By Cris O’Neall, Esq. of Greenberg Traurig LLP
With the number of public-private partnerships for constructing public facilities on the rise, communities across the country wrestle with the question of how to treat such arrangements for ad valorem property tax purposes. In most instances, private developers and taxing entities take opposing positions on the issue.
Public-private joint ventures have become a popular strategy to achieve community objectives through collaboration with private developers. To construct a particular facility, a municipality or other government will typically provide subsidies or other financial incentives to encourage participation in the project by a private-industry partner or partners.
These subsidies, which may come in the form of grants or tax credits, often lead to property tax contention. Some taxing authorities include the subsidies or tax benefits granted to the private developer in the taxable assessed value of the real property.
In contrast, private developers view such subsidies or benefits as tax-exempt intangible property that should not be included in assessed values.
Here are a few common incentives and their property tax implications:
Low-Income Housing Subsidies
The treatment of federal subsidies for operation and construction of low-income housing became an early battleground in the ongoing conflict over property tax and subsidies. Michigan, Kansas, Idaho and some other states account for subsidies in assessing low-income housing for property tax purposes. Taxing authorities in these states argue that subsidies are tax credits that artificially depress values and prevent assessment of such properties at market value.
However, Arizona and some other states disregard subsidies in assessing such properties. Those states assert that subsidies are transferable, meaning the incentives are not intertwined with the real property, and that subsidies enhance the value of low-income housing in the marketplace.
Renewable Energy Subsidies
States have taken a somewhat different view of government subsidies and tax incentives used to finance construction of renewable energy facilities. Particularly in states that promote alternative or green energy, taxing authorities exclude subsidies from the taxable property, choosing instead to classify such incentives as tax-exempt, intangible property.
For example, California’s State Board of Equalization in 2017 issued guidelines excluding the federal cash grants and income-tax credits from inclusion in the valuation and assessment of windfarm properties. In 2014, the Arizona Legislature approved a similar subsidies exclusion in the assessments of solar power properties.
More recently, the Oklahoma Supreme Court in Kingfisher Wind LLC vs. Wehmuller held that production tax credits are intangible personal property and are not subject to ad valorem taxation. Production tax credits are federally issued subsidies to help finance construction of windfarms.
The reasons for not including subsidies in the assessed values of renewable energy properties vary. Some taxing authorities assert that subsidies are not bargained for between buyers and sellers of such properties, and that the statutes governing incentives often impose sunset dates.
Notably, some taxing authorities identify subsidies as a needed financial incentive for construction of high-cost properties that would otherwise be economically infeasible to build.
‘If You Build It, They Will Come’
Local governments have found that, in many cases, the only way to construct public facilities that will attract a sports franchise or similar occupants to host concerts, sporting events and other large, public events is to subsidize a portion of the construction cost. The development cost for football stadiums, basketball and hockey arenas, indoor theaters, convention hotels and similarly sized public venues often do not pencil out for a private developer without government subsidies. Joint ventures with private developers allow governments to gain the facilities they need by making projects feasible for developers.
Subsidies or grants, perhaps funded by municipal bonds, are one avenue governments use to promote construction of public facilities. But tax credits and similar incentives can be — and are — used to encourage public venue development.
In a similar vein, governments can increase a developer’s available funding to construct a desired project by allowing developers to pursue additional revenues at the public venue. An example would be to allow construction of additional outdoor advertising assets associated with the facility that are not assessable for property taxation.
California Decision Pending
California’s Supreme Court is currently addressing the property tax treatment of government subsidies. In Olympic and Georgia Partners LLC vs. County of Los Angeles, the court is considering whether the assessed value of a convention center hotel should include a subsidy the City of Los Angeles provided to the developer and owner for its construction.
The city based the subsidy on an amount of transient occupancy tax the hotel was expected to generate for a period of years after it opened. City leaders reasoned that the hotel would not be economical to build without the subsidy.
The court is wrestling with this question: Is the subsidy the city provided an intangible benefit that is not subject to taxation, or is it a part of the real property and assessable for property tax purposes? The court’s decision is expected later this year.
Taxable Property or Exempt Intangible?
Like the California Supreme Court, communities across the country continue to grapple with the fundamental question of whether government development incentives contribute taxable property value to a completed project. The answer to this question has significant implications.
If assessors subsume subsidies into the assessed values of real property, it may significantly limit local governments’ ability to induce private developers to construct public venues needed to revitalize city centers and rejuvenate local economies. If government subsidies are to be tax-exempt and excluded from the assessed value of real property, however, tax authorities must address a few key points in determining the treatment of individual properties.
First, is the subsidy being used to further the goal of local government, particularly when the subsidy is essential to make the project’s construction feasible? Second, will the subsidy’s benefit continue throughout the life of the completed property?
When the subsidy funds a project that is not economical to build otherwise, and when the incentive is a one-time construction subsidy that will not be transferred to a subsequent owner, there is good reason for excluding the subsidy from the project’s assessed value for property tax purposes.
— Cris K. O’Neall represents owners/operators of public venues in challenging property tax assessments on their properties. He is a shareholder in the law firm of Greenberg Traurig LLP, the California member of American Property Tax Counsel, the national affiliation of property tax attorneys. Reach him at oneallc@gtlaw.com.