. The investor (identified by the company) buying the bond makes the loan. In many cases, the IRBs are purchased by the company making the investment. Capital expenditures (land, building, equipment) purchased with the proceeds of the IRBs will be titled and technically owned by the community. The community will lease the land, building, and/or equipment back to the company for the length of the bond term. At the end of the term, title is transferred to the company. 11 Industrial Revenue Bond What are the Challenges of IRBs? Typically requires public approval Limited Expertise Due the complexities of the transaction, including the bond issuance and leaseback, internal expertise may be limited Financing Costs Bond counsel and other professional fees are paid up front, prior to realizing any potential tax savings Limited to Large Project Due to the upfront financing fees, IRBs are not recommended for projects will less than $2 3 million in investment Equipment Depreciation The baseline value of the equipment is established when the bonds are issued. Since the term of the bonds can be as long as years, companies must perform additional analysis to determine when tax savings from the IRBs is no longer greater than actual taxes paid on depreciated equipment Subject to clawback provisions 12 6

7 Abatements Why Abatements? Abatements are usually a direct reduction of expense to a Company s bottom line. 13 Abatements How do Abatements Work? An abatement is a reduction of property tax. It may be based on a reduction in the assessed value of taxable property, or a parcel may be exempted completely from the property tax based on ownership and use. 14 7

8 Abatements What are the Challenges of Abatements? Typically requires public approval What is the baseline? What is actually abated? Pay attention to your assessments to ensure you are not paying excessive taxes at the end of the abatement period Subject to clawback provisions 15 Economic Development Grant Agreement Why Economic Development Grant Agreements? In certain states an Economic Development Grant Agreement is used to provide the stimulus for the development, growth and expansion of business and industry. This includes the relocation or expansion of a business that would not have occurred except for the award of the Grant, or to encourage the development or help ensure the success of certain targeted businesses and/or geographic areas. 16 8

9 Economic Development Grant Agreement How do Economic Development Grant Agreements Work? The Economic Development Grant Agreement is provided to businesses that meet certain criteria and is tied to performance based goals (i.e. new jobs, capital investment, incremental increase in property taxes, etc.)detailed within the agreement. 17 Economic Development Grant Agreement What are the Challenges of Economic Development Grant Agreements? Typically requires public approval May be limited to certain industries and uses Timing of payments may be restricted on an annual basis Record keeping obligations Subject to clawback provisions 18 9

10 What is a Clawback? A good back scratch A lobster found off the coast of Texas A tax on shellfish Recapture or reimbursement of the benefits of tax credit/incentive/abatement Clawback Features Clawback features are provisions of credit/incentive/abatement programs that require a taxpayer to recapture or reimburse the government for the benefits the business previously received if certain conditions of the grant are not satisfied

11 Clawback Features (cont d) Tax credit/incentive/abatement statutes may include clawback provisions and/or grant power to government authority to include recapture provisions in the credit/incentive/abatement agreement. May be at the discretion of the government authority if business does not remain in compliance with the tax credit/incentive/abatement agreement for the required term. May be a partial recapture if business was in compliance for part of credit/incentive/abatement grant period. 21 Clawback Features (cont d) States have increased their use of clawback features in their credit/incentive/abatement programs. Clawback features are usually triggered when a recipient of the grant fails to maintain the level of employment, investment or other commitment required under the particular program

12 Grant may be recaptured and/or Grant may be reduced if certain levels of employment are not maintained. 23 Grant may be recaptured and/or reduced if required conditions of the grant are not achieved or maintained. For example, if grant required an agreed capital investment which is not made or if grant was conditioned on a particular use of property and that use is not maintained for any required period

13 Some real-life examples: Teacher summer employment credit is subject to recapture if teacher hired for summer discontinues teaching and becomes employed by taxpayer. Prison investment credit is recaptured if property on which credit has been allowed is converted within a certain time frame to another use Recapture of enterprise zone low interest credit if the property acquired with loan proceeds is removed from the enterprise zone. Excess profit may be required to be paid by taxpayer if profit exceeds a certain amount. 25 Authority for Clawback: Clawbacks may be provided for in statutory language creating tax credit/incentive/abatement. Clawbacks may be provided for in agreement memorializing tax credit/incentive/abatement. Standard may be reasonable effort or may be strict construction

