Realizing the intended benefit of a tax abatement
August 28, 2017
It is not uncommon for a municipality to work with a property owner to them achieve some mutually beneficial goal – usually because the project might not otherwise be feasible without some sort of public assistance. Among the reasons a municipality may be considering the inventive,, they may be doing it to bring new jobs, protect existing jobs, to help spark a development corridor, or to prevent or reverse a property from becoming blighted. The assistance can come in many different forms, one of which is a tax abatement.
If the intent is for the abatement to benefit the landlord so that it can be used to help finance a project, the leases have to be worded in such a way or the landlord may not realize the benefit.
A simple example would be if a property owner was being billed $500,000 in real estate taxes and the tenants of the property pay a full prorata share of taxes. The landlord pays $500,000 in taxes, bill the tenants $500,000, and (if they are at 100% reimbursement) collect $500,000 from those same tenants. If the municipality grants the landlord a tax abatement so that the landlord can use the $500,000 per year towards a project, without specific language in the lease, the benefit flows to the tenants, not to the landlord. The landlord would receive a tax bill for $0, and then could not bill or collect any taxes from the tenants. Therefore, the tenants receive the benefit of the tax abatement.
However, the addition of a few lines in the standard lease form can ensure that the landlord receives the intended benefit. A simplification of the language would read something to the effect of:
「If the property is the beneficiary of any real estate tax abatement, the tenant will pay its share of taxes absent such abatement.」
With this language, the landlord would receive a tax bill of $0, but would bill the tenants their share of taxes 「absent such abatement,」 or $500,000. The landlord then has collected $500,000 with a $0 tax bill, and the funds are available for the project.
I have seen one 「workaround」 by a landlord and municipality when this language did not exist in the lease. A service contract was negotiated for the period which would have otherwise been the abatement period. The service contract was where the property provided services, including jobs and education fairs, community events and other 「services」 which the property was already 「providing.」 In that case, using our same numbers, the landlord was billed $500,000 by the municipality and was then able to bill the full $500,000 to the tenants. Upon receipt of the payment by the landlord, the municipality then made its service payment to the landlord. The landlord then had the $500,000 per year available for the intended project.
With more B and C properties losing anchors, it is likely we will see the need for more public/private partnerships to redevelop properties to thrive in new ways. Lease language must be considered for these partnerships to work.