Chapter 100 Bonds in Missouri — Real Property Tax Abatement and Sales Tax Exemption for Developers

Avoiding or reducing real property tax and sales tax is a primary skillset for a real estate development attorney. In fact, I argue that we “earn our keep” and “pay for ourselves” through this skillset alone. It is a bit hard to argue against your attorney’s fees if he or she just helped you avoid millions of dollars in potential taxes.

So…you can be that attorney that sits on the closing conference call and pretends to understand how this happens, or you can actually understand it and diagram on a napkin while pitching a client at happy hour.

Which attorney do you want to be? Which attorney lands the client?

Today we are going to talk about Chapter 100 Bonds in Missouri. The wonderful legal fiction that allows a developer in Missouri exemption from real property taxes and sales tax.

The Legal Fiction

Chapter 100 serves a single purpose: to make a municipality the owner of the developer’s project so that the project is exempt from real property tax and its construction purchases are exempt from sales tax.

Property owned by a political subdivision is exempt from ad valorem taxation. Mo. Const. art. X, § 6; § 137.100(2), RSMo. Sales to a political subdivision are exempt from sales and use tax. § 144.062, RSMo. Where the municipality holds title to the improvements and is the purchaser of the construction materials, both exemptions apply.

Chapter 100 is the mechanism for placing title with the municipality without requiring the developer to surrender the economic benefits of ownership. The municipality issues industrial development revenue bonds (Mo. Const. art. VI, § 27(b); §§ 100.010