Property tax abatement is a discretionary economic development tool used by cities, counties and states across the country to encourage investment and economic growth in their communities. Local governments provide abatement to attract or encourage investments which they view as positive for the community. When local governments have the opportunity to increase their property tax base, add jobs and bring value to their area, they may engage with businesses to negotiate abatement (or phase-in) on taxes derived from the prospective project. The negotiated reduction in property tax over a set term is called abatement, and when used in competitive situations, it’s can be good for both businesses and the community.
How abatement works in Missouri
Enhanced Enterprise Zones
In Missouri, state law allows for direct local property tax is through Enhanced Enterprise Zones (EEZs). EEZs must be created by local governments and certified by the state. Zone designation is based on certain demographic criteria, the portal to create sustainable jobs in a targeted industry and a demonstrated impact on local industry cluster development.
While EEZs can be useful, they are also limited. They don’t provide the ability for local government to provide abatement on personal property and they cannot be established in areas where the demographics don’t meet pre-determined definitions of “blight.”
Bond Lease Agreements and PILOTS
Outside of EEZs, offering abatement directly is not constitutional in Missouri. In order for abatement to be offered, assets related to a project actually have to be held by a tax exempt municipal entity. This is where Chapter 100 and Chapter 353 Bonds come into play. Cities, counties, towns and villages in Missouri are authorized to issue industrial development bonds (“IDBs”) to finance projects for private corporations, partnerships and individuals. Any property financed by IDBs may be abated so long as the bonds are outstanding. With Chapter 100 and Chapter 353 Bonds, the municipality will issue IDBs (which will generally be purchased by the business) for the value of the construction and/or equipment. The municipality will then purchase/own the property for the term of the IDBs, collecting lease payments which are used to pay the Bond interest. Throughout the term of the Bonds, the business physically possesses the property and utilizes it in its business through a capital lease even while ownership technically resides with the municipality. At the end of the bond term, legal ownership of the property goes to the business as the Bonds are terminated.
With the municipality technically owning the property, the project property is exempt from taxation according to Missouri law. In most cases, the municipality will offer partial tax abatement, requiring the business to make “payments in lieu of taxes,” or PILOT payments, to the city or county. If 50% abatement is provided, the PILOT would be half of what the property taxes would otherwise be. When significant dollar amounts are involved, the savings to a business over the term of the IDBs can be quite large with hundreds of thousands or even millions of dollars in savings provided.
As an added bonus, these arrangements can also allow for certain sales taxes to be exempted – potentially saving money for businesses as they construct new facilities.
Is Missouri abatement competitive with other States?
Every state has its own laws governing how and when abatement can be offered. The laws in Missouri which necessitate Bond-Lease agreements outside of blighted areas create an extra bureaucratic step in the process which can effectively limit the usefulness of abatement for smaller projects.
As a state that taxes both real property and personal property (while some states do not tax personal property or exempt industrial equipment), abatement is a very important tool for communities competing across municipal and state lines. Bond-Lease agreements often involve significant legal costs (on both the municipal and business side) that can make the arrangement cost prohibitive for smaller projects – leaving Missouri communities and businesses at a disadvantage compared to other states.
What is the verdict? Under Bond-Lease agreements, Missouri municipalities can offer abatement to compete with any state, but the cost of setting up these agreements certainly make abatement less flexible than it is in competing states. With smaller projects such as a manufacturer looking to build a $2M facility, the benefit of the abatement may not be sufficient to justify the process.
Can abatement in Missouri affect your location decision?
Property taxes and therefore abatement should be considered any time your company is considering an expansion that includes considerable investment in new construction or new personal property. Expansion and incentive discussions need to take place as early as possible as you evaluate your options for growth. Whether your company is building a new headquarters facility, investing in manufacturing equipment for a new customer program, or commercializing new technology, economic incentives – including EEZs, Chapter 100 and Chapter 353 Bonds – should be considered.
Capitalizing on Incentives
Economic incentives like abatement can be valuable tools for both governments and growing businesses. Here’s a quick guide to ensuring that you identify incentive opportunities and maximize the value received:
- Plan job related and capital related growth in advance and discuss your plans with your advisor
- Remember that discretionary incentives are project, timing and location specific
- Consider location alternatives for growth and investment on both a local and state level before making definitive expansion decisions
- Never act before understanding incentive possibilities
- Work with an advisor with experience in incentive evaluation and negotiation
Considering expansion? Have questions about local or state economic incentives? Want to learn more about how abatement in Missouri could affect your project? Contact McGuire Sponsel today at 317-564-5015 or email@example.com to discuss how proactive location and incentive discussion can impact your business.