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Construction Insurance and Real
Estate
Timely articles covering the most
pressing issues facing construction firms in the Midwest
MISSOURI REDEVELOPMENT
INCENTIVES
By: Dan Cofran
Missouri offers a number of tax incentives for urban redevelopment
projects, including seven measures featuring property tax relief.
Each either abates or returns real property taxes as well as, in one
measure, additional sales and other taxes, generated by a project's
new improvements. In addition, the power of eminent domain is also
available with several of these measures to acquire needed
properties and eliminate title problems.
The seven property tax measures are Chapter 353 Urban Redevelopment
Corporations, Chapter 99 Land Clearance for Redevelopment Authority
projects, Chapter 100 Planned Industrial Expansion Authority
projects, Chapter 99 Tax Increment Financing projects, Chapter 100
Bonds, Enterprise Zones and Brownfield Projects.
Chapter 353 Redevelopment Corporations
This is the oldest of the measures, passed by the Missouri
legislature during World War II to stimulate the construction of new
housing. However, in practice, it is widely used for commercial
development.
Projects qualifying under Chapter 353 have their state, city,
county, school district and other local real property taxes on their
new improvements abated for up to 25 years. For up to the first ten
years, the property taxes on the improvements are abated up to 100%.
For up to the following fifteen years, taxes on the improvements are
abated up to 50%. Taxes are not abated on the land during the first
ten years since bare ground theoretically has the same value before
and after the renewal project. However, during this ten-year period,
the assessed value on the land cannot be increased over its level at
the time of the project's inception - it's "frozen" at that level.
Thereafter, for up to the next fifteen years, taxes on the land are
abated up to 50% in the same manner as the taxes on the
improvements.
Because abating property taxes can be controversial, the statute
permits the developer and city to negotiate for payments in lieu of
taxes, commonly called "PILOTS," generally in an amount equal to the
taxes on the existing improvements so the City and other taxing
jurisdictions avoid any net loss in taxes. This is a matter of
negotiation. However, many cities, including Kansas City, almost
without exception require PILOTs equal to the pre-existing taxes on
the improvements. In addition, relocation expenses of displaced
commercial and residential tenants must be paid.
The power of eminent domain is also available under Chapter 353 to
ensure land assembly and elimination of possible title problems.
When redeveloping in older areas of an urban area frequently
characterized by multiple, small ownerships, the power of eminent
domain is an important land assembly tool. Under Missouri law, the
power of eminent domain permits the developer to acquire property
and pay the appraised value, as determined by three court-appointed
commissioners, into Court for subsequent determination by a jury of
the property's fair market value if the commissioners' value is
disputed. Acquisition of title does not have to wait until
conclusion of the court proceedings.
Unlike the other measures and common practice in other states, the
power of eminent domain is exercised by the private redevelopment
corporation itself, not the city. However, the statute permits the
city to exercise the power on behalf of the developer if preferred.
To qualify for Chapter 353 redevelopment, the developer must
demonstrate to the City that the propertyas a whole (not each
parcel) is "blighted" under a statutory definition. Blight is
defined somewhat broadly and is not limited to the common meaning
associated with slums or physical blight.
An important limitation under this statute is that annual net
earnings on the project cannot exceed eight percent. A general
definition or formula for computing net earnings is included in the
statute. Annual net earnings in excess of eight per cent, however,
can be held in reserves for maintaining an eight per cent return in
the future, offsetting prior years' returns over eight per cent,
accelerating amortization and other purposes. Over the life of the
project, however, the annual eight percent limitation cannot be
exceeded. Annual reports are required in Kansas City for this
purpose.
The basic procedure requires the i n cor p or a t i on of a sep a ra
t e redevelopment corporation that applies to the city council for
approval of the redevelopment plan and project, reviewed first by
the city's plan commission in Kansas City.
Cities frequently have specific ordinances implementing the state
statute that provide more specific guidance and detail than the
state statute. Kansas City requires a plan to include a narrative
description of the project, a project timetable, a summary of
project costs, a financing plan, identification of sources of equity
funding, a feasibility plan, a description of necessary zoning
changes (done as a companion case to rezone the property to URD in
Kansas City), a site plan and typical elevations, a relocation
assistance plan, an affirmative action plan, a plan to encourage use
of Minority Business and Women Business Enterprises (MBE/WBEs),
proof that the area is blighted and computations of taxes that will
be abated.
The city, through its city council based upon a recommendation from
the city plan commission and city staff in Kansas City, makes the
decision on whether to approve a Chapter 353 project, even though
the taxes of other jurisdictions are abated. In recent years in the
Kansas City area, other taxing jurisdictions have monitored Chapter
353 applications more closely than in the past and it is important
to advise these jurisdictions, school and library districts in
particular, of proposals as part of the approvals process.
