Economic Development & Other Development Incentives

Tax Increment Financing (TIFs)

South Carolina law provides several methods to finance the costs of capital improvements associated with residential, commercial, industrial, and mixed-use developments. Often called “public-private partnerships,” these financings require the cooperation of local governments with private developers or industries in order to achieve mutually beneficial goals for the public sector and the private sector. The bond attorneys at Howell Linkous & Nettles have served as bond counsel and underwriter’s counsel for improvements funded with TIF bonds, such as roads, streets, storm water drainage, water and sewer lines, other utilities, parks and playgrounds and public parking.

Under South Carolina statutes, municipalities and counties can create TIF districts. The local government must determine that the proposed TIF district is a “blighted area,” a “conservation area,” or an “agricultural area” meeting certain statutory requirements. Unlike some of the other economic development incentives, property owner consent is not a condition to including property in the TIF district. In the case of counties, instead of “agricultural areas,” there is the category of “sprawl areas” (in addition to blighted areas and conservation areas) as the basis for the formation of a TIF district. This category, a “sprawl area,” would permit the creation of TIF districts in the unincorporated areas of the county.

Tax increment financing is secured by taxes generated by the increase in property value in a district after a redevelopment project has begun. As such, it does not increase the tax rate on district taxpayers, but merely reallocates tax revenues that would otherwise flow to pre-existing taxing entities in favour of redevelopment project costs or debt service on bonds issued to fund redevelopment project costs.

It has been the experience of our bond lawyers that TIF bonds benefit from several favourable structural elements compared to other development incentives. Unlike CDDs, MIDs, and special tax district bonds, no additional tax burden is created for property owners. Tax collection rates are generally of less concern for a TIF bond, unless TIF district tax payments are concentrated in a few taxpayers. Although undeveloped land in a CDD, MID, or special tax district can lead to high debt burdens, undeveloped land in a TIF district is generally a favourable factor, since tax revenues will increase to the extent new development occurs and taxable property values grow.

Investment-grade TIF bonds handled by the bond lawyers at Howell Linkous & Nettles usually have sufficient TIF revenues to cover future maximum annual debt service (“MADS”) at the time of the issuance of the TIF bonds. This circumstance is known as “coverage in the ground.” Some of the common pitfalls our bond attorneys have seen for TIF bonds include volatility in commercial real estate values during an economic downturn, particularly for warehouse and hotel properties. A residential real estate bust, such as the one we have seen recently, would similarly harm TIF bonds. Plant closures can harm TIF bonds for an industrial TIF district. Construction risks for projected development is another pitfall in a TIF financing. Concentration in a few taxpayers is a common problem for TIF bonds. High tax increment volatility ratio for a newly formed TIF district can be problematic.

The bond lawyers at Howell Linkous & Nettles can advise the local government and the private developer on structures to avoid or minimise these pitfalls in order to close on a successful tax increment financing.

Special Assessment Financing (CDDs, MIDs, etc.)

South Carolina law provides several methods to finance the costs of capital improvements associated with residential, commercial, industrial, and mixed-use developments. Often called “public-private partnerships” these financings require the coöperation of local governments with private developers or industries in order to achieve mutually beneficial goals for the public sector and the private sector. Our lawyers have served as bond counsel to communities and developers across the South in financing infrastructure, such as roads, streets, storm water drainage, water and sewer lines, other utilities, parks and playgrounds, and public parking with special assessments.

Special assessment bonds are secured by special assessments imposed on property located in Community Development Districts (“CDD”) also known as Municipal Improvement Districts (“MIDs”) or Residential Improvement Districts ("RIDs"). The special assessment is generally levied in relation to the benefit a property receives from an improvement project. Because the assessment is usually not based on the actual value of the property, debt burdens as a percent of the market value of a parcel can vary greatly from parcel to parcel. Because annual assessment payments are usually fixed and cannot be raised to cover the delinquency of any other assessment payer, our bond attorneys know that attention must be given to the exposure due to the weakest properties, even if overall average property value to debt ratios are strong districtwide.

The assessments may be based upon assessed value, front footage, area, per parcel basis, the value of improvements to be constructed within the district, or a combination of them. Careful structuring by bond counsel can provide that an assessment imposed upon real property remains valid and enforceable even if there is a later subdivision and transfer of the property or a part of it.

