"The Kentucky General Assembly authorized cities and urban county governments to establish programs that grant property tax moratoriums for existing residential or commercial properties "for the purpose of encouraging the repair, rehab, restoration or stabilization of existing improvements."
The Louisville-Jefferson County Metro Government offers a property tax incentive designed to encourage redevelopment of economically-blighted properties. While not a widely advertised offer, property owners and developers should be aware of this opportunity to reduce their property taxes.
The Kentucky General Assembly authorized cities and urban county governments to establish programs that grant property tax moratoriums for existing residential or commercial properties "for the purpose of encouraging the repair, rehab, restoration or stabilization of existing improvements." This program was established as the result of an amendment to the Kentucky Constitution passed in 1982 by Kentucky voters.
In 1983, Jefferson County was one of the very few local governments to implement the newly passed legislation, and in 2003, the then-merged Louisville-Jefferson County government continued the program. In essence, it encourages redevelopment of existing properties by "freezing" for five years a property's tax assessment at pre-rehab levels. Unfortunately, the moratorium applies only to the "county" portion of the tax assessment, which currently amounts to $0.125 per $100 of assessed value. Efforts to extend the moratorium to other portions of the total property tax assessment have thus far been unsuccessful. Nevertheless, the moratorium presents an additional incentive for a property owner to rehabilitate an eligible property.
The moratorium program is jointly administered by the Jefferson County Property Valuation Administrator ("PVA") and the Louisville-Jefferson County Metro Government's Inspections and Licensing Department ("IPL"). The eligibility requirements for the moratorium are relatively straightforward. First, the existing residential or commercial structure(s) must be at least twenty-five years old. Second, either (a) the cost of the repair or rehab must be at least twenty-five percent of the pre-rehab value (as determined by the PVA's assessment); or (b) the property must be located within a "target area," an economically-depressed area based on residents' income. In the latter case, the cost of the repair or rehab must be at least ten percent of the pre-rehab value.
A property owner wishing to apply for the moratorium needs to submit an application to the IPL. In addition to other requirements, the application must include proof of the building's age, a description of the proposed use of the property, a general description of the work that will be performed to repair or rehabilitate the property and a schedule for completion of the proposed work. The owner should also obtain the necessary building permits and submit them to IPL. Once the application has been submitted, the owner has two years to complete the project. Upon completion of the project, the owner notifies the IPL, which inspects the property for compliance with the rehab plan set out in the application. If the project has been successfully completed, the IPL notifies the PVA, and they issue a moratorium certificate.
The moratorium's benefits can be calculated by determining the difference between the property's pre-rehab and post-rehab value. The PVA certifies the pre-rehab assessment of the property as part of the application process. Once the project is completed, the PVA reassesses the property at the higher post-rehab value; however, with the moratorium in place, the assessment for the county portion of the taxes will be "frozen" at the pre-rehab value. For example, assume that a developer purchases a qualifying property for $1,000,000. After rehab, the PVA reassesses the property for $10 million. With the moratorium in place, the assessment remains at $1,000,000 for purposes of the county portion of the tax, while the assessment for all other property taxes (state, school and others) increases to $10 million. The resulting tax savings for the property add up to approximately $11,250 per year for five years, or a total tax savings of over $55,000.
Property owners considering rehab of an eligible property should pay particular attention to the pre-rehab assessment. If the owner believes the property may be over-assessed, she should meet with the PVA and present evidence of the true value of the property prior to applying for the moratorium. Given the fact that the moratorium freezes the assessment at the pre-rehab value, a decrease in the assessment results in a corresponding increase in the tax savings, once the moratorium certificate is issued.
Conversely, a developer planning to purchase a property for redevelopment should be aware that the PVA's pre-rehab assessment will most likely be governed by the price the developer pays for the property, rather than by the pre-purchase assessment. Using the previous example, assume that a developer purchases a property for $2 million. Prior to the purchase, the PVA had the property assessed at $1 million. The PVA will inevitably pick up the purchase price from the deed and will reassess the property at $2 million, thus decreasing the tax benefit gained from the moratorium.
In any case, owners and developers should be aware of the moratorium process in order to take advantage of the potential tax savings on eligible properties.