Capital investment projects often involve tight margins, and every single dollar counts to ensure that the project is a success.  For that reason, property tax exemptions are key components of any economic development project.  There are two main types of development-related property tax exemptions available in Ohio – Enterprise Zone (“EZ”) exemptions and Community Reinvestment Area (“CRA”) exemptions.  The two programs are very similar, but there are some key differences that could help determine which tool is the better fit for a particular project.

EZ Exemptions

Establishment of an EZ:

EZs may be established by municipal corporations or counties based on criteria set forth in the Ohio Revised Code.  Those criteria generally relate to the distressed or underdeveloped nature of the area contained within the EZ.  Once the EZ has been established, the municipal corporation or county petitions the Director of the Ohio Development Services Agency (“ODSA”) for confirmation of the EZ.  Once the confirmation is issued, the municipal corporation or county may begin offering property tax exemptions for property owners that make capital investments and create or retain jobs within the EZ.

Scope of EZ Exemptions:

EZ exemptions may apply to (i) the total increase in the assessed value of real property (including inflationary increases), and (ii) new personal property.  Personal property tax exemptions have lost much of their significance since the phase-out of the general business tangible personal property tax in 2008, but remain an important tool for public utility taxpayers, which still must pay tangible personal property tax. 

Without approval from the affected local school district, the maximum EZ exemption that may be offered in connection with a project is 10 years, 75% in incorporated areas and 10 years, 60% in unincorporated areas.  With local school district approval, which often involves an agreement by the property owner to compensate the school district, the exemption may be for up to 15 years, 100%. 

EZ Agreements:

The terms of an EZ exemption are memorialized in a written EZ agreement between the public entity or entities and the property owner.  Most of the terms of the EZ agreement are dictated by statute, but there still are potential pitfalls associated with EZ agreements.  Because the penalties associated with non-compliance can be severe (e.g., termination of the agreement and/or recapture of previously-claimed exemptions), caution should be used in negotiating and executing EZ agreements.

CRA Exemptions

Establishment of a CRA:

Like EZs, CRAs may be established by municipal corporations or counties, which are authorized by the Ohio Revised Code to survey housing within their boundaries and pass legislation indicating that the area surveyed is one in which housing facilities or structures of historical significance are located and new housing construction and repair of existing facilities or structures are discouraged.  The municipal corporation or county then petitions the Director of ODSA for confirmation of the boundaries of the proposed CRA.  Once that confirmation is received, CRA exemptions may be offered.

Scope of CRA Exemptions:

Unlike EZ exemptions, only real property tax exemptions are available under the CRA program.  In addition, the scope of a CRA exemption is narrower than the scope of an EZ exemption.  CRA exemptions apply only to the assessed value of new construction or remodeling of structures.  Other increases in assessed value of real property (e.g., inflationary increases, parking lots, land improvements) are not eligible for a CRA exemption.

Without approval of the affected local school district, the CRA exemption is up to 15 years, generally 50%.  With local school district approval, which, like EZ exemptions, typically involves the payment of compensation to the affected local school district, the exemption can be for up to 15 years, 100%. 

CRA Agreements:

For residential projects, a written CRA agreement is not required.  The terms associated with the CRA exemptions are set forth in the legislation passed to establish the CRA, and property owners simply apply for a CRA exemption after completion of the residential project.

For commercial projects, the determination regarding whether a written agreement is required depends upon when the CRA was established.  For certain CRAs established on or before July 21, 1994 that continue to meet statutory grandfathering requirements, no written agreement is required to claim a commercial CRA exemption.  For all other CRAs, a written CRA agreement is required to claim an exemption for a commercial project.  Like with EZ agreements, much of the content of the CRA agreement is dictated by statute, but there are still mistakes that can be made without careful drafting.

Conclusion

Property tax exemptions are often critical tools for successful capital investment projects.  Although many communities have long-standing procedures in place for implementing EZ and CRA exemptions, it is very easy to make mistakes that could significantly limit the value of the exemption.  For that reason, it is important to perform due diligence and to carefully review all documentation associated with an EZ or CRA exemption.