Beginning in the 1960’s, a number of states enacted statutes that created quasi-governmental entities empowered to encourage economic development and create job growth. New York followed in 1969 by enacting the New York State Industrial Development Agency Act, codified as Title 1 of Article 18-A of the New York State General Municipal Law (the “GML”). Under the GML, industrial development agencies (“IDAs”) are state-level, independent, corporate governmental agencies and, therefore, avoid constitutional debt limitations and restrictions on lending of public credit to private businesses.
Each IDA is formed for the benefit of a particular county, town, city or village (the “Benefited Municipality”) and normally operates only within the geographic boundaries of the Benefited Municipality. IDAs are formed for the purposes of promoting the economic welfare, recreation opportunities and prosperity of the inhabitants of the State of New York (the “State”); developing certain projects to advance the job opportunities, health, general prosperity and economic welfare of the people of the State; and preventing unemployment and economic deterioration. IDAs achieve these purposes by providing “financial assistance” (typically by granting tax exemptions) to qualified businesses that apply to the IDA for such financial assistance (an “Applicant”).
Any business that is considering a move to the State, the construction of a new facility in the State, or even the renovation or expansion of an existing facility in the State, should contact the applicable IDA because the value of IDA financial assistance can be substantial. In addition, any business that requires financial assistance in order to maintain its level of activity in the State should also contact the applicable IDA.
Although IDAs are empowered to undertake projects on their own behalf, most projects are undertaken for the benefit of an Applicant. IDAs may undertake projects and grant financial assistance for the following types of facilities, among others:
- commercial (including “retail” under certain circumstances)
- educational or cultural
Structuring the Transaction
An IDA project is generally structured as either a “straight lease” or a bond financing. Under either structure, the IDA acquires an interest in the real and/or personal property involved in the project (the “Project Property”). Normally, the IDA either takes title to or a leasehold interest in the Project Property, but lesser property interests (such as a license) may also be permissible. The IDA leases such property pursuant to a lease agreement or sells it under an installment sale agreement back to the Applicant. The acquisition of the property interest by the IDA entitles the project to a number of tax exemptions. The lease or sale back arrangement affords the IDA an opportunity to impose any obligations it may wish on the Applicant as consideration for such exemptions (e.g., job creation requirements, use of local labor, etc.).
The “straight lease” structure may also include conventional mortgage financing provided by a bank or other lender without the issuance of IDA bonds (the tax exemptions often aiding in underwriting the loan). In such instances, the IDA would agree to subject its fee or leasehold interest to the lender’s mortgage(s) on a non-recourse basis.
In a bond financing, the IDA agrees to issue its revenue bonds to support the project. Although the IDA is the nominal obligor, the bonds are non-recourse to the IDA. The use of the term “IDA financing” is therefore a misnomer. IDAs do not lend their money (or their credit) to Applicants’ projects. The issuance of the bonds by the IDA simply enables the Applicant to obtain the lower interest cost resulting from the exemption from federal, state and/or local income taxation.
“Tax-exempt” bonds, also called “triple tax free” bonds, are available only in the specific instances set forth in the Internal Revenue Code (the “Code”). The most likely candidates for these transactions are manufacturing facilities and so-called “affordable” multifamily housing facilities. If tax-exempt bonds are not available, an Applicant may request that the IDA issue “taxable” bonds. Although the interest on such bonds is not exempt from federal income taxation (thus the name), the interest on such bonds remains exempt from personal income taxes imposed by the State and all political subdivisions thereof (including the City of New York). Also, taxable bonds are not subject to the Code provisions that restrict and limit the availability of tax-exempt bonds. Typically, taxable bonds are issued simultaneously with tax-exempt bonds to finance certain costs of issuance and other costs that cannot be included in the tax-exempt issue.
Under the lease or installment sale agreement, the Applicant agrees to make payments sufficient to pay all costs of the project (including payments in lieu of real property taxes and, if bonds are issued, the principal and interest thereon as they become due).
IDA “Financial Assistance”
Whether a transaction is structured as a “straight lease” or a bond financing, IDAs can provide three key forms of financial assistance: (i) sales and use tax exemption, (ii) mortgage recording tax exemption, and (iii) real property tax exemption. IDAs may provide any or all of these forms of financial assistance to a particular project, subject to the GML.
A. Sales and Use Tax Exemption
Eligible project purchases of goods and services made by an Applicant, as an agent of an IDA with respect to a project, are exempt from New York State sales and use tax pursuant to GML §874. In order to afford this exemption, the IDA enters into an agency agreement authorizing the Applicant and/or its contractors and subcontractors to act as the IDA’s agents in making purchases of Project Property necessary for the completion of the construction, renovation and/or equipping of the project. The exemption is normally limited to the construction/renovation/ installation period and does not cover ongoing operational costs (i.e., cleaning contracts, utility charges).
The sales and use tax, which is composed of a state component and a local component, generally ranges from 7 percent to 8.75 percent depending on the county. The cost savings to the Applicant are generally significant.
B. Mortgage Recording Tax Exemption
New York State imposes a recording tax for the privilege of recording a mortgage on real property. The tax varies by county (or city) and generally ranges from .75 percent to 1.5 percent of the principal amount of the indebtedness secured by the mortgage.¹ Typically, the Applicant and the IDA execute one or more mortgages encumbering their respective interests (e.g., fee and leasehold) in the mortgaged property, thereby triggering the exemption.
C. Real Property Tax Exemption
In New York, real property owners generally pay ad valorem real property taxes (“Property Taxes”) based on the assessed value of the land and any improvements thereon. Pursuant to GML §874, “property acquired by [an IDA] or under its jurisdiction or control or supervision” enjoys an exemption from Property Taxes.² However, such real property remains subject to special assessments, direct assessments and user fees despite the IDA’s ownership or involvement.
IDAs rarely agree to a 100 percent exemption from Property Taxes for a project. Rather, they normally negotiate a Payment in Lieu of Taxes Agreement (“PILOT Agreement”) with an Applicant setting a schedule of PILOT payments. An IDA has the authority to negotiate any PILOT Agreement it deems appropriate. A PILOT Agreement may be of any length (although most IDAs limit the period to a term of 10 to 20 years), and it may require the payment of fixed dollar amounts or utilize a percentage of assessed value to determine the PILOT payments, or any variation thereof. In addition, a PILOT Agreement may provide for fixed periodic increases, thereby protecting Applicants from unexpected property tax rate increases, not just from reassessments by a tax assessor.³ A fixed dollar amount PILOT Agreement will add certainty to a project’s pro forma budget projections.