14 Case Law Studies: Charter Township Ypsilanti v. General Motors Corp., Willow Run Plant, 201 Mich. App. 128, 506 N.W. 2d 556 (Mich. Ct. App. 1993) Action to enjoin taxpayer from closing plant that had received property tax incentive. Court held in favor of taxpayer finding there was no contractual promise to keep the plant open. 27 Case Law Studies: (cont d) Owens Brockway Glass Containers Inc. v. State Tax Commission and City of Charlotte, No , 2014 WL (Mich. Ct. App. October 21, 2014) Court upheld award of $4,015,875 in damages to City due to closing of plant which had been granted a property tax abatement. Court focused on wording in agreement

15 Case Law Studies: (cont d) In the Matter of Prudential Financial, Inc. s Urban Transit Hub Tax Credit Application, No. A T3, 2013 WL (N.J. Super. Ct. App. Div. Aug. 22, 2013, cert. den. 217 N.J. 294) (2014) Challenge to Economic Development Authority s ( EDA ) grant of urban hub credit to Prudential in the amount of $210,828,357 with respect to construction of office building. Owner of office building which would suffer vacancy as result of new building challenged the grant as action of EDA being arbitrary and capricious. Court denied request to invalidate grant. 29 Case Law Studies: (cont d) City of Westlake v. VWS, Inc., 2014 Ohio 1833 (Court of Appeals of Ohio, Eighth District, Cuyahoga County) VWS materially breached tax abatement agreement and Westlake was entitled to invoke clawback provision. VWS ceased its operations and, therefore, failed to keep its agreement regarding job retention and creation

16 Who has standing to challenge grants? A taxpayer who can argue they are harmed as a result of the grant. Some credit/incentive/abatement statutes may contain provisions on challenges. Town of Secaucus v. TPI Urban Renewal, 19 N.J. Tax 10 (Tax 2000), as supplemented at 19 N.J. Tax 538 (Tax 2001) Town of Secaucus contended Jersey City improperly granted a number of tax abatements and such abatement agreements violated the provisions of the tax abatement statutes and were invalid. Town of Secaucus v. City of Jersey City and 101 Hudson Street Associates c/o Linpro, 20 N.J. Tax 384 (Tax 2002) Town of Secaucus challenged property tax exemption granted by City to urban renewal entity. Among other issues, court held master lease arrangement utilized for purpose of circumventing the net profit limitations imposed under the Long Term Tax Abatement Law, N.J.S.A. 40A:20 1, et seq., was disregarded and all of the income generated by the project would be attributed to the urban renewal entity and doctrines of laches and estoppel were not applicable to town s challenge of property tax exemption. 31 Other Hot Topics: Prevailing Wage Can it be required to be paid if a grant is given? Statutory Requirements and/or Local Municipal Ordinance may provide for it Tax credit/incentive/abatement Agreement may provide for it Affirmative Action/Diversity Business Goals Statutory Requirements and/or Local Municipal Ordinance may provide for it Tax credit/incentive/abatement Agreement may provide for it Reasonable efforts v. strict requirements to comply with required project labor agreements 32 16

17 The Future of Tax Credits and Incentive Programs: States may increase and/or clarify use of clawback features as case law develops. Tax credit/incentive/abatement agreements may be drafted to better define and/or clarify terms of clawback. Litigation over meaning of statutes and agreements will continue. Third party challenge to the grant of credits/incentives/abatements will continue. 33 Clawback Tips Review statutory recapture provisions before seeking credits Be informed about penalties for missing investment or hiring goals Plan for ownership changes Do not overstate promises regarding jobs or investment Balance job retention and job creation Provide for partial or percentage clawback 34 17