Tax Incentives-IDA Projects

TAX INCENTIVES THROUGH INDUSTRIAL DEVELOPMENT AGENCY PROJECTS
BY
MICHAEL J. LOMBARDO, ESQ.

New York State statutorily authorizes the creation of Industrial Development Agencies.^[1] Industrial Development Agencies are created with the authority and power to own, lease and sell property for the purpose of acquiring, constructing and equipping civic, industrial, manufacturing, commercial and other facilities. The idea behind projects involving Industrial Development Agencies is to provide tax incentives for businesses to locate or remain in New York State with the expectation that jobs will be created or retained.

LIST OF TAX INCENTIVES

The tax incentives an Industrial Development Agency is authorized to provide include the following:

Exemption from State and local sales and use taxes on material to be incorporated into the Project.
Exemption from State and local sales and use taxes on equipment that is to be included in the Project.
Exemption from the mortgage tax that is payable upon the recording of a mortgage given to secure indebtedness incurred by the or for the benefit of the Company in connection with the Project.^[2]
Reduction in real property taxes (County, Town and School taxes).

METHODS BY WHICH AN AGENCY PROVIDES ASSISTANCE

An Industrial Development Agency will provide its benefits by taking an interest in the real property and personal property that is to be a part of the Project. The manner in which this is accomplished is usually through an arrangement whereby the Company enters into a lease agreement with the Industrial Development Agency to lease to the Industrial Development Agency the property already owned by the Company followed by an immediately lease-back by the Industrial Development Agency to the Company. The rental amounts paid by the Company to the Industrial Development Agency are usually an amount equal to the fees charged by the Industrial Development Agency (see the section on FEES below for more information). In addition, in order to provide exemption from sales and use taxes, the Industrial Development Agency will appoint the Company to act as the agent of the Industrial Development Agency to procure and construct the materials, equipment and improvements that are to be a part of the Project.

PROCEDURE

In order to take advantage of the incentives offered by an Industrial Development Agency, an application for approval must be filed by the Company with the applicable Industrial Development Agency.^[3] Once the Industrial Development Agency approves an application as containing a permitted Project, the Agency is required to conduct a public hearing.^[4] If there are no objections voiced at the public hearing, the Industrial Development Agency then issues what is referred to as “inducement resolution”. An inducement resolution is a resolution passed by the Industrial Development Agency approving and authorizing the Project. However, it is important to obtain legal counsel early on and before the inducement resolution is finalized and approved to be sure there is conformity between the description of the Project and the description contained in the inducement resolution.

FEES

Each Industrial Development Agency has a schedule of fees. Fees are usually based on the total cost for the Project. In addition, the applicant is responsible for all legal fees incurred by the Industrial Development Agency in negotiating and closing on the structure of a lease with a lease-back as discussed previously.

DOCUMENTATION

The documentation that is required to obtain the benefits that can be provided by an Industrial Development Agency include the following:

Agency Agreement. This document is the instrument by which the Industrial Development Agency appoints the Company as its agent to undertake the Project.
Sales Tax Exemption Letter. This is a letter that is issued by the Industrial Development Agency that is utilized to make purchases for the Project by the Company as agent for the Industrial Development Agency so as to enable the purchases to be made without the payment of a sales or use tax.
Lease. This document is a lease from the Company to the Industrial Development Agency. It is the document that gives the Industrial Development Agency an interest in the real and personal property that is the subject of the Project so as to enable the Industrial Development Agency to offer a reduction in real property taxes and an exemption in sales and use taxes.
Lease-Back. This document is a lease-back by the Industrial Development Agency to the Company. It is the document that enables the Company to use the real and personal property that is the subject of the Project.
Payment In Lieu of Taxes Agreement (“PILOT”). This is the document whereby the terms of the real property tax reduction is created. Once the Industrial Development Agency has an interest in the real property, the real property is no longer subject to assessment for real property taxes. The PILOT Agreement requires the Company to make payments to the taxing authorities instead of taxes. The PILOT Agreement usually provides a significant reduction in what would have been paid in real property taxes in the early years of the Project, with gradual increases over the life of the Project. At the end of the Project, the amounts paid under the PILOT Agreement then are the same as what would be paid in real property taxes. This arrangement provides for substantial savings over the life of the PILOT Agreement.

CONCLUSION

If a company seeks to expand, or needs assistance in maintaining jobs in a particular community, consideration should be given to utilizing the tax incentives offered by Industrial Development Agencies. The incentives are significant and may permit a company to remain competitive especially in a global economy. Legal assistance should be sought at the early stages due to the complex nature of the documents that are needed (and often negotiated) to properly obtain the benefits that are offered through Industrial Development Agencies.

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Footnotes

1. Section 1 of Article 18-A of the General Municipal Law. [go back]

2. For example, in Erie County, the Mortgage Recording Tax for mortgages encumbering commercial property is 1% of the amount of the Mortgage. [go back]

3. One of the issues and concerns about Industrial Development Agencies is that there can be multiple Industrial Development Agencies with overlapping territories, each attempting to be the agency to which an application is made. This sometimes results in what some critics call "cannibalism" by the agencies instead of taking a regional approach to development. [go back]

4. See General Municipal Law Section 859-a. [go back]

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CAUTION: THIS ARTICLE IS INTENDED TO PRESENT GENERAL INFORMATION AND IS NOT INTENDED TO BE A SUBSTITUTE FOR CONSULTATION WITH LEGAL COUNSEL.

IRS CIRCULAR 230 Disclosure: To ensure compliance with requirements imposed by the IRS, please be aware that any U.S. federal tax advice contained in this communication (including any attachments or enclosures) is not intended or written to be used and cannot be used for the purpose of (i) avoiding penalties that may be imposed under the Internal Revenue Code or (ii) promoting, marketing or recommending to any other person any transaction or matter addressed herein.

Last Update: May 15, 2011