In The News › BGR report questions tax break standards

May 4, 2007

Source: Times-Picayune

BGR report questions tax break standards

BGR report questions tax break standards
Project panel willing to change
Friday, May 04, 2007
By Greg Thomas
Real estate writer

The Bureau of Governmental Research is questioning the New Orleans Industrial Development Board’s practice of giving property tax abatements to projects that are already highly subsidized and suggests that a new, standardized vetting practice be followed to determine whether applicants truly need more of a tax break.

The bureau released a report Thursday titled “Seeking Subsidies on Top of Subsidies” that criticizes the agreements the board makes with developers to freeze property taxes at pre-development levels for 10 to 15 years. The report is the second one issued this year by the nonprofit research group that finds fault with the so-called payment in lieu of tax agreements, or PILOTS.

Development board President Jimmie Thorn says his group carefully reviews PILOTS applications, is working to improve the analyses it conducts and will cooperate with the bureau.

The bureau says in its report that applications from developers for PILOTS are not thoroughly analyzed and are awarded to projects that don’t need them, a practice it says whittles away the city’s tax base.

In some instances, as much as 90 percent of a low-income housing development’s cost can be financed with tax credits, and after receiving state and federal subsidizes, the developers behind the projects turn to local government bodies such as the Industrial Development Board for even more of a break, the report says.

The bureau is calling for a better process to determine which projects truly need PILOTS and which entities should be able to pull their own weight.

Before Hurricane Katrina, the Bureau of Governmental Research issued a report that showed 65 percent of the properties in New Orleans were not on the tax rolls because they were either PILOTS, were nonprofit entities or were government or university properties.

According to the new report, there are 11 PILOTS applications for everything from low-income apartment complexes to retail centers and hotels on the board’s Tuesday meeting agenda, and each has already received substantial subsidies through Gulf Opportunity Zone Act subsidies, whether GO Zone bonds, low-income housing tax credits or other breaks.

“I knew (the Bureau of Governmental Research ) would eventually begin attacking (developments that already got substantial subsidies) and ask ‘why do they want more?’ “ Wade Ragas of Real Property Associates, a real estate consulting firm, said Thursday.

“It’s a quandary. . . . The current problem is why the subsidies appear to BGR to look awfully big when (on many projects) it isn’t enough (money),” Ragas said.

Operating costs have soared for apartment owners and developments of all kinds in New Orleans. Labor costs and building materials have also climbed. What seems like inflated cost is actually a reflection of the recovery economy, Ragas said.

“The IDB needs to take an in-depth look to analyze the problem as a whole to see how necessary (each application) is,” said Janet Howard, the Bureau of Governmental Research’s executive director. “A comprehensive analysis needs to take place where tax breaks are given.”

Howard calls the Industrial Development Board’s procedures “ad hoc” and says it should be carefully following a city master plan when making its awards.

Ragas, however, pointed out that “I’m not claiming the process we’re using right now is inappropriately designed.”

“The use of PILOTS and public-private partnerships are seen across the nation as necessary for affordable housing,” he said. “It’s almost the norm.”

Thorn said allegations that his group isn’t thoroughly analyzing applications aren’t necessarily true and added that the bureau plans to increase its outsourcing of cost-benefit analyses to third parties to get more detailed reports.

Thorn won praise from the bureau for participating in its analysis. “BGR applauds the IDB for taking the first steps to review its policies and procedures for awarding PILOT subsidies,” bureau Chairman Poco Sloss wrote in the report released Thursday. But “to protect the citizens of New Orleans, the IDB and city leaders need to come together to craft a comprehensive approach that converts PILOTS from a developer-driven subsidy vehicle to an effective strategic incentive” used to benefit the city and its coffers, he wrote.

The report adds that the bureau is “concerned that abating local taxes to reduce the operating costs for rental complexes is a short-sighted. . . . In attempting to address one problem it creates another longer-term problem by depriving local government of resources needed” for services such as road maintenance, police and fire protection, and other public infrastructure services.

But proponents say PILOTS help create housing, retail, grocery stores and even a possible luxury hotel and condominium complex near Canal Place by awarding property tax breaks to developers.

Sloss said what is needed is what Howard and Ragas have proposed: a stringent, standardized procedure for handling tax abatement applications and a protocol through which to approve based on their economic impact.

Ragas said the second biggest issue facing the Industrial Development Board after PILOTS will be tax breaks for new retail projects. Do big national chains need the same tax breaks as the owner of a 200-unit eastern New Orleans apartment complex that was flooded for weeks? And should national corporations with the financial resources of a Home Depot get tax breaks?

“Those are catalysts to other (developers not seeking tax breaks),” he said. “Those attract private money” for ancillary development near the anchor projects.

The Bureau of Governmental Research’s bottom line is that projects should receive PILOTS only if they spur further development that would not occur were it not for the subsidies. Furthermore, instead of subsidies that run 20 years, the group wants an annual review of financial records from PILOTS recipients so that when revenues show that their projects are no longer at a disadvantage and in need of tax breaks, the subsidies can be removed.

The Bureau of Governmental Research also says a super majority of five City Council members should approve all PILOTS, which now require only the approval of the Industrial Development Board.

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Greg Thomas can be reached at gthomas@timespicayune.com or (504) 826-3399.

May 4, 2007

Source: Times-Picayune

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