Local Economic Revitalization Tax Assistance Law

Did you know that if your redevelopment project is located on a "deteriorated property" there may be an opportunity for special tax provisions to encourage its development?

The Local Economic Revitalization Tax Assistance Law, 72 P.S. § 4722 et seq. (“LERTA”), allows local taxing authorities to exempt new construction in deteriorated areas of economically depressed communities and improvements to certain deteriorated property, including industrial, commercial and other business property. 

In order for LERTA to apply to a property, each local taxing authority must, by ordinance or resolution, exempt from real property taxation the assessed valuation of improvements to deteriorated properties and the assessed valuation of new construction within the designated deteriorated areas of economically depressed communities.  However, the municipal governing body must first identify the boundaries of the deteriorated area or areas during at least one public hearing where interested parties will have the opportunity to comment and provide recommendations concerning the boundaries.  Of course, the boundaries may not be arbitrary and must take into consideration certain criteria set forth in the LERTA regulations. 

The actual amount of taxes exempted shall be in accordance with the schedule of taxes exempted established by a local taxing authority, subject to the following:

  • The length of the schedule of taxes exempted shall not exceed ten (10) years.
  • The schedule of taxes exempted shall stipulate the portion of new construction or improvements to be exempted each year.
  • The exemption from taxes shall be limited to the additional assessment valuation attributable to the actual costs of new construction or improvements to deteriorated property or not in excess of the maximum cost per unit established by a municipal governing body.

LERTA provides local governing bodies and developers with an effective tool to increase the opportunity for revitalization and improvement of deteriorating properties. 

Introduction to Tax Increment Financing

As a result of the tightening of credit, costly infrastructure requirements or other conditions specific to a project, many projects would not be able to proceed without a subsidy of public funds. One potential source of public funds is a Tax Increment Financing (“TIF”), which provides financial assistance for residential, commercial, industrial or mixed use redevelopment projects.

In essence, this mechanism involves a pledge by taxing bodies of all or a portion of future increases in real estate taxes resulting from the project. The assessed value of a property to be redeveloped is compared with its assessed value upon project completion, and the increased real estate taxes resulting from this spread, or “increment,” is able to be pledged by the taxing bodies for up to twenty years to support the project. These pledged tax revenues then become the source of repayment for a financing the proceeds of which are contributed up front to the developer for use towards project costs.

TIFs are becoming more common in redevelopment projects. Even in tough economic times when the budgets of the taxing bodies are strained, taxing bodies may be willing to consider supporting a TIF. One reason is that the pledge is of taxes that otherwise would not be received but for the redevelopment project, and thus the funding does not come from the taxing body’s budget. Also, if the taxing bodies only pledge a portion of this tax increment, the amount not pledged increases the taxes to be collected by the taxing bodies.

In order to pursue a TIF for a particular project, the developer typically first contacts the Redevelopment Authority for the County in which the project is located. The Redevelopment Authority, in turn, notifies the taxing bodies having jurisdiction over the project of the application, and then the taxing bodies appoint a working group which meets to discuss and evaluate the project, and work out the details of the TIF.

Each taxing body has different objectives and concerns with respect to redevelopment projects within its jurisdiction, and these must be anticipated and adequately addressed in the application for the TIF. Failure to do so can be fatal to the application. For example, in addition to the fiscal impact to the taxing bodies, the applicant should consider and address such matters as whether the project:

  1. Is supported by the community
  2. Will create or retain jobs
  3. Will include improvements to public infrastructure
  4. Includes residential use, will increase the number of school-age children in the area
  5. Will materially burden public services or infrastructure

Through this process, the applicant should consult and work with professionals who are experienced in handling and negotiating the details of TIFs. By considering the project from the viewpoint of the taxing bodies and identifying and addressing their likely objectives and concerns, the applicant can tailor its application to significantly increase the likelihood of success in attaining TIF support.