Property Tax Incentive Financing: Payment in Lieu of Taxes (PILOT)

With few exceptions, including the Industrial Tax Exemption Program (click here to view a comparison of the ITEP and PILOT programs), the State of Louisiana (the “State”) and its local governments are not able to provide tax abatements directly to private companies.  Recognizing this barrier to job creation and economic growth, Louisiana has embraced the use of Payment-in-Lieu of Tax (“PILOT”) agreements as a way to provide tax abatements to companies in furtherance of economic development. PILOT agreements have been utilized for decades and have helped attract numerous companies to the State, resulting in thousands of new high-quality jobs and billions of dollars in capital expenditures. This summary provides an overview of how PILOT agreements provided through the Northwest Louisiana Finance Authority (“NWLFA”) work, and what is required to obtain a tax abatement through a PILOT agreement.

Article VII,§18(A) of the Constitution of the State of Louisiana (the “Constitution”) provides that only property subject to ad valorem taxation is listed on the assessment rolls. Article VII,§21 identifies certain property “and no other” that shall be exempt from ad valorem taxation. Included among the types of property exempt from ad valorem taxation is property that is both: 1) public and 2) used for public purposes. Property that meets these two requirements is removed from the tax rolls.   

Public Property: In order for property to be considered “public” and therefore meet the first requirement, ownership of the property must be in the name of a public entity, such as a local public trust ("Public Trust”). State law provides municipalities and parishes the authority to establish a Public Trust for the purpose of carrying out economic development. All properties owned by a Public Trust, such as NWLFA, and used for a public purpose, and any income generated by those properties, is exempt from taxation in the State. 

Public Purpose: Bona fide economic development activity, as defined by law, is considered a “public purpose” that meets the second requirement necessary for property to be exempt from taxation.  This includes property owned by NWLFA in connection with a project satisfying one or more public purposes as set forth in La. R.S. 9:2341 et. sec., including any action to “acquire, own, lease, rent, repair, renovate, improve, finance, sell, and dispose of properties” for the purpose of “inducing manufacturing, industrial, commercial, and other enterprises to locate in this state.” Although, the property must be owned by NWLFA to receive the exemption, there is no requirement that NWLFA occupy or operate the property.

PILOT Agreement: In order to provide a tax abatement to a private company, NWLFA utilizes a contractual sale-leaseback structure. Under the PILOT agreement, the private company transfers ownership of the real and/or personal property to NWLFA for an agreed upon term. NWLFA immediately leases the property back to the private company.  The private company, as lessee, remains entitled to all of the tax attributes of ownership, including, without limitation, the right to claim depreciation or cost recovery deductions and the private company has the right to amortize capital costs and to claim any other federal or state tax benefits attributable to the property. The retention of the ownership attributes by the private company allows the private company to obtain financing for the project as if the private company had maintained full ownership.   At the expiration of the PILOT agreement, ownership of the property reverts to the private company. Additionally, the private company has the option to take back ownership and forfeit future tax abatements at any point during the term of the PILOT agreement, without penalty. 

The level of tax abatement is negotiated between the private company and NWLFA.  NWLFA is not required to provide any abatement and typically reviews each request on a case-by-case basis. The abatement percentage and the term of the abatement vary based on the needs of the project and the economic deliverables the community anticipates receiving. Economic deliverables include, but are not limited to, job creation, wages, total capital expenditure, economic diversification and/or fulfilment of other community needs.  

Once the NWLFA determines the annual percentage of taxes abated under the PILOT agreement, the private company is responsible for paying the remainder of the taxes through a Payment-In-Lieu of Tax, which the law categorizes as a “Statutory Imposition”. The private company is required to make the PILOT payment annually through the same process that is used to collect ad valorem taxes. Additionally, the private company is responsible for annual administrative fees payable to the NWLFA, so long as the combined amount of the PILOT payment and other fees are not in excess of the taxes such lessee private company would have been obligated to pay to such authorities had the lessee private company been the owner of such project during the period for which such payment is made. 

In addition to providing a property tax abatement, NWLFA may agree to provide, through a contractual PILOT, an abatement of sales and use taxes on materials and equipment purchased during the construction of the project.  For the exemption to apply, NWLFA must agree to designate the general contractor and each sub-contractor on the project as a mandatary (agent) of the lessor for the purpose of purchasing construction materials and equipment. 

When considering requests from companies to grant tax abatements utilizing a PILOT agreement, NWLFA requires a full economic evaluation of the project. This evaluation considers several factors including, but not limited to:

-But for the tax abatement, would the project occur? 

-Does the community need to provide the tax abatement to compete with another state for the project?

-Does the company need the PILOT to meet economic viability?

-Is the benefit to the local community commensurate with the benefit provided to the company?

-What is the financial gap the company needs to make up to meet economic viability? 

This evaluation is critical to meet the legal standard necessary for the property to meet the public use requirement. Before granting the property tax abatement, NWLFA coordinate with the local taxing bodies and will obtain a resolution of approval of the local municipality (or the parish if the project is not located within an incorporated municipality) in which the project is located.