As we start to see indicators of slower growth, and in turn, a softer real estate market, it may become increasingly difficult for developers to demonstrate project viability to lenders and investors. However, if your project has the right characteristics, state and local public incentive programs can help. This article surveys several state and local incentive programs that can be employed in projects involving investments in real estate.
Restoration Tax Abatement
Under the Restoration Tax Abatement Program, the State Board of Commerce and Industry, with the approval of the local governing authority, can enter into contracts granting a tax abatement to property owners who propose an expansion, restoration, improvement or development of an existing structure in a downtown, historic, or economic development district. Qualifying districts in New Orleans are shown here:
Specifically, the RTA contract gives the owner the right for an initial term of five years after completion of the work to pay property taxes based upon the assessed value of the property for the year prior to construction, allowing the owner to avoid increased property taxes based on the increased value of the renovated building for at least five years.
For projects in New Orleans, in order to obtain the required approval by the City Council, as the local governing authority, the property owner must meet additional requirements, such as compliance with the City’s Disadvantaged Business Entity participation goals. RTA contracts can also be renewed for an additional five years, but projects in New Orleans require additional investment and further review. The contracts can also be transferred to a party who buys the property subject to the abatement, but in New Orleans transfers are limited by ordinance to only certain types of projects.
Applicants should apply for this program through Louisiana Economic Development before beginning construction. The tax abatement is not available if taxes have been paid on the basis of an assessed valuation which reflects the improvements resulting from the renovation.
Industrial Ad Valorem Tax Exemption
The Industrial Ad Valorem Tax Exemption Program similarly allows the Board of Commerce and Industry, with the approval of the local governing authority, to enter into a five-year contract providing a property tax abatement of 80% of a manufacturer’s qualifying capital investment in facilities integral to the manufacturing process. The program can be used by manufacturers new to Louisiana and is also available to existing manufacturers who propose new investments to existing facilities. Projects deemed routine maintenance, repairs, environmentally required and that do not provide for job creation or retention are not eligible.
Industrial tax exemption contracts may also be renewed for an additional 5 years if the applicant meets the same criteria that was used for the initial contract, and the contracts can be transferred if the property at issue is sold.
Applicants should apply for this program through Louisiana Economic Development before beginning construction. The industrial exemption is currently the subject of media attention as local governments impose stricter requirements on applicants, as discussed here:
The Retention and Modernization Tax Credit Program also provides a state tax credit for manufacturers modernizing or upgrading existing facilities in a way that improves capacity or efficiency by 10 percent or adds at least $5 million in investment to a facility owned by a company with multi-state operations.
Industrial Development Board Bonds and PILOTS
The Industrial Development Board of the City of New Orleans (“IDB”), a public corporation, issues low-interest, tax-exempt bonds to assist companies in acquiring land, constructing, purchasing or renovating buildings and acquiring and installing machinery and equipment. In addition, the IDB offers a “Payment-in-Lieu-of-Tax” (“PILOT”) arrangement whereby the IDB can freeze or reduce ad valorem property taxes by purchasing the developer’s property and leasing it back to him for some amount less than the property taxes would have been for a number of years.
IDB considers a number of factors in deciding whether to issue a PILOT, including whether the project will lead to employment, future increased tax revenues, improvement of quality of life and/or other economic benefits. The IDB may require employment of Orleans Parish residents and/or disadvantaged business or minority firms for at least a portion of construction on a property benefitted by a PILOT. IDB agreements may also include provisions that provide for increased tax payments in the event that the project is more successful than expected and deceased benefits if promised economic benefits of the project are not delivered.
Applicants should apply to the IDB before beginning construction. Examples of recent projects benefitting from PILOT arrangements are described here:
Historic Tax Credits
The Louisiana Division of Historic Preservation (“DHP”) and the Department of Revenue administer Louisiana’s Historic Rehabilitation Tax Credit Program, which provides a 20% state income tax credit for the cost of rehabilitation of income-producing buildings that are “certified historic structures” located within a Downtown Development District or certified Cultural Districts, shown here:
All exterior and interior work must be certified by the DHP as meeting the U.S. Secretary of the Interior’s Standards for Rehabilitation, and the project must exceed $10,000 in qualified rehabilitation expenses, including materials, fixtures, mechanical equipment, labor, and fees. The rehabilitation cost does not include the cost of acquiring the property, new construction additions or landscaping, fences, or parking lots. Once earned, the state credits are fully transferable and may be carried forward for up to five years.
