S. Shawn Whitney
Editor's note: S. Shawn Whitney represented the developers of two projects on seven blighted acres near Missouri State University that were approved for 10-year city tax abatement Jan. 10.
As a community ages, it is natural for some areas within it to decay. Failure to take steps to remedy the decay discourages both public and private investment, leading to further decline as businesses and residents leave.
Ultimately, these factors cause a community’s tax base to depreciate and lower its tax revenues.
Many communities offer redevelopment incentives such as tax abatements to the general public to encourage investment with the goal of reinvigorating run-down, or blighted, areas and restore them as positive financial community assets.
Unfortunately, redevelopment is typically more expensive than new construction due to costs associated with acquiring existing structures, assembling those structures into a development plan, and factoring in unknown challenges that can come when working with older buildings.
It is a common misconception that tax abatement lowers the real property taxes that a community receives on abated property, but the true effect of abatement is property taxes are essentially frozen for a period of time. There are two tax abatements in Missouri: the Chapter 99 abatement and the Chapter 353 abatement.
Any person may apply for Chapter 99 abatement, but an applicant must demonstrate that the real property and improvements are blighted and submit a redevelopment plan to the community for approval. Blight can be demonstrated by showing that the area is a liability due to obsolescence, structural deterioration or dangerous conditions.
If the community’s governing authority designates an area blighted and approves the associated redevelopment plan, then the area is eligible for Chapter 99 abatement for 10 years. During the abatement period, the maximum assessed value of the property for tax purposes will be frozen, equaling the value of the real property and improvements before any rehabilitation on the property. In other words, once redevelopment is complete, the applicant is not required to pay taxes on the increased value of the real property and improvements until the end of the abatement but is still required to pay taxes equal to the amount paid before redevelopment.
This is beneficial to both the applicant and the community as it allows the redevelopment project to be financially feasible, ultimately leads to a higher tax base at the end of the abatement and spurs development within a community’s taxable boundaries.
Unlike Chapter 99 abatement, Chapter 353 abatement is only available to for-profit urban redevelopment corporations. To receive Chapter 353 abatement, an applicant must demonstrate blight, show that “but for” the abatement the project is not feasible and submit a redevelopment plan. If a community finds the applicant’s property is blighted, determines the project satisfies the “but for” test and finds that the redevelopment plan conforms to the community’s requirements, the property will be eligible to receive Chapter 353 abatement for 25 years.
During the first 10 years of abatement, real property taxes will be based on the value of the land exclusive of any improvements. During the last 15 years, taxes may be assessed up to 50 percent of the value of the land and improvements. The community is made whole by a payment in lieu of taxes from the applicant equal to the amount of real property taxes paid before the redevelopment commences.
Redevelopment helps preserve older buildings, create jobs, boost local revenue through business and income tax, reduce crime and improve overall neighborhood conditions and spur additional development, but communities would miss out on many of these benefits if incentives were not in place.
Partner S. Shawn Whitney practices real estate law at Husch Blackwell LLP in Springfield. He can be reached at shawn.whitney@huschblackwell.com. Associate Sarah Icet Wilson also contributed to this article.[[In-content Ad]]
