The complicated way local governments provide property tax breaks to businesses and developers is facing a new challenge in Fulton County, which could upend a powerful business incentive that critics contend is too loosely granted and costs Georgia taxpayers hundreds of millions of dollars per year.
The lawyer for a Fulton County resident contends the county’s Board of Assessors isn’t properly appraising properties subject to tax breaks granted by local development authorities, acting instead as a “rubber-stamp” for the deals.
Buckhead attorney John Woodham urged the board in a Dec. 5 letter to stop issuing appraisals requested by development authorities until it reviews its processes and the merits of these transactions — lest they face potential legal action or expulsion.
“Without the board’s complicity, this tax abatement scheme perpetrated on the public by (development authorities) cannot work,” Woodham wrote in the letter, which was obtained by The Atlanta Journal-Constitution.
Taxpayer groups have complained for years that Fulton undervalues commercial properties for tax purposes, putting a greater share of the tax burden on homeowners. A 2018 investigation by the AJC and Channel 2 Action News found dozens of commercial properties, including apartment buildings, office complexes and shopping centers in the city of Atlanta were valued for property tax purposes at far less than what buyers paid for them.
At its Dec. 7 meeting, the five-member board delayed consideration of two such property tax breaks presented by the Development Authority of Fulton County. One was for a data center at the former Tilford Yard in west Atlanta that would reduce the project’s taxes by $32 million over 10-years.
During the meeting, Chairman Edward London said the board received roughly a dozen public comments on this topic and will consult with the county’s attorneys to further evaluate Woodham’s allegations and arguments.
“We may need to form a committee to address these matters,” London said. “It seems it’s something that a number of members of the public are concerned about.”
The Board of Assessors did not respond to a request for comment, and it’s unclear when the board will reconsider the tabled items.
‘Fake’ bonds
Woodham has challenged taxpayer-subsidized developments for years, including the Atlanta Beltline and Mercedes-Benz Stadium.
At issue is Georgia’s unique system of passing along property tax breaks to developers and expanding companies. The state Constitution forbids government entities from providing a good, service or property without an equitable return.
State and local governments have developed a workaround commonly called “bond-for-title,” “phantom bonds” or “lease-purchase” agreements.
This workaround often involves bonds that aren’t really real, leases that don’t act like typical leases and a government body — a development authority — holding title to a project that they often don’t really own.
Development authorities are local agencies with board members typically appointed by local elected leaders that recruit companies to expand. Recruiters say in the war for jobs such incentives are needed to keep Georgia competitive. Critics argue the incentives are often too loosely granted for projects that would happen anyway.
The development authority issues “bonds” to “finance” the project, but the “bonds” typically don’t fund the project and the company usually finds its financing elsewhere. The prospect company is usually the one that buys the bonds, not investors. The authority does not publicly sell the bonds and taxpayers are not on the hook for them and no money changes hands, but the bonds still must be approved or “validated” by a local judge like any other bond issued by a Georgia government.
This is where the “phantom bond” name comes from because they’re a sort of legal fiction.
In exchange for the “bonds,” which usually represent the potential future value of the project, the company grants title to the development authority. Development authorities are government entities and don’t pay property taxes and as part of this arrangement pass along that tax savings to the company. How much tax savings is provided and for how long varies by agency.
The company then generally leases the property back from the development authority in exchange for rent at whatever terms the parties set and eventually the title is returned to the company at the end of the tax break period.
What’s a ‘phantom’ lease worth?
The Board of Assessors plays an ancillary, albeit important, role in these bond-for-title transactions.
In Fulton, these bond-for-title deals typically last 10 years under what’s known as a “ramp-up valuation.” In that time, the project owner or developer will pay a reduced tax bill of 50% based on what’s supposed to be the assessed fair market value the first year with the tax burden rising each year until it reaches the full tax value in year 11.
But instead of valuing the property itself as it does with every other Fulton property, the Board of Assessors uses the “ramp-up” methodology provided by the development authority. Woodham said the board usually approves the appraisal requests without analyzing the leases or any supplemental documents, which he argues violates the board’s legal duties.
The board approves a “Memorandum of Agreement” outlining the contours of these bond-for-title deals, which is all part of what goes before a judge for validation.
Woodham’s letter said the board should not be “willing to suspend its rules and regulations for a select few, who seek preferential tax treatment sponsored by (development authorities).”
Robert Highsmith, an Atlanta lawyer who often represents public officials in civil and development matters, said the 50% ramp-up methodology has been the standard across the state for decades.
That method, he said, has “been upheld in a number of deals, even where there have been (legal) challenges.”
The Memorandum of Agreements typically allow for the company receiving the tax abatement to terminate its lease “at any time for any reason or no reason at all” by paying a nominal $10 fee, Woodham’s letter said. He argues this “renders the entire lease structure itself an illusory sham,” allowing the project’s owner to distort the value of the property.
The tax break agreements also allow the prospect to avoid paying transfer taxes if the site is sold before the end of the lease term.
That, the letter said, “has resulted in the loss of millions of dollars in transfer taxes owed to Fulton County and the State of Georgia.”
Credit: Development Authority of Fulton County
Credit: Development Authority of Fulton County
The $32 million tax break granted by the Development Authority of Fulton County to data center developer Edged Energy was the largest item tabled Thursday by the Board of Assessors.
Edged did not respond to a request for comment, and the DAFC declined to comment on legal matters.
