As various areas of the Commonwealth focus additional resources on blight reduction in urban and rural boroughs, townships, and cities, we will start to hear more about these tools, and wonder how (or if) they may apply to our own properties. This article describes just one of those blight reduction tools, which comes in the form of an underutilized tax exemption under a decades-old law.
What is LERTA?
In 1977, the Pennsylvania legislature passed the Local Economic Revitalization Tax Assistance (“LERTA”), which enables municipal authorities to create ordinances temporarily exempting the payment of certain real estate taxes. The purpose of this tax exemption structure is to encourage economic development in “deteriorated areas” of the Commonwealth by allowing certain property owners to continue paying the property’s current taxes for a set amount of time, rather than the increased tax that would result from new construction and improvements.
The statute, found at 72 P.S. § 4722 et seq., operates to:
“authorize local taxing authorities to exempt new construction in deteriorated areas of economically depressed communities and improvements to certain deteriorated industrial, commercial and other business property…[e]ach local taxing authority may… exempt from real property taxation the assessed valuation of improvements to deteriorated properties and the assessed valuation of new construction within the respective municipal governing bodies deteriorated areas of economically depressed communities…”
How does a LERTA ordinance get put into place?
With the authority of 72 P.S. § 4722 et seq., a “LERTA” may be initiated by a draft ordinance or resolution of the local taxing authorities, i.e., the county, school district(s), and relevant cities, boroughs, townships, etc. Before the ordinance or resolution may be adopted, a public hearing must be held to determine the boundaries of the geographic areas in which the exemption will apply.
LERTA ordinances can also be implemented by a team of two or more municipal governing bodies. For example, if two neighboring boroughs each wish to implement LERTA, they can work together to define the boundaries of the deteriorated area(s) and establish a uniform maximum exempt cost per unit. These provisions can then be worked into the respective ordinance for each local taxing authority.
A local taxing authority can even make its own tax exemptions contingent upon the adoption of a similar ordinance by an adjacent taxing authority. For example, Allegheny County’s LERTA is contingent upon the implementation of a similar ordinance by the City of Pittsburgh and a similar resolution by the school district. Presumably, a LERTA ordinance might only apply to one portion of property taxes (for example, an exemption for county taxes, but not city or school district if they do not agree), but this could create administrative issues, and likely wouldn’t have the intended impact on development.
To what kinds of Projects can LERTA apply?
Not every improvement project will qualify for a LERTA tax abatement. LERTA only applies to “new construction in deteriorated areas,” and “improvements to certain deteriorated… business property (emphasis added).” The key phrases here are “deteriorated areas” and “business property.” Generally, a homeowner would not qualify for LERTA exemption to improve his/her residence, but a housing developer may qualify for the construction of, for example, apartment units or a hotel.
Additionally, if the project is not new construction, a LERTA exemption can only be applied to improvements “having the effect of rehabilitating a deteriorated property so that it becomes habitable or attains higher standards of safety, health, economic use or amenity, or is brought into compliance with laws, ordinances or regulations governing such standards.” Notably, “ordinary upkeep and maintenance” do not qualify as “improvement” for which an owner may seek a LERTA exemption.
What kinds of tax benefits can be offered?
A LERTA ordinance can offer abatement of taxes that would otherwise be assessed on qualifying new construction and/or improvements to qualifying existing buildings. The owner of the qualifying property can delay paying the taxes that would be assessed due to the new construction/improvement for a period of up to 10 years, depending upon the time frame set forth in the local ordinance.
Of particular importance is that the exemption is limited to the additional assessment valuation attributable to the actual cost of new construction or improvements. In other words, the property owner must continue paying the currently-assessed taxes on the land and existing improvements as if no improvement were taking place. As a result, the taxing authorities are not losing current revenue — they are choosing to foregorevenue to which they would otherwise be entitled with the goal of encouraging economic development.
How does LERTA work?
The amount of the tax benefit is based on the actual cost of new construction or improvements, and will be determined by a taxing “schedule” outlined in the local ordinance. The ordinance can also place a “maximum cost” limitation (a cap) on the benefit amount to be received for each property. For example, many municipalities cap the benefit at $10 Million, regardless of the project’s “actual” costs. Some municipalities place a minimum “floor” on the improvements (ex: to qualify, the owner must invest at least $25,000 in improving the property).
Each municipality passing such an ordinance will determine a “schedule of taxes,” setting forth how much abatement can be realized each year, and for how many years. Most municipalities develop a sliding scale abatement plan, meaning that, over the course of several years, the additional tax is gradually “phased in” at a certain percentage each year.
Under Pennsylvania law, a LERTA ordinance cannot exceed ten years, meaning that the tax benefit is not perpetual. Generally, a certain percentage of the actual cost is exempted each year, and this percentage is specified by the ordinance.
The LERTA is generally transferrable and runs with the land, so if the property owner sells in Year 3, the purchaser of the property will usually receive the remaining benefit to which the seller is entitled (potentially, 7 additional years of partial tax exemption in this example).
