United States: Georgia Ad Valorem Tax Incentives Through Bond-Lease Transactions In GA

All Georgia communities can provide partial relief, and some can provide full exemptions, from ad valorem taxes for certain privately-used facilities through bond-lease transactions. This ability can be used as an incentive to induce the location of a new business or the expansion of an existing business in the community. This incentive can be provided whether or not the project qualifies for tax-exempt bond financing.

An absolute waiver of ad valorem taxes would be illegal under the Georgia Constitution as well as under basic principles of uniformity of taxation and equal protection of the laws. Ga. Const. of 1983, art. 7, sect. 1, para. 3; See also, e.g., Sheet Metal Workers' Intern. Ass'n v. Lynn, 488 U.S. 347, 109 S.Ct. 639, 102 L.E.2d 700 (1989) (holding that the systematic undervaluation by state officials of other taxable property in the same class "contravenes the constitutional right of one taxed upon the full value of his property"); Hillsborough v. Cromwell, 326 U.S. 620, 623, 66 S.Ct. 445, 448, 90 L.E.2d 358 (1946) (stating that the "equal protection clause . . . protects the individual from state action which selects him out for discriminatory treatment by subjecting him to taxes not imposed on others of the same class"). However, if a development authority owns the property and leases it to a private business, the property is in a different class and can be taxed advantageously.

To create a property tax incentive through a bond-lease transaction, a development authority issues tax-exempt or taxable bonds to acquire a facility that it will lease to a private company. (For more information on tax-exempt bonds, request our "Overview of Private Activity Bonds and Incentives," or on taxable bonds, our memorandum "Taxable Versus Tax-Exempt Bonds.") The lease payments amortize the bonds, and the company typically will own the facility at the end of the lease. The types of facilities that can enjoy this treatment are described in the particular statute or constitutional amendment governing the locality's development authority.

Using the proceeds of the bonds that it issues, the development authority acquires title to the project to which the incentive will apply. The lease of the property to the lessee company calls for annual rental payments equal to debt service on the bonds. The bonds are payable solely from the lease payments. This lease is a triple-net financing lease passing income tax ownership of the property and usually includes a purchase option exercisable for a nominal sum when the bonds are paid. The lessee company normally acts as the development authority's agent to contract for, oversee and acquire the property to be leased. The lessee company may advance the costs of the property and be reimbursed from the proceeds of the bonds. The lessee normally is entitled to depreciation, is responsible for insurance, taxes and maintenance, has freedom with respect to design and construction, and may be regarded as the project "owner" for all other practical purposes. During the term of the financing, the lessee has essentially the same control over the project as under conventional financing. Furthermore, covenants and security devices usual in conventional lending normally can be incorporated in the bond transaction. Frequently, although the bonds and lease have a term of at least the period which has been agreed upon for the tax incentive, the documents provide that the lessee company can require the bonds to be paid early. Upon payment of the bonds the purchase option is effective and the lessee can obtain full legal title to the project without restriction.

The lessee company may arrange for the sale of the bonds to provide for the financing of the project. However, many lessee companies prefer not utilize the bonds for actual financing, but to purchase the bonds themselves in what is sometimes referred to as a "phantom bond" or self-purchased bond transaction. Because the lessee pays the annual debt service and receives the funds back as a payment of debt service on the bonds on a same day basis, there is no real financial or accounting impact in such a transaction. Because the funds used to purchase the bonds typically are received back as a reimbursement (often on the same day) for costs expended on the project, the lessee/bondholder's only investment is in the project itself. The bond framework provides a vehicle to put the legal title to the assets in the development authority, to access ad valorem tax incentives.

Some communities have developed policies on when such property tax incentives will be made available. Other communities have not, but can be approached, usually through the local development authority, about making the incentives available in a particular case. However, a bond-lease transaction may violate the state constitutional requirement of uniform taxation and the state statutory requirement that all property be returned for taxation at its fair market value if other taxpayers in the same county who leased similar property financed by bonds had not obtained a similar reduction. (Coweta County Bd. of Tax Assessors v. Ego Products, Inc., 241 Ga. App. 85, 526 S.E.2d 133 (1999)). The Coweta County case emphasizes that the lease should be clear in describing the property to be subject to the tax incentive and that the county tax assessor's office should be made aware of and acquiesce in the development authority's incentive policy or activities.

There are three types of Georgia development authorities with differing powers regarding ad valorem tax leasing transactions:

  • Authorities created by general statute, such as the Development Authorities Law and the Downtown Development Authorities Law, which can only provide reduced taxes on the lease.
  • Authorities created by constitutional amendment with power only to provide reduced taxes on the lease.
  • Authorities created by constitutional amendment with power to provide complete or partial tax exemption.

Bond-lease financing through authorities in the first two categories results in a tax on the value of the lease only. The value of the leasehold estate must be determined by the local tax commissioner. Given the terms and other characteristics of the lease, taxation of the leasehold will be less than taxation of the ownership interest. See, e.g., Delta Airlines, Inc. v. Coleman, 219 Ga. 12, 131 S.E. 2d 768 (1963) and DeKalb County Board of Tax Assessors v. W.C. Harris & Co., 248 Ga. 277, 282 S.E.2d 880 (1981).

