Canada: IMIT/TIEG Grants Result In Big Realty Tax Savings In The City Of Toronto

Copyright 2011, Blake, Cassels & Graydon LLP

Originally published in Blakes Bulletin on Real Estate - Commercial Leasing, October 2011

The Imagination, Manufacturing, Innovation and Technology (IMIT) grant (also known as the TIEG (Tax Increment Equivalent Grant)) is a financial program designed to encourage new construction and renovation of existing buildings for certain eligible uses throughout the city of Toronto. Building owners are given an incentive, by way of a property tax refund, to construct, retrofit or expand the buildings they own or occupy. Development charges are also waived.

The program was launched in 2008 as a means of incentivizing businesses to move to or stay in Toronto in an effort to help recover the jobs which the city of Toronto has lost to its surrounding suburbs in the last 20 years. The program also seeks to encourage development of lands for eligible employment uses, in lieu of residential uses where the developers tend to get a faster and better return.

According to the City of Toronto's Economic Development Committee, as of June 2011, IMIT applications have been received in connection with almost $1-billion dollars in total construction investment, representing over 10,000 jobs.

How Is the Realty Tax Rebate Calculated?

Property owners eligible for the IMIT grant receive a realty tax rebate over a 10-year period. The amount of the rebate is calculated based on the increase in the municipal portion (but not the educational portion) of property taxes resulting from the new construction or renovation. In the first year following the new construction or renovation, the tax rebate is equal to 100% of the property tax increase. This rebate declines on a sliding scale such that it amounts to 20% of the increase in year 10. Over the 10-year period, the IMIT grant provides a total 60% savings on the municipal portion of the tax increase.

By way of example, if the municipal portion of a property's taxes amounts to $20,000 prior to construction and $120,000 following construction, the property owner will be entitled to a rebate equal to the entire $100,000 increase in the first year and a total rebate of $600,000 over the 10 years (being 60% of $100,000 multiplied by 10 years).

The realty tax savings are significant. In terms of real dollars, one new office tower in downtown Toronto is able to offer tenants an annual average realty tax savings of $3 per square foot. For a tenant leasing 100,000 square feet, that amounts to $300,000 per year and $3-million over a 10-year term!

Eligible Projects and Eligible Uses

To be eligible for the grant, a property owner must undergo development with a minimum construction investment of $1-million. Typically, such development will involve construction of a new building or the expansion or significant renovation of an existing one. In order to receive the grant, the property owner must submit its application prior to the issuance of the first above-grade building permit.

The IMIT grant is also only available for certain eligible uses which the City of Toronto has identified as being key employment sectors. In other words, the building occupant – whether the owner or a tenant – must conduct the eligible use on the property in order for the grant to apply. Examples of eligible uses include scientific research and development, manufacturing, software development, corporate headquarters and business incubators. In multi-tenant buildings, only the gross floor area occupied by the eligible use(s) will be eligible for the IMIT grant.

Other Requirements

There are other requirements which must be satisfied in order to receive an IMIT grant. For example, the development must conform to the minimum requirements of the City of Toronto's Green Development Standards. In addition, the one or more tenants whose tenancies are identified as eligible uses in the initial IMIT application must agree to participate in at least one of the local hiring programs endorsed by the City of Toronto.

Lease Considerations

A landlord and tenant entering into a lease with the expectation of realty tax savings due to an IMIT grant should address several issues in their lease document. A failure to do so could result in loss of the grant or other unintended consequences.

First and foremost, the parties need to consider whether the tenant should receive 100% of the rebate related to its tenancy or, alternatively, whether the rebate should be allocated such that all tenants of the building share in the savings – whether or not those tenants lease premises for eligible uses. Based on our deal experience, we have seen instances of both.

Bear in mind also that it is the property owner (and not the tenant) who enters into the IMIT grant agreement with the City of Toronto. The agreement provides that the rebate is paid to the property owner by way of an annual rebate cheque issued by the City – in other words, it is not a credit or tax reduction reflected in the tax bill. There is no requirement on the part of the landlord to pass any rebate savings on to any tenant. Accordingly, a tenant should ensure that its lease includes an express covenant on the part of the landlord to pay or credit to the tenant the tenant's share of the applicable rebate. Also, the tenant should ensure that its lease includes language which stipulates that if the landlord loses the benefit of the grant for any reason due to a default by the landlord under its IMIT agreement with the City (such as would be the case if the landlord failed to pay realty taxes in the normal course or if the landlord became bankrupt), the tenant's share of realty taxes shall nevertheless continue to be calculated as if the grant remained in place. This is especially important if the expectation of an IMIT grant induced a tenant into signing its lease in the first place.

Tenants should also be aware that the IMIT agreement with the City could allow a property owner to assign to a third party the rebate funds which the property owner is entitled to receive. Consequently, a tenant should also ensure that its lease includes a restriction prohibiting the landlord from assigning or otherwise transferring the rebate funds except to a successor owner or successor landlord of the property, which successor owner or successor landlord must be similarly bound to provide the tenant with the benefit of the IMIT rebate.

From a landlord's point of view, it should ensure that its lease includes a provision whereby the tenant agrees not to or omits to do anything that would result in a default by the landlord under its IMIT agreement with the City, particularly where the landlord is looking to distribute the savings to all tenants in its building.

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.