Terzulli: IDAs are more important now than ever
By: Opinion, Nicholas T. Terzulli, May 13, 2021
Seemingly every week detractors decry the need for Long Island’s Industrial Development Agencies (IDAs). Questioning whether the financial tax incentives IDAs provide to the business community and real estate developers is legal, proper, and necessary, these stakeholders need to understand the history of IDAs to realize their importance today. Indeed, the reason why the New York State Legislature created IDAs in 1969 is the same reason why they are necessary today. IDAs provide the first and often last line of defense against lower cost states stealing New York’s commercial tax base.
In the 1960s, lower cost states began aggressively poaching New York’s industrial and manufacturing base. These states used a combination of lower taxes, less regulation (sound familiar?) and the ability to issue tax-exempt bonds, which provided companies access to low-cost financing, to successfully relocate businesses from New York. The political and business class noticed and demanded action.
In response to this assault on New York’s tax base, New York Gov. Nelson Rockefeller signed into law The Industrial Development Agency Act of 1969 which gives local New York municipalities the ability to use certain financial assistance vehicles, tax incentives, and tax-exempt bonds to maintain and grow New York’s industrial, commercial, and manufacturing sectors. The Act gave New York cities, counties, and towns the ability to create local Industrial Development Agencies. Each IDA is an independent public benefit corporation established by a special and separate act of the New York State Legislature at the request of a sponsoring municipality, and each IDA is expected to act in the interest of that municipality.
Today there are 109 active IDAs throughout New York and 8 on Long Island. Their raison d’etre in 1969 and 2021 is the same: incentivize businesses to remain and grow in New York and attract new capital investment.
IDAs retain industry, attract capital investment, and preserve and grow the commercial tax base by providing tax incentives. These incentives provide businesses with the financial assistance needed to remain in New York. These incentives provide developers the ability to attract debt and equity partners to finance and develop their projects here instead of locating their projects in more development-friendly states. Ultimately, these incentives lead to an expansion of the commercial tax base and creation and retention of jobs.
Two incentives are easily quantifiable. They include an exemption from Mortgage Recording Tax (“MRT”) and an exemption from Sales and Use Tax (“Sales Tax”). IDAs can exempt up to 75 basis points of the 1.05% of the MRT levied in Nassau and Suffolk counties in connection with a loan secured by a mortgage for an approved IDA project. IDAs also exempt the entire sales tax amount, which in Nassau and Suffolk counties is 8.625% on all qualified furniture, fixtures, and equipment associated with an approved IDA project. These two exemptions alone add up to significant savings for a business or developer.
While these exemptions are important, the most critical exemption an IDA can provide, especially on Long Island, is an exemption from real property taxes. IDAs exempt real property taxes through a negotiated payment in lieu of taxes agreement. PILOT Agreements allow a business to pay a certain percentage less than the stated real property taxes on the property, typically range in length from 10 to 35 years, and control the assessed value and tax rate affecting the property. With Long Island’s suffocatingly high property tax burden, PILOT Agreements are essential to ensure businesses remain and grow on Long Island and developers locate new projects here. PILOT Agreements are often the sole reason for development on Long Island.
IDA can also issue tax-exempt bonds, subject to the limitations of the Internal Revenue Code of 1986, for qualified manufacturing facilities. The proceeds of these tax-exempt bonds can be used to fund all or substantially all the costs of a qualified project. Tax-exempt bonds are exempt from federal, state, and local income taxes.
Following the end of the Cold War, Long Island became a front line in the national economic development battle. Thankfully, the Long Island IDAs are extremely effective at incentivizing businesses to stay and new developments to begin. According to the state comptroller’s report on IDAs in 2020, the 8 Long Island IDAs lead New York in incentivizing projects and creating jobs. It said Long Island IDAs are responsible for assisting 846 projects and creating 45,783 net new jobs – the most of any region in New York.
IDAs are doing today exactly what Gov. Rockefeller imagined over 50 years ago: providing incentives to retain our manufacturing, industrial, and commercial sectors and inducing new development to increase our tax base.
Nicholas T. Terzulli, Esq. is managing partner of Standard Advisors Group, a leading tax incentive consulting firm, and general counsel of a private equity real estate firm.