Land Clearanc for Redevelopment Projects
This is an early 1950s typical urban renewal statute pursuant to
which a governmental authority, not a private redevelopment
corporation, acquires and clears blighted property, constructs basic
streets and other infrastructure and then constructs housing or
other improvements itself or makes the cleared and prepared property
available to the private sector at fair market value for
redevelopment. Property taxes on the new improvements are abated up
to 100% for up to ten years, if the project is located in Kansas
City or St. Louis.
The redevelopment authority, commonly called an "LCRA," has the
power of eminent domain to acquire blighted properties. In addition,
the redevelopment authority has the power to issue revenue bonds to
finance the redevelopment by loaning the bond proceeds to a private
sector developer with income from the project dedicated to retiring
the bonds.
To qualify under this measure, an area must be "blighted"
or"insanitary." The definitions are similar to the Chapter 353
blight definition and in actual practice are broadly construed.
The tax abatement provisions basically fix the assessed valuations
for both the land and improvements at their levels before
construction of the redevelopment project improvements and keep the
assessed valuations for the improvements (but not necessarily the
land) at those levels for a period of ten years. Therefore, the
redeveloper ends up paying no real property taxes on the new
improvements for up to ten years. Procedurally, an application for
redevelopment of an area must be submitted to the redevelopment
authority which must recommend approval to the city council. City
council approval follows the normal ordinance process, including
city plan commission review and recommendations.
The application must cover a number of matters similar to a Chapter
353 redevelopment application including a narrative description of
the project, boundary map, a description of existing land use and
conditions, proposed land use and conditions, population densities
after redevelopment, a project timetable, a summary of project
costs, a financing plan, a description of necessary zoning changes
(again, done as a companion case to rezone to URD in Kansas City), a
site plan and other plans, a relocation assistance plan, affirmative
action plan and MBE/WBE plans (in Kansas City), and proof that the
area is blighted.
Planned Industrial Expansion Projects
This measure, passed in the mid-1960s, combines elements of the
Chapter 353 redevelopment corporations law and the Chapter 99 land
clearance law. It is very nearly identical to the latter, providing
for an planned industrial expansion authority's acquisition,
clearing and constructing basic infrastructure on "blighted" or "insanitary"
property, using the same definitions as found in the land clearance
statute. The authority is commonly called a "PIEA." This measure
also has an additional category of qualifying property called
"undeveloped industrial area" with a similar definition, somewhat
broader, however, with respect to including vacant land.
As with the preceding statute, the planned industrial expansion
authority can build improvements itself upon the property (with a
much longer list of types of improvements, e.g., plants, stores,
shops, shopping centers, office buildings, hotels, motels, parking
garages, apartments, warehouses, etc.) or make available to private
sector developers the cleared and prepared land for fair market
value for redevelopment. Similarly, an industrial expansion
authority can acquire property by eminent domain and provide revenue
bond financing for private sector redevelopment on the cleared and
prepared land.
However, instead of providing tax abatement for ten years as in the
case of a land clearance authority, an industrial expansion
authority is permitted to convey its property to a private Chapter
353 redevelopment corporation, with the 25 year tax abatement
benefits, upon a 3/4s vote of the city council.
The procedure is very much like that applicable to land clearance
projects, with the submission of an application to the planned
industrial expansion authority followed by city council approval.
Kansas City also requires city plan commission review before going
to the city council.
Tax Increment Financing Projects
A newer and more generally advantageous measure is tax increment
financing, generally referred to as "TIF" financing. It was added in
the early 1980s. Instead of receiving 10 or 25 year property tax
abatement for developing blighted property, the property’s assessed
valuation is frozen at the pre-development level and the developer
pays a separate sum equal to full local taxes on the land and new
improvements every year (called “payments in lieu of taxes”), but
gets the “payment of lieu of tax money back (but not portions
attributable to the state's Pension for the Blind and the state's
Merchants and Manufacturer's Replacement Tax), as well as up to 50%
of most other local taxes generated by the project, e.g., sales,
earnings, restaurant and utilities taxes, to reimburse the developer
for project costs. This return of monies to the project can last up
to 23 years.
The developer's annual payments in lieu of taxes are used annually
to reimburse a broad range of qualifying project costs including
studies, surveys, plans and specifications, architecture,
engineering, planning, legal work, accounting, land acquisition,
site preparation, demolition, relocation assistance, new
construction, rehabilitation, remodeling, public improvements,
marketing and debt service.
In addition to the payments in lieu of taxes, up to 50% of local
economic activity taxes, commonly called "EATS," generated by the
project are used for reimbursement of the same project costs. EATS
include local sales,restaurant, earnings and utility taxes. Taxes
excluded as EATS, however, are hotel/motel taxes, the Kansas City
bi-state cultural district sales tax, the St. Louis public
transportation sales tax and personal property taxes.
One twist under tax increment financing is what is commonly known as
the "but for" test. Under this requirement, the developer must show
that the area (not the project) could not reasonably be anticipated
to be redeveloped without the taxes being returned to the project.
A tax increment financing commission can acquire property by eminent
domain for the developer's project as well as issue revenue bonds
for constructing the project and adjacent public infrastructure.
Finally, to qualify, the property in question must be blighted under
the same definition used under the land clearance and planned
industrial expansion statutes, or be what is known as a
“conservation" or "economic development" area, the latter having
less rigorous standards.
In that regard, a "conservation area" is defined as any "improved
area . . . in which fifty percent or more of the structures in the
area have an age of thirty-five years or more." The definition
states that such an area is "not yet a blighted area" but may become
blighted in the future due to at least three of the following
factors: Dilapidation; obsolescence; deterioration; illegal use of
individual structures; presence of structures below minimum code
standards; abandonment; excessive vacancies; overcrowding of
structures and community facilities; lack of ventilation, light or
sanitary facilities; inadequate utilities; excessive land coverage;
deleterious land use or layout; depreciation of physical
maintenance; and lack of community planning.
"Economic development area," more broadly defined, includes any area
determined by the City Council for which "redevelopment is in the
public interest" because it will "discourage commerce, industry or
manufacturing from moving their operations to a different state,
result in increased employment . . . or result in preservation or
enhancement of the tax base." However, taxes generated by a project
in an economic development area can be used only for public
infrastructure costs, not private building costs.
The city or tax increment financing commission can issue revenue
bonds for up to 23 years to finance project costs, with the debt
serviced by the real property and other taxes returned to the
project as described above.
The procedure requires filing an application with the city's tax
increment financing commission much like that used for the land
clearance and planned industrial expansion authority expansion
authorities. Under state aw, the application must include a general
description of the project, a project timetable, projected costs,
anticipated sources of funds, financing commitments, evidence that
the area is blighted, a conservation area or an economic development
area, the property's most recent assessed valuations, projected
assessed valuations upon completion, projected economic activity
taxes and a cost benefit analysis detailing impacts on all taxing
jurisdictions. Relocation expenses of displaced commercial and
residential tenants must be paid.
The tax increment financing commission conducts hearings and makes a
recommendation to the city council. If the recommendation is
favorable, the city council's action follows the normal ordinance
process. In Kansas City, unlike the other measures, tax increment
financing projects do not include city plan commission review except
for the companion URD re-zoning.
Chapter 100 Bonds
Chapter 100 bond projects are less common because they put a city in
the position of actually owning land and improvements and leasing
them to the developer, with the developer’s rent being used to pay
off bonds used to acquire and build the facility.
Because city owned property is exempt from all property taxes, the
developer as the tenant ends up paying no property taxes, in effect,
a 100% property tax abatement during the term of the lease.
Chapter 100 bond projects are limited to major projects including
industrial facilities, warehouses, R & D facilities, agricultural
processing and “office industries” (regional, national or
international headquarters, telecommunications operations, computer
operations, insurance companies and credit card processing centers).
Examples in Kansas City include the Harley Davidson plant and the
Quintiles facility.
Bond financing, which can be used to acquire land, build and equip
the facility, can be either general obligation (voter approval
required) or revenue bond financing, the latter to be paid off
solely from rents and revenues from the constructed facility.
Enterprise Zones
The Missouri Enterprise Zone law permits economically depressed
areas (generally, 4,000 to 72,000 inhabitants, at least 65% with
incomes below 80% of Missouri median income, and over 1.5 times the
Missouri unemployment rate) to be declared "enterprise zones" by
city councils. Kansas City, Missouri did this in 1988 and its
enterprise zone is quite large.
Developments in enterprise zones providing at least 50 new full time
jobs can qualify for various levels and durations of property tax
exemptions on improvements for up to 25 years from the date of the
zone's original designation. The amount and duration is determined
by the city council on a case-by-case basis, but the exemption for
industrial properties must be at least 50% and for a minimum of ten
years.
Developments in enterprise zones can also qualify for exemption of
50% of taxable income from the state's income tax, additional state
income tax credits and refunds based upon the number of persons
employed in the zone and who reside in the zone and credits equal to
2 percent of new investment, all for up to ten years.
Brownfields
Certain properties either (a) vacant for at least three years or (b)
less than 35% used for their most economically productive uses that
are redeveloped for industrial, commercial, distribution or research
uses also qualify for the Enterprise Zone tax exemption for
improvements of at least 50% for at least 10 years. To qualify, the
project must create at least 10 new jobs or retain an existing
business with at least 25 jobs.
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