Financial Incentives Spotlight: Property Tax Abatements

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Most incentives today come in the form of tax credits, exemptions, abatements, low-interest financing or infrastructure improvements. In this article, we highlight property tax abatements, how they work and how you can determine whether it makes sense to pursue for your expansion.

If you are going to significantly increase the assessed value of a property, you might consider requesting the tax abatement. Typically this is only worth pursuing if you are going to add square feet to a property or build new. Façade improvements or interior build-out will not typically sufficiently increase the value to make abatement worth pursuing.

The abatement typically locks in a tax rate for a set number of years, incrementally increasing the value at which the property will be taxed to “ease in” the tax on the incremental increase in the property value. This does not decrease or eliminate property tax; it slows the rate at which the tax on the improvements will be phased in to the taxed amount.

What to look for: Ask whether the property has a pre-approved abatement. This will make the abatement automatic, without having to approach each taxing body to get an abatement approved individually. Also, you cannot abate property taxes in a tax-increment financing (TIF) district.

Administrating body: All participating taxing bodies approve abatements individually. It is possible to have only some of them involved in a partial abatement.

Example: The city of Rochelle, Illinois, has a pre-approved 50% abatement for six years; this means that companies are taxed on 50% of the increase in assessed value for six years. This is only approved for properties in their Enterprise Zone.

Financial incentives are changing, and predictions as to what will be available in five years is a topic for another day. One trend is that incentives are coming under increasing political scrutiny as taxpayers demand more transparency and clear articulation on the economic impact of financial incentives. While practitioners of economic development can often clearly demonstrate the return provided to economies from these incentives, governments are coming under increasing financial pressure, causing them to decrease services, which puts further pressure on these programs.

When considering incentives, keep these key things in mind:

  • Weight incentives appropriately in the context of total long-term operating cost. Don’t use incentives to guide the process; use them to help make final decisions between two comparable options.
  • Apply early. Almost all of these incentives have an out-of-state competition requirement, meaning you have to be approved before you can commit to a transaction at any one location. Already signed the lease? Sorry, you are out of luck.
  • Eligibility is stringent, and incentives are not easily given. Prepare for an application process and enlist help as needed.