It is the experience of the bond lawyers at Howell Linkous & Nettles that special assessments on undeveloped land can create burdensome assessment payments for those properties. Undeveloped land typically carries property value-to-debt ratios of 3:1 or less, whilst developed properties are generally closer to 20:1. To have a strong deal, our bond attorneys believe a sensitivity analysis should be done on a multi-year delinquency by the 2 to 5 largest assessment payers. In addition, a sensitivity analysis should also look at a permanent delinquency by all assessment payers with under a 5:1 value-to-overlapping debt ratio. Excess cash, held in a debt service reserve fund or through excess cash flow, should be available to cover a delinquency by at least the 2 to 5 largest assessment payers. A CDD or MID that is largely undeveloped or concentrated in one type of industry is a risky credit. An entirely residential district usually exhibits little concentration of ownership, a very favourable situation, if the district is fully developed or built out. High property value-to-debt ratios, preferably above 7:1, increase the likelihood that assessment payments will be made on a timely basis. Value to lien ratios should be examined on a parcel by parcel basis for the largest assessment payers.

Another deal structure familiar to our bond lawyers is the creation of special tax districts by county council using one of several statutory methods. When the district is created, the maximum amount of the special tax or user charge to be imposed on property located in the district must be established. If the maximum amount provides an adequate cushion in the event of property tax delinquencies by some of the property owners in the district, the deal can be structured along the lines of a California Mello-Roos deal, which generally receives higher ratings than a typical TIF or CDD bond financing.

Whatever the deal structure, our bond attorneys can provide the experienced guidance to the development team in structuring the optimum municipal bond financing for the development.

Industrial Revenue Bonds

State law provides several methods to finance the costs of capital improvements for industrial development. Typically known as IDBs or IRBs, industrial revenue bonds usually are issued by a state or local governmental authority to provide tax-exempt financing for manufacturing facilities, port facilities, recycling facilities, and other purposes for which tax-exempt private activity bonds may be issued under the federal income tax code. Many industrial development bonds are subject to volume cap limitations imposed on private activity bonds by the Internal Revenue Code.

Industrial revenue bonds provide long-term, often fixed rate, and, if qualified, tax exempt financing for privately owned or operated facilities. These bonds can also be used to avoid personal guarantees and other collateral requirements of conventional lenders. Our bond attorneys have also handled transactions structured on a non-recourse basis. Deal structures for which we served as bond counsel or underwriter’s counsel include both public offerings of bonds as well as private placements, IDBs backed by credit enhancement (such as bank letters of credit), issues sold based only on the project’s or industry’s ratings, and non-rated bonds.

The bond lawyers at Howell Linkous & Nettles have served as bond counsel, underwriter’s counsel, lender’s counsel, and borrower’s counsel for many industrial revenue bond financings across the South. Our extensive experience in this type of financing includes nearly all categories of private activity bonds that can be issued under the Internal Revenue Code (such as for small issue manufacturing facilities, solid waste disposal facilities, recycling facilities, port facilities, and multifamily housing), as well as taxable bonds for facilities which do not meet the eligibility criteria for tax exempt finance.

FILOTs and PILOTs

South Carolina law provides several property tax incentives designed to promote commercial, industrial, and mixed-use developments. Negotiated fee-in-lieu of taxes (“FILOT”) is available to businesses which make certain new capital investment in real and personal property at levels which exceed minimum requirements established by State law and, in certain cases, local government. The effect of the FILOT incentive is the reduction of assessment ratios used in calculating the property tax with respect to the capital investment, thereby reducing property taxes for 20 or more years. Millage rates can also be locked in at current levels, thereby removing the risk to the taxpayer that property tax rates could rise in future years.

Certain affordable housing facilities can qualify for the payment of a reduced payment-in-lieu of taxes (“PILOT”). The lawyers at Howell Linkous & Nettles are very experienced in negotiating FILOTs and PILOTs on behalf of taxpayers and county governments. As with other economic development incentives, FILOTs and PILOTs are often combined with industrial revenue bonds, multi-county business or industrial parks, special source revenue bonds, multi-family housing bonds, and infrastructure credits. Our attorneys can assist you with combining the appropriate incentives for your project.

Multi-County Business or Industrial Parks

South Carolina law provides several property tax incentives designed to promote commercial, industrial, and mixed-use developments. By locating a facility on property that is designated as a “multi-county business or industrial park,” the taxpayer changes the property taxes on such property into a fee-in-lieu of taxes (“FILOT”). The change does not necessarily reduce the property tax with respect to the property located in the park without compliance with the additional requirements discussed in FILOTs and PILOTs or Infrastructure Credits. However, the business becomes eligible for greater jobs development tax credits and is also a candidate for funding qualifying infrastructure with special source revenue bonds.

