On December 4, 2012, Metro Council passed an economic incentive for Nashville-based HCA Holdings, Inc. (“HCA”) that is estimated to total $66 million over 20 years and is one of the largest Metro Nashville has ever offered to a company. See “HCA incentives package sails through final council vote,” Nashville City Paper, December 4, 2012. One of the components of this package authorized the Industrial Development Board of the Metropolitan Government of Nashville and Davidson County (“Metro Nashville IDB”) to enter into a payment-in-lieu-of-taxes (PILOT) agreement for the benefit of West End Summit Development, LLC (the “Developer”) and the HCA affiliates known as Parallon Business Solutions, LLC, HealthTrust Purchasing Group, LP, and Sarah Cannon Research Institute, LLC (collectively, the “HCA Affiliates”). See Ordinance No. BL2012-297 (Matthews & Langster). The agreement provides for a one hundred percent (100%) real property tax abatement of up to $3 million per year for fifteen years, with an additional five year extension so long as an HCA Affiliate continues to occupy the project. If extended for five years, the total potential amount of the property tax abatement would be $60 million over the life of the agreement.
However, as of today, the project has stalled and HCA is reportedly exploring its options. See “HCA ‘exploring all options’ as West End Summit stalls,” Nashville Business Journal, September 13, 2013. Given this recent development, I thought I would go back and revisit what HCA stands to lose should this project fall through. This article will only review the PILOT terms of the HCA incentive package and outline how property taxes are abated in Tennessee through the use of PILOTs.
PILOTs – Generally
A PILOT agreement is, generally, an agreement that is used to transfer a public or local government’s tax exempt status to a private entity. The property is not on the local government’s tax rolls because it belongs to a tax exempt entity, even though the property is being leased to and used by a private entity, and the private entity receives the benefit of this tax abatement. These agreements are typically used by local governments as an incentive to induce the relocation of a new business or the expansion of an existing business in the community.
How They Work
The Metropolitan Government of Nashville and Davidson County (“Metro Nashville”) cannot directly abate property taxes for private entities as an absolute waiver of ad valorem taxes is illegal under the Tennessee Constitution. The Tennessee Constitution generally prevents local governments from directly abating property taxes stating that “all property, real, personal or mixed shall be subject to taxation.” See Tenn. Const. Art. II, § 28.
However, the Tennessee Constitution also recognizes that property owned by a local government can be exempt from taxation. See Id. Relying on this exemption, a property tax incentive program can be achieved by titling property in the name of the local government and then leasing the property back to the private entity. Ergo, the local government owns the property which is now exempt from property taxes and the private entity receives the benefit of this abatement.
Tax abatement agreements in Tennessee are generally implemented through industrial development boards (“IDB”s). Pursuant to the Industrial Development Corporations Act, codified at Tenn. Code Ann. §§ 7-53-101 – 316 (the “Act”), the State of Tennessee authorizes the incorporation of public nonprofit corporations, IDBs, by cities and counties in Tennessee. Under the Act, these IDBs have the authority to acquire, whether by purchase, exchange, gift, lease or otherwise, and to improve, maintain, equip and furnish, land or building “projects” in Tennessee, and to lease such projects to a private entity. Because IDBs serve a public function, these projects are therefore exempt from taxation. See Tenn. Code Ann. § 7-53-305. Therefore, the ownership interest in any property conveyed to an IDB and leased to a private entity will be exempt from property taxes.
Thus, in Tennessee, private entities may receive economic incentives through tax abatement agreements with IDBs. Through these PILOT agreements, projects are exempt from property taxes and instead make a payment-in-lieu-of-taxes.
To create an incentive through a bond-lease transaction, an IDB will issue industrial development revenue bonds to finance the acquisition, construction and development of a project that it will ultimately lease back to the private entity. Using the proceeds of the bonds that it issues, the IDB acquires title to the project to which the tax incentives will apply. The lease payments amortize the bonds and the private entity typically will own the project at the end of the lease. This is what has been proposed in the HCA incentive package.
HCA’s Incentive Package
In accordance with Ordinance No. BL2012-297, the Developer will enter into a PILOT agreement with the Metro Nashville IDB to lease the project who will in turn sublease 475,000 to 500,000 square feet of the project to the HCA Affiliates. As noted above, this PILOT agreement provides for a one hundred percent (100%) real property tax abatement f up to $3 million per year for fifteen years, with an additional five year extension as long as an HCA subsidiaries continues to occupy the office space. If extended for five years, the total potential amount of the tax abatement would be $60 million over the life of the agreement. The tax abatement would take effect upon the execution of the lease with the Metro Nashville IDB at the time the Metro Nashville IDB issues the industrial development revenue bonds required to finance the costs associated with this project.
After accounting for the $60 million tax abatement, Metro Nashville will still potentially net $17,599,215 in new real property taxes over the life of the PILOT agreement, plus approximately $2 million in additional personal property taxes.
Unique terms found in this PILOT agreement:
- Section 3(a)(ii) & Section 3(c) – The PILOT Deduction and PILOT Deduction Credit. If the property taxes that would otherwise be owed to Metro Nashville fall below $3 million in a given year, the lessee will have the ability to “bank” the difference and apply it against PILOT payments in future years. This means that the HCA Affiliates would get the benefit of the full $3 million abatement per year even if the property value falls or the tax rate is lowered.
- Section 3(a)(iii) – Job Benchmarks. It is required that a certain number of employees work in Davidson County as a result of the project in order for the HCA Affiliates to receive the full amount of the abatement. The job benchmarks are 1,000 full-time equivalents (“FTEs”) in 2016, 1,300 FTEs in 2017, and 1,500 FTEs in 2018 and subsequent years. Failure to meet these benchmarks would result in a $300,000 reduction in the amount of the abatement for every shortfall of 100 incremental positions. Employees that are currently working in Metro Nashville do not count toward the benchmark.
- Section 5 – DBE Requirements. This is the first time a Metro Nashville PILOT ordinance would require the creation and implementation of a small, minority, and disadvantaged business program (“DBE Program”). The DBE Program must have a participation target of at least 20% of the project’s hard construction costs. The Developer will be required to make periodic reports regarding the DBE Program to the Metro Nashville council and the minority caucus.
Additional information on various PILOT programs in Tennessee:
- Knoxville and Knox County – Business Assistance: PILOT Financing.
- Shelby County – PILOT Program.
- Metro Nashville – Economic Incentives and Tax Structure: Payment in Lieu of Taxes.