Sample Tax Schedule
To better understand how the percentage abatement plan might work, below is a relatively typical straight-line tax schedule used in some places throughout Pennsylvania. This sample tax schedule assumes the municipality has enacted a 10-year plan with at least a $1 million cap (or no cap).
Assume construction is completed in 2017, the actual cost of construction totaled $1 million.
|Year||% of Exempted Improvements||Example Cost Allowed|
On a $10 Million investment, this means that $10 Million of the improvements (cost of improvements) is the basis for determining the computation of taxes. $10 million does not represent the actual tax payment.
The LERTA Ordinance
Drafting the Ordinance
In drafting the ordinance, the municipal authorities will propose the boundaries of the area(s) to which the ordinance will apply. A LERTA exemption does not necessarily apply to each and every property in a municipality. Rather, a LERTA ordinance must identify and may only apply to “deteriorated areas” or “deteriorated property,” which requires an analysis of your particular area.
The statute defines “deteriorated property” as:
“industrial, commercial or other business property owned by an individual, association or corporation, and located in a deteriorating area… or any such property which has been the subject or an order by a government agency requiring the unit to be vacated, condemned or demolished by reason of noncompliance with laws, ordinance or regulations.” 72 P.S. § 4724.
To help determine the boundaries of a “deteriorated area” or “deteriorated property,” drafters must look at local “blighted areas,” as defined by the 1945 Urban Redevelopment Law, and “impoverished areas,” as defined by the 1967 Neighborhood Assistance Act. Additionally, municipal drafters should consider the following types of properties:
- Unsafe, unsanitary and overcrowded buildings;
- Vacant, overgrown and unsightly lots of ground;
- Disproportionate number of tax delinquent properties;
- Excessive land coverage;
- Defective design or arrangement of buildings, street or lot layouts; and
- Economically and socially undesirable land use.
Once areas have been defined according to the criteria above, non-deteriorated properties located adjacent to such areas may also be eligible for the LERTA exemption if the local taxing authorities determine that new construction on such non-deteriorated property would “encourage, enhance or accelerate improvement of the deteriorated properties within economically depressed communities.” This determination will likely be made on a case-by-case basis.
In determining the deteriorated area(s), the drafters must hold at least one public hearing to receive comment. At the public hearing, the drafters, local planning commission, local redevelopment agency(ies), or anyone else interested in the improvement of deteriorated areas will present regarding their recommendations for determining the area(s) to which the ordinance may apply.
Notice of the hearing must be advertised to the general public, and should also be communicated to the relevant taxing authorities, planning commission(s), redevelopment agency(ies), and other interested organizations.
Adopting the Ordinance
After at least one public hearing has been held, the municipal governing body must determine the final “deteriorated” areas and/or properties to which the ordinance or resolution will apply, and ensure an appropriate description is included in the final draft. The final ordinance or resolution must also indicate any cap, or amount of improvements per unit to be exempted, and describe the schedule of taxes as discussed above.
The Process of Obtaining a LERTA Exemption
Once the LERTA ordinance or resolution is in place, property owners can start receiving tax exemptions as early as the calendar year following the completion of the construction or improvement, or in some cases, securing the building permit. The process is not necessarily one of application and approval, but rather notification. The local taxing authority passing the ordinance must have a form for property owners to fill out. The property owner must complete the form from the local taxing authority and return it to the taxing authority “at the time he secures the building permit.” As stated in most ordinances, failure to timely notify the taxing authorities of your request for a LERTA exemption results in a waiver of rights to claim the exemption.
If the project requires no building permit or other notification of the work being performed, then the property owner must submit the written notification at the time construction commences.
The local assessment/taxing authority will process the owner’s request and will typically notify the taxpayer and any other relevant authorities of the reassessment amount and the amount of that assessment eligible for LERTA exemption.
Both the taxpayer and relevant local authorities have the right to appeal the assessment determination and the amount of the assessment determined to be eligible for tax exemption.
The statute does not provide any specific relief if the assessment authority fails to provide notice of the reassessment and/or a schedule of assessment, and the issue has not been addressed by Pennsylvania courts specific to LERTA. However, in a case involving a similar tax exemption (albeit, for residential properties), the Pennsylvania Commonwealth Court found that the assessment should not be set aside due to a defect in the notice of assessment. Rather, the failure of the taxing authority to provide appropriate notice to the taxpayer simply preserved the taxpayer’s right to a hearing to appeal the assessment.
Each municipality can alter the above framework, so long as it continues to comply with the requirements of the LERTA statute.
The LERTA statute technically only applies to industrial, commercial and business property. Some residential property may be covered if the ordinance also
applies to “commercial residential,” generally meaning apartments or hotels. However, LERTA is not an authorized vehicle for most residential tax abatement.
A later article will address options for owner-occupied properties.
As always, this article is merely a general overview of the topic described, is not tailored to your individual situation, and is only current as to the date indicated in the introduction. There are many exceptions and factual scenarios that can change the application of the information contained within this article. As such, this article should not be construed as legal advice or relied upon in any way in making your own decisions regarding taxes, a real estate purchase, sale, assessment appeal, or any other action without first consulting an attorney regarding the specifics of your own individual situation.