Our lawyers pioneered the use of multi-county business parks to provide economic incentives for the development of tourism-related projects such as hotels and restaurants.

The lawyers at Howell Linkous & Nettles are very experienced in establishing and negotiating the terms of multi-county business or industrial parks and related incentives on behalf of taxpayers and county governments. As with other economic development incentives, multi-county business or industrial parks are often combined with FILOTs, industrial revenue bonds, special source revenue bonds, State jobs and other tax credits, and infrastructure credits. Our attorneys can assist you with combining the appropriate incentives for your project.

Special Source Revenue Bonds (SSRBs)

South Carolina law provides several methods to finance the costs of capital improvements associated with residential, commercial, industrial, and mixed-use developments. Often called “public-private partnerships” these financings require the coöperation of local governments with private developers or industries in order to achieve mutually beneficial goals for the public sector and the private sector. Special Source Revenue Bonds (“SSRBs”) are secured by and payable from fee-in-lieu of tax payments (“FILOT Payments”) made by property owners located in a multi-county business or industrial park. Unless the property owner has qualified for and negotiated a reduced FILOT Payment for the capital investment represented by its facility in the park, the FILOT Payment will be in the same amount as ordinary property taxes would have been if the property were not located in the park.

SSRBs must be used to fund infrastructure serving the issuer of the bonds or for improved or unimproved real estate used in the operation of a manufacturing or commercial enterprise in order to enhance the economic development of the issuer. Municipalities, counties, and special purpose districts can issue SSRBs.

Unlike TIF districts, multi-county business parks can be created without the need to obtain property owner consent. They may only be created by county councils, not city councils, and it does, however, require the cooperation of a contiguous county in order to form one. In addition, the contiguous county is entitled to receive a negotiated portion of all fee-in-lieu of tax payments made with respect to property located in the park. The consent of the municipality must be obtained to include any property located within the corporate limits in a park.

As with other economic development incentives, special source revenue bonds are often combined with FILOTs, industrial revenue bonds, and state jobs and other tax credits. Our attorneys can assist you with combining the appropriate incentives for your project.

Infrastructure Credits

South Carolina law provides several property tax incentives designed to promote commercial, industrial, and mixed-use developments. Infrastructure credits against payments of fee-in-lieu of tax payments (“FILOT Payments”) made by property owners located in a multi-county business or industrial park are another effective means to reduce the property tax for eligible facilities. Unless the property owner has qualified for and negotiated a reduced FILOT Payment for the capital investment represented by its facility in the park, the FILOT Payment will be in the same amount as ordinary property taxes would have been if the property were not located in the park.

As the result of being in the park, the expenditure of FILOT Payments is subject to the discretion of the county so long as it is applied and distributed as set forth in the park agreement. Consequently, all or any portion of the FILOT Payments can be reduced as an economic development incentive by the county government. The consent of the municipality, however, must be obtained to include any property located within the corporate limits in a park.

State Jobs and other Tax Credits

South Carolina law provides several business income tax credits or employee withholding tax refunds for qualifying businesses creating new jobs in the State. Although some of these credits can be claimed as a matter of right by the business in its annual income tax return filed with the South Carolina Department of Revenue, other credits are only available as the result of entering into a revitalization agreement with the Coordinating Council for Economic Development at the South Carolina Department of Commerce prior to making the capital investment in the State. Even those tax credits that are available as matter of right can be significantly increased by designating the project site as a multi-county business or industrial park.

These State jobs and other tax credits include the Job Tax Credit, the Job Development Credit, the Job Retraining Credit, Research and Development Credit, Economic Impact Zone Credit, Corporate Headquarters Credit, Infrastructure Construction Credit, and various industry-specific credits, such as for energy conservation, water impoundments, rehabilitation of historic structures, recycling facilities, and motion picture project and production credits.

The lawyers at Howell Linkous & Nettles are very experienced in advising businesses and negotiating the terms of revitalization agreements and related incentives on behalf of taxpayers. As with other economic development incentives, State jobs and other tax credits and refunds are often combined with FILOTs, industrial revenue bonds, special source revenue bonds, multi-county business and industrial parks, and infrastructure credits. Our attorneys can assist you with combining the appropriate incentives for your project.