The Harris case in particular discussed how the tax assessors are to discharge their duty to determine the value of the leasehold subject to tax. The Court indicated that there may be a variety of methods that are acceptable and approved the particular method utilized. The method approved in that case involved determining the fair market value of the leasehold (by analyzing market rents), deducting the assumed value of the property (determined by capitalizing the annual bond payments), and adding the value of the reversionary interest of the lessee (presumably, the "equity" accumulated toward the acquisition of the project through rental payments). Thus, the taxable assessment increased annually based upon increases in market value of the property and the portion of rental payments applied to principal of the bonds.

The challenger in the Harris case argued that the leasehold should be taxable as if the property were owned entirely by the lessee company, based upon the assertion that the lessee had all practical ownership over the property and would obtain title upon paying a nominal sum when the lease terminated. In rejecting this argument, the Court noted that the lease contained significant restrictions on the lessee, making its interest less than fee simple ownership. For example, the lease required the lessee to operate the project throughout the term for the sole purpose of continuing its business operations, limited the expenditures which the lessee could make on the leased property, required any plans for modifications to the property to be submitted to the development authority, and gave the authority a right to inspect the premises. Under the lease, the lessee was required to maintain its corporate existence and, if the premises were to be sublet, would still be primarily responsible for the rental payments and the premises would have to be operated for the same purposes. The lessee agreed not to convey its interest during the lease term, and, upon the occurrence of an event of default, the authority could terminate the lease and exclude the lessee from possession.

Many counties, following the general outline of the Harris valuation method, routinely value bond leases in annually-increasing increments, corresponding to the percentage of principal repaid on the bonds. In other words, for a ten-year project where principal of the bonds is repaid in equal periodic payments, 10% of the fee simple valuation will be applied after one year, 20% after two years, etc. until the full fee simple valuation applies after the ten-year bond maturity. Different results may be obtainable when repayment of the bonds is hastened or delayed.

Assessments are required by law to reflect the market value of property. Although the Harris case provides one method of valuation, particular assessors can and do apply different methods. For example, some counties assess the leasehold at one-half the value of the full ownership interest. An incentive tends to lose effectiveness if its impact is uncertain. Unfortunately, because the Georgia ad valorem tax abatement incentive derives from this tax assessment treatment rather than a statutory scheme, businesses receiving these incentives frequently are forced to rely upon "gentlemen's agreements" or informal understandings and past practice concerning the future assessments they will receive.

With constitutional authorities in the third category, the lease will be fully exempt from tax. The Constitution of 1983 outlawed local constitutional amendments, so new constitutional authorities may not be created. See Ga. Const. of 1983, art 9, sect. 1, para. 1. Two Georgia Supreme Court decisions, McMillan v. Jacobs, 249 Ga. 117, 288 S.E.2d 211 (1982), and Hart County Board of Tax Assessors v. Dunlop Tire & Rubber Co., 252 Ga. 479, 314 S.E.2d 188 (1984), have held that the interest of lessees from development authorities of this type obtained in bond-lease arrangements were entirely free of ad valorem taxation. The Court emphasized in each case that the pertinent constitutional amendment stated not only that the development authority was not subject to property tax but that the property of the development authority was not subject to tax. Thus, the Court concluded that the exemption from taxation extended to a leasehold interest in the property held by a lessee under the authority.

In the several jurisdictions that have constitutional authorities exempting all property of the authority from taxation, as in the McMillan and Hart County cases, businesses can be assured that they will receive the incentive. Because the abatement resulting from the lease is for 100% of the value of leased property, such an incentive might provide more tax relief than is desired by the community. A practice has emerged requiring the business and the development authority to enter into a payment in lieu of taxes ("PILOT") agreement that requires the company receiving the tax abatement incentive to make payments in lieu of taxes in accordance with an agreed-upon schedule. Alternatively, or in addition, the agreement may require the business to make payments based on some percentage of the tax abatement received to the extent the business does not live up to its commitments to increase investments, provide employment, and so forth. Such arrangements should be enforceable against the business, so long as they are clear and the development authority has given adequate consideration for the agreement, which consideration can be found in the authority's agreement to enter into the bond-lease transaction.

Ordinarily a contract in which a city or county agrees to waive taxes or to accept stated amounts in lieu of taxes is void. See, e.g., Georgia Presbyterian Homes, Inc. v. Decatur, 165 Ga. App. 395, 299 S.E. 2d 900 (1983). However, a private party enjoying a valid tax exemption, as described above, may agree to pay amounts in lieu of taxes if the agreement is supported by consideration and does not otherwise violate state law. A PILOT agreement may be useful to refine the ad valorem tax incentive arrangement or to reconcile a situation in which the ad valorem tax incentive is intended to be shorter than the period over which the project is to be financed with the bonds. For example, the PILOT agreement can call for the partial payments in lieu of tax to be made over an initial 5- or 10-year incentive period, for full payments in lieu of tax to be made after the end of the incentive period and until the bonds are paid in full and title to the project is transferred to the lessee, or for payments ("claw-backs") to be made by the lessee if it fails to meet agreed-upon criteria for level of investment, number of jobs, length of operation or similar matters.

Communities should carefully consider their ad valorem tax incentives and tailor a uniform policy that appropriately encourages the type and location of businesses that are desired. The policy should weigh the forgone taxes against the broader benefits that the community will receive in terms of jobs, future tax base, increase in allied economic activity and taxes, and increased property values. As described above, the incentive policy must be tailored to the laws governing the particular jurisdiction and should be uniformly applied.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions