The tax abatement program that was put into place in the City of Richmond in the 1990’s has been another lesson in incentivized urban renewal that has, for the most part, worked quite well.
What is Abatement?
The abatement program effectively says that improvements made to qualified properties are not taxed for a period of time — usually anywhere from 10-15 years — depending on the property type and use as well as when the property renovation was completed and put into the program.
While there are other facets to the program that govern how the abatement is actually computed, it is best understood as a program that reduces the taxable value of a property by the value of the improvements made. In other words, the net effect is that the City continues to tax the property as if it has not been improved. This credit is attached to the property, and not the individual who completed the improvement, so that if a property is sold prior to the expiration of the abatement, the remaining abatement passes to the new owner.
How Does it Work?
As an example, if a property was worth $400,000 prior to being improved and worth $800,000 after the renovation or addition, the City would issue an abatement credit of $400,000 making the net taxable real estate amount $400,000. In other words, you are paying tax on $400,000 worth of real estate when the value is $800,000.
That is pretty powerful.
The overall goal is to create a situation where someone is not ‘dis-incentivized’ to improve their property.
By creating lower costs of ownership for residents from a real estate perspective, vacant buildings become filled and blighted property becomes renovated. The additional revenues generated by having living and breathing occupants in the city means sales and meal taxes and higher values of real estate in the aggregate.
This abatement program is basically a down payment on investment in the city. In the long run, it will pay off handsomely.
Abatement + Tax Credits = INVESTMENT
The Abatement program also works hand in hand with the Historic Tax Credit Programs to increase the likelihood that abandoned structures are renovated.
One criticism of the abatement program is that it is only applicable to existing structures and not vacant land. Between HTC’s and Abatement, the overall cost of new construction compared to heavily incentivized renovation of old structures is arguably prohibitive.
The tax abatement program periodically comes under attack by the City Council members that fail to realize its impact or by the public who feels it is another way developers line their pockets. What they fail to realize is that these programs have been some of the primary drivers of redevelopment in the City and once a property’s abatement finishes, the City reaps the benefit.
I hope this program stays alive for a long time.