Application forms should be submitted as early in the development process as possible to DHP. DHP also administers the Federal Historic Rehabilitation Tax Credit Program, which provides a 20% federal income tax credit and can generally be used in combination with the state program. More information on that program is located here:
New Markets Tax Credits
Louisiana law also provides for a new markets tax credit, which mirrors the federal New Markets Tax Credit. The federal program allows taxpayers to receive a tax credit against federal income taxes for making Qualified Equity Investments in certified Community Development Entities (“CDEs”). CDEs in turn must use “substantially all” of the investment to provide loans to or investments in Low-Income Communities, which can be located on mapping software here:
Investments are typically made through Qualified Active Low-Income Community Businesses, including businesses that develop or rehabilitate commercial, industrial, retail, and mixed-use real estate projects and for-sale housing units in Low-Income Communities. Under the Louisiana program, an investor in a CDE for federal purposes may also claim a credit against their Louisiana income tax or transfer or sell the tax credits to another person or entity. If an investment qualifies as a Qualified Equity Investment under the federal program, the investment qualifies under Louisiana law as well.
If your business is located in a Low-Income Community and looking for financing, you can contact CDEs directly to inquire about tax credit financing. An awards database of CDEs is located here:
Tax Increment Financing
Tax increment financing (“TIF”) is a financing mechanism that enables a local government to capture future incremental tax revenues generated in a designated area and use them to invest in improvements in that area. Typically, the local government agrees to forgo its future incremental tax revenue and use it to assist with economic development projects in a special TIF district.
For example, the local government entity may issue bonds payable from the future incremental tax revenues from the district to finance new or improved infrastructure in the district. In theory, the TIF district finances its own revitalization and eventually generates larger tax revenue for the community as a whole.
TIF districts have rarely been used in New Orleans, but the Spirit of Charity district may employ TIF financing, as described here:
Enterprise Zones and Quality Jobs Programs
Under the Enterprise Zone Program, the Board of Commerce and Industry is permitted to enter into contracts for up to five years which provide for either (1) a 4% rebate of state sales and use tax, with approval of local governing authorities, for material used in the construction, addition or improvement of a building used for a legitimate business enterprise and also for machinery and equipment used in the enterprise or (2) an income tax credit of 1.5% of all qualified expenditures, namely capital expenditures excluding tax exempted items and the existing building/land, not to exceed $100,000 per net new job.
The Board may also enter into a five-year contract to provide either (1) a $1,000 tax credit for each net new employee or (2) a $3,500 tax credit for each net new employee if the employee receives certain types of public assistance or if the business itself is located in an Enterprise Zone, shown on a map here:
Businesses seeking these tax benefits must (1) give preference to Louisiana manufactures, suppliers, contractors and labor where reasonably possible, (2) create at least five net new permanent jobs within two years of the project start date or increase their number of employees by 10% within the first year; and (3) certify that at least 50% of their net new employees (a) live in an Enterprise Zone, (b) receive some form of public assistance or (c) are considered unemployable by traditional standards or lacking in basic skills.
The Quality Jobs Program provides (1) up to a 6% cash rebate on annual gross payroll for new direct jobs for up to 10 years and (2) either (a) a state sales/use tax rebate for material used in the construction, addition or improvement of a building or for machinery and equipment, as described above or (b) a project facility expense rebate of 1.5% of qualified capital expenditures, as described above.
In order to obtain these benefits, the employer must create at least five new jobs with an annual payroll of at least $225,000 if it has 50 or fewer employees or create at least 15 new jobs with an annual payroll of at least $675,000 if it has 51 or more employees. The jobs must be fulltime, provide a basic healthcare plan and pay a minimum wage of either $18/hour (for the 4% rebate) or $21.66/hour (for the 6% rebate).
The jobs programs above are only available to certain types of businesses as provided by statute. Applicants should apply for the programs through Louisiana Economic Development before beginning construction. The programs are mutually exclusive and may prevent participation in other incentive programs. The Competitive Projects Payroll Incentive also provides up to a 15% payroll rebate for new jobs in target sectors, including specific types of durable goods manufacturing, with a similar sales and use tax or project facility cost rebate as described above.
Other Programs and Additional Information
Louisiana offers many other state incentive programs which are not tied directly to real property investment or are applicable to particular industries, such as the Angel Investor Tax Credit, the Research and Development Tax Credit and entertainment industry tax credits. Information on these programs can be found at the Louisiana Economic Development website, located here:
Other local incentive programs are outlined on the City of New Orleans Office of Economic Development website, located here:
The City also offers density bonuses for affordable housing as described in the Comprehensive Zoning Ordinance, and the New Orleans Redevelopment Authority offers other incentives, such as the Façade RENEW Storefront Improvement Program, as described on its website, located here:
Assistance in Applying for State and Local Incentives
Steeg Law can assist businesses in applying for state and local incentives, securing permits and licensing and drafting corporate and transactional documents to help them establish and maintain a thriving business in New Orleans. Please contact Paul Simoneaux if you have any questions about how we can help you.