Tennessee promotes economic development with a variety of initiatives, from employee training and infrastructure improvements to employment and investment related tax incentives. Most of these are described online at web sites for the state Department of Economic and Community Development www.tennessee.gov/ecd and state Department of Revenue (www.tennessee.gov/revenue). Tennessee also provides property tax incentives through various programs enacted by the legislature involving either of two structures: 1) assumption of nominal property ownership by a city or county industrial development board (IDB) accompanied by a lease of the property to an operating business; or 2) creation of a tax increment financing (TIF) zone within which incremental increases of property taxes are dedicated to economic development projects within the zone.

These incentives are subject to policies and procedures established by the city or county where the project is located, and there are also state laws that require filing of project agreements and analyses when the project begins and annual reporting of the public revenue impact of the projects by the business owners who benefit.

The following are frequently asked questions and answers concerning the program and filing requirements.

When and where must IDB leases and other incentive agreements be filed? Within ten days of execution, to the city and county mayor where the property is located, and to the state Comptroller of the Treasury, Division of Property Assessments, Ste. 1400, 505 Deaderick St., Nashville, TN 37243-0277. Parties to these agreements may submit proposed agreements for advance review by the Comptroller as to form without identifying the business.

Agreements must be accompanied by a cost-benefit analysis in a format approved by the Commissioner of Economic and Community Development, available at the ECD website. Agreements longer than 20 years must be accompanied by a written determination of the state Comptroller and Commissioner of E&CD, that the project agreement is “in the best interest of the state.

It is generally wise to provide a copy of the agreement to the county assessor of property, and the agreement must be provided on request. The assessor must assess all property at fair market value unless he or she is provided a basis to assess it otherwise, and the agreement allows the assessor to take the IDB lease or other agreement into account.

May Tennessee cities or counties negotiate property tax incentives directly? Generally, no. Unless a duly constituted industrial development board has agreed to take title to the project property, or agreed to submit a TIF economic impact plan for city or county approval, property used by a business will be subject to the same property tax levies as nonproject properties. City or county leaders may engage in preliminary discussions about incentives, and may establish eligibility criteria to guide the industrial development boards they create, but it is the board that must initiate the legal arrangements to make the incentives possible. Cities and counties that create the boards control them indirectly as the appointing authority for board directors.

May cities agree to PILOT payments that exclude the county, or vice versa? Yes. An industrial development board must abide by PILOT limits or requirements imposed by the city or county that created it, but not otherwise. It is nevertheless generally in the interest of the city and county where a project is located to cooperate in PILOT programs, and usually in the interest of the business to insist on a reasonable sharing of PILOT payments between affected cities and counties.

Special provisions applicable to Shelby County prohibit PILOT payments at less than the amount of county tax otherwise due, unless the county approves a lesser amount.

May IDB’s collect incremental taxes due under a TIF plan if nonparticipating cities or counties have not approved the plan? No, as to taxes otherwise due the nonparticipating city or county.

May TIF or PILOT incentives apply to tangible personal property as well as real property? Yes.

Who is responsible for filing the annual fiscal report? The business using the property under lease from the ID Board or Health and Ed Board should file the report. If there are both prime and sublessees it is suggested that the business using the property take the lead in insuring the report is filed.

Is it possible to extend or postpone the filing deadline (Oct. 1)? No, the statute does not provide for extensions. The penalty for late filing has been reduced to $50. A copy of the report must be filed with the county assessor of property by October 15, and failure to file with the Board or assessor within 30 days after written demand will add $500 to the PILOT otherwise due.

How is estimated value determined? The law requires merely a good faith estimate of value, not a formal appraisal. For relatively new property, a summary of costs may be a good measure of value. State assessment standards for tangible personal property require depreciated acquisition cost be used as the taxable value of personalty, using depreciable lives provided by statute (e.g., eight years for manufacturing equipment, to a maximum of 80% depreciation). Construction-in-process personalty values are limited to 15% of acquisition cost as long as it is still reported as CIP for federal income tax purposes.

How are estimated taxes determined? Use your estimated value to calculate city and county taxes. Multiply the value estimate by 40% for realty or 30% for personalty, yielding an assessed value estimate, then multiply again by the tax rate most recently adopted by the county or city. The county trustee and city collecting official can supply these rates. Tax rates in Tennessee are expressed as an amount per $100 of assessed value, so convert the tax rate to a percentage by dividing it by 100. For example, with an estimated value of $1,000,000 for land and buildings leased from an ID Board, a $2.45 tax rate yields an estimated tax of $9,800 when multiplied times an assessed value of $400,000 (estimated value of $1,000,000 times 40% equals assessed value of $400,000 times .0245 = $9,800).

How are leasehold taxes determined? The lessee’s interest (leasehold interest) is assessable but rarely has a positive value. If actual “rent” charged for use of the property, including PILOT payments and imputed rent (e.g., amortized cost of required improvements) equals or exceeds a fair market rent for the property, the leasehold interest has no value. The assessor is required to evaluate leasehold interests and can confirm whether a particular leasehold has positive value. If so, taxes are due on the assessed percentage (40%) of leasehold value.

How does the filer determine when the property will return to the assessment rolls? With the option to renew the lease or to exercise an option to purchase at any time, it may not be possible to precisely predict when the property will return to the assessment rolls. It is suggested you use the lease expiration date as the likeliest time unless you have reason to believe another date is better.

For more information contact Kelsie Jones, Executive Secretary, State Board of Equalization, 615-747-5379, or Robert Lee, Counsel to the state Comptroller, 615-401-7779.