- Louisiana PILOTs: A Flexible Alternative to the State’s Industrial Tax Exemption Program (ITEP)
- August 11, 2016 | Authors: James Lawrence Moffett; Tracy Averett Morganti; David M. Wolf
- Law Firms: Adams and Reese LLP - Ridgeland Office; Adams and Reese LLP - Baton Rouge Office; Adams and Reese LLP - New Orleans Office
- As a result of Louisiana’s continuing budget woes, Governor John Bel Edwards’ administration has conducted a review of the economic impact and effectiveness of the state’s generous economic development incentives.
Under scrutiny in particular is the Industrial Tax Exemption Program (ITEP), which allows manufacturers and industrial operators to obtain 100% property tax exemptions on buildings and equipment. The Governor’s analysis concluded that existing contracts will result in an average of $1.4 Billion in lost tax revenue each year for the next five years for parishes, municipalities, school districts and other local political subdivisions. Consequently, on June 24, 2016, Governor Edwards issued an executive order that adds additional layers of local oversight and greater discretion in awarding the ITEs, and ensures that Louisiana citizens receive assurances of job creation through the use of local workers.
These added restrictions likely will prompt local governments and businesses that are looking to invest in Louisiana to explore alternative development vehicles. One option they can consider is a PILOT.
WHAT IS A PILOT?
The term PILOT is an acronym for “Payment in lieu of Taxes.” The PILOT structure is an incentive given to a private company through a governmental unit (usually a city, parish, port commission or industrial development board) whereby the governmental unit takes title to an economic development project for a term of years, and the project is leased back to the company when the project has actually been built or developed. The company generally receives the benefits of depreciation, while being responsible for paying maintenance, operation and insurance costs on the project. However, since the governmental unit has title to the economic development project, its property is exempt from local property taxes allowing for the contractual structuring of the PILOT payments (reduced tax payment). The PILOT payments may never exceed the amount of property taxes that otherwise would have been due.
There are some key differences between PILOTs and ITEs. PILOTs may be used for a broader range of economic development projects-e.g., manufacturing, multifamily housing, warehouse, distribution centers, commercial and retail facilities, and transportation facilities. ITEs are limited to manufacturing.
PILOTs are also more flexible with regard to the terms of the agreement with local governments. The ITE program is limited to ten years, whereas the PILOT payments can be extended over a much longer duration. A typical commercial PILOT may run from 10 to 20 years, but in some cases a PILOT may run from 30 to 40 years.
PILOTs are a cutting-edge economic development tool, and their flexibility and “customizable” structure should make them increasingly appealing as local governments look to ways to boost investment.
HOW CAN PILOTs BENEFIT LOCAL GOVERNMENT AND INCENTIVIZE ECONOMIC DEVELOPMENT?
The PILOT, like an ITE, is a form of tax abatement. PILOTs may also be used in conjunction with taxable bonds or as an additional incentive associated with tax-exempt Private Activity Bonds.
Whereas ITEs include a full tax abatement period of 10 years, PILOTs allow companies and local governments to structure negotiated arrangements that may provide immediate revenues to local taxing bodies in return for negotiated reductions over future years.
By reducing a project owner’s annual local property tax liability, additional cashflow is created that can make a marginal project economically feasible, or allow an even larger development to be financed that might otherwise be possible without the PILOT incentive. However, PILOT applicants must show that the benefits to the community in the form of additional employment through construction and/or permanent jobs, minimum annual payroll, sales tax revenues, etc., will equal or exceed the reduction in property tax payments. Failure to meet certain targets can result in penalties.
HOW HAVE PILOTs BEEN USED IN LOUISIANA?
- To provide a property tax abatement/reduction purely as an incentive to attract/retain business.
- Integrated with the State’s 10-year industrial tax exemption program to provide a longer period of tax reduction/abatement.
- Used in lieu of the State’s 10-year ITE program to provide a longer incentive period but with structured income to local taxing bodies during the first 10 years when they would otherwise be receiving no additional tax revenues from the project under the ITE program.
- To redirect local tax revenues for the purpose of financing necessary infrastructure and/or site improvements needed to attract/retain business that would otherwise be unaffordable for local government units.
- As a tool for creating a public/private partnership through a cooperative endeavor agreement whereby PILOT payments are redirected or leveraged into other economic development projects or for financing necessary infrastructure and/or site improvements.
- As a vehicle for project developers to obtain certainty regarding the amount of future tax payments, which may be necessary in order to secure financing.
- As a way for local governments to also secure assurances about minimum jobs, payroll and/or preference for local or minority/disadvantaged businesses.