|
PILOT is
a tool that has created an emerging trend in the commercial real estate
development and finance industries that can make a powerful difference
in your project's bottom line. PILOT (Payment
In Lieu Of Taxes) programs are based upon the state's interest in
attracting capital investment - principally in the form of attracting
commercial real estate development programs and developers to given
areas of the state where development might not otherwise be undertaken
if there are a lack of incentives. This program is definitely a an
incentive that you need to consider.
Property taxes are what are in play here. You have property
taxes that need to be paid. Initially, the thinking with this
program was that the state (acting through the local county industrial
development authority) would offer a rebate of a portion of the first 10
years of property tax receipts to the developer by using the Payment In
Lieu Of Taxes approach to reduce the property tax bite, with the
resulting development being the outcome everyone wants to promote.
Well, that's nice (in as far as it goes) but the commercial real
estate development finance needs cannot be set aside because it doesn't
matter what the future property tax liability is going to be if in fact
the proposed project cannot attract sufficient capital investment to
undertake the development, construction and stabilization of the
emerging asset. RMC sees an opportunity for the developer to
attract additional funding using the future payment differential as the
basis for funding some present funding source (grant, loan, etc.) that
is needed to help with the capital funding plan, and needed right now.
Let's use a working example to illustrate the potential
opportunity...
You are developing a 48-unit assisted living dementia care
unit. The project will cost approximately $6,000,000 to develop,
construct and operate to the point of economic stabilization.
The property taxes are $2.00 per $100 of assessed valuation.
The assessed valuation is based upon direct development expense, so
we'll assume 75% of the budget goes to the development of hard
assets. That works out to a basis of $4,000,000 with a
corresponding future tax liability averaging $80,000 per annum, or
$800,000 over the first 10 years. With me so far? Good.
The Payment In Lieu Of Taxes program allows the county to take
control of the real property (for taxation purposes only!) and reduce
the property tax bite to $60,000 a year for the first 10 years (25% more
or less - keeping the math easy, not exact). That's a savings of
$200,000 over the period that results in an increase of $20,000 per
annum in the property's EBITDA.
The developer now has a choice - take the rebate and then enjoy an
enhanced level of debt service coverage; or, the developer could pay the
same amount and use the differential for paying out a grant or
loan. We'll take a grant or loan for $200,000 now, that will be
retired out of the resulting deal.
Is it significant?
Well, $200,000 divided by $6,000,000 is a little over 3.3% of the
total structure, but if it is compared in terms of the equity
requirement for a HUD/FHA Section 232 Insured Loan, then it can cover
the working capital requirement of the loan, all by itself.
What can you do with it? |
