Timothy Van Valen
With vast amounts of land, financial and technical resources and access to trade corridors, New Mexico is a state of expansive opportunity for real estate developers. It’s also a state with some of the most aggressive incentive packages in the country. While the New Mexico Constitution generally bars the state and local governments from providing direct cash grants to private businesses or project-specific tax abatements, both of which are common in other states, New Mexico offers a plethora of incentives that can help facilitate real estate development. These incentives include industrial revenue bonds; Tax Increment Development Districts; infrastructure funds provided under the Local Economic Development Act; and the Investment Tax Credit. As with most states, New Mexico also offers numerous gross receipts and income tax incentives, particularly for the film, renewable energy and aircraft industries. It also provides a generous job-training program for qualifying businesses.
Industrial Revenue Bonds
For substantial commercial projects, one of the most commonly used economic development incentives in New Mexico is an industrial revenue bond issued by a county, municipality or the New Mexico Finance Authority. While obtaining an IRB requires a developer to navigate the political process, it has been used for everything from multi-billion dollar computer chip manufacturing plants to service centers, wind farms, cheese factories and grain mills.
There are several requirements for an IRB:
· Project includes land, buildings, furniture, fixtures or equipment.
· Municipal projects may not include retail space.
· Financing includes only capital and transaction costs.
· Working capital generally cannot be financed with IRBs.
A typical IRB project involves a business that wants to purchase, construct or equip a facility. The business enters into an agreement with a government-bond issuer that is usually in the form of a lease. The agreement provides that the company will construct and equip the facility as an agent for the government issuer, lease the facility from the government issuer and operate it. At the end of the lease and bond term, the developer purchases the facility from the issuer at a nominal price. The proceeds of the bond sale are used to pay the capital expenses of the facility, and bonds are paid off solely with the payments made by the company to the issuer under the lease. The bonds do not put governmental funds or assets at risk, and the local government has neither the ability nor desire to operate the project facility.
Since an IRB project is owned by a governmental entity, the project assumes the tax-exempt attributes of a governmental entity under New Mexico law. IRBs can be used as a true project finance mechanism, but its primary use is two-fold. The first use is to provide an exemption from property tax on real and personal property purchased for the project for up to 30 years. The second use is gross receipts and compensating tax exemptions and deductions for the purchase of tangible personal property other than construction materials.
Though the property is constitutionally exempt from property tax, the governmental-bond issuer may impose a contractual requirement for a payment in lieu of taxes for some fraction of the property tax that would otherwise be due. The agreements may also include “clawback” provisions requiring repayment of tax savings if certain project goals are not met or the facility does not remain in operation for a stated period of time.
Tax Increment Development Districts
A recent development in New Mexico has been the ability to establish tax increment development districts (TIDDs) to fund construction of a wide range of public infrastructure in support of private development that government use. TIDDs are created by counties and municipalities, but are independent political subdivisions of the state that are governed by a board. Typical infrastructure expenditures allowed by TIDDs include roads and sewers, transit facilities, schools, libraries and electric generation and transmission facilities.
TIDDs usually do not increase the tax rates within a district, but rather use increased tax revenue from new activity and investment to back construction bonds. Unlike TIDDs in many other states, New Mexico officials can dedicate not only additional property tax revenues generated by improvements within the TIDD, but also additional gross receipts tax revenue generated by new activity within the TIDD.
TIDDs have been approved by local governments for both development of greenfield sites and redevelopment projects. However, greenfield projects have encountered increasing resistance from interests opposed to urban sprawl as well as by those who think tax revenues should not be earmarked exclusively for development purposes. On the other hand, use of TIDDs ensures construction of infrastructure in support of new development, something that might be overlooked by local governments.
Local Economic Development Act
The New Mexico Local Economic Development Act provides a mechanism for use of state and local funds to provide land, buildings and infrastructure in support of a qualifying private development. The act implements an exception to the prohibition against the use of government funds for private projects. To utilize this incentive, developers must partake in local political processes. Typically, local governments provide funds appropriated by the New Mexico Legislature to a county or municipality to support a specific private project.
Investment Tax Credit
The New Mexico Investment Credit Act provides a credit against gross receipts, compensating and withholding taxes for a business that invests substantial amounts in qualifying equipment and increases its number of employees. Unlike the above incentives, the credit does not require developers to navigate the political system. The available credit is 5 percent of qualifying expenditures for industrial equipment with a requirement to increase employment by one person for every $500,000 of qualifying expenditure up to $30 million and one person for every $1 million thereafter. The investment credit is used primarily with large, new facilities rather than smaller businesses or retrofits that increase efficiency but do not increase employment. The investment credit can be used in combination with IRBs and can be carried forward until exhausted, but it is not refundable or transferable. The investment credit is a partial solution to the fact that New Mexico does not provide a gross receipts tax exemption or deduction for the purchase of manufacturing equipment, as is the case in some states.
Developers who understand and can capitalize on the array of incentives the state of New Mexico offers have a substantial opportunity available to them. All it takes is aligning the right project with the right incentives to make the development happen, creating a win-win situation for both the developer and the state of New Mexico.
— Timothy Van Valen is senior counsel in Brownstein Hyatt Farber Schreck’s Albuquerque office.