The Kyle Report

The Kyle Report

Tuesday, June 19, 2018

Short course: Tax Abatements 101

In response to an article I wrote about an economic development project that should be approved by the City Council without much disagreement tonight, a David C. Crowell wrote on Facebook: "How much more will the actual taxpayers be on the hook for because of this tax break for an absentee landlord?"

Semi-legitimate question that deserves a wider response than one simply posted on Facebook (although, obviously, this reply will appear there as well).

The short answer is zero. Nothing. Nada. Zilch. But the question deserves a more detailed response than that so let me see if I can provide that detail while, at the same time, reducing this down to its simplest terms.

Let’s say you are the owner of an undeveloped piece of land and your current property tax bill on that land is $10,000. But now you’ve decided to develop that land into some kind of commercial/industrial usage and you know you are going to need basic city services on that property like water lines, wastewater lines, probably even effluent water lines and other utilities and the new infrastructure required on the property is going to cost a hefty bundle. So you go to the city to discuss it and the city hits you with the fact that it isn’t going to pay for it. "That’s going to be up to you," the city tells you. "But you can recoup your investment with the lease payments you receive from whatever tenants lease the facilities you are providing. And since this is a triple freeport area you should have no trouble attracting tenants willing to pay premium rates.

"But, we actually really want this development to happen," the city tells you, "so we’re willing to make you a deal." And the deal they offer you is a five-year, TIF-based (TIF being the acronym for tax increment financing) property tax abatement nearly identical to the one on tonight’s council agenda. Here’s how it works:

Because of the development you place on this project, the value of that land appreciates to an extent that your property tax bill the following year is $25,000, a $15,000 increase on the year before. The city’s offer is that if you pay that $25,000 tax bill on time, it will give you the $15,000 difference back, as long as all the buildings you placed on the property are vacant. However, if, say, 30 percent of those buildings have been leased, that $15,000 will be reduced by that 30 percent, so your rebate will be $10,500. In each of the five years of this deal, that percentage of the rebate drops another 20 percent (yet all the while the city will continue to receive at least the $10,000 in property taxes it would have had the property never been developed). So in Year two of the agreement, if the property tax bill would normally have ballooned to $40,000 and now you have 80 percent of the buildings leased, you would receive a rebate of $4,800 (80 percent of the $40,000 minus the original $10,000 and then 20 percent of that total).

You are being repaid for the remainder of your original infrastructure investment from the lease payments you are getting as a result of your development being so attractive to potential lease holders due to the triple freeport exemption. It’s important to note here that you, as the owner and the developer of the land, are not entitled to this exemption. That is a tax exemption based not on land value, but on inventory value. So it is only of use to those who would want to lease one of the facilities on your property. For example, I have a company that manufactures smart phones. I import all the parts needed to manufacture the phone, assemble them and then ship the phones to the companies that will eventually sell them to the public. Triple freeport exemption means the (1) county, (2), the school district and (3) the city exempts me from having to pay property tax on those parts as long as they leave my facility inside a smart phone within 175 days from the day I receive them. I think you can see why someone like a smart-phone manufacturer or really any kind of a distribution center would seek out locations with this triple-freeport exemptions. And that's what makes your development so appealing to potential occupants and increases the likelihood it will be a success.

But I don’t want anyone to just take my word on how this process works so I ran this whole thing by Assistant City Manager James Earp, the guru the city selects to negotiate and draft economic development agreements. He was kind enough to take some time out of what I believe is a vacation cruise he’s taking in the Gulf of Mexico to read all the above and then tell me "the way you describe it seems sound."

So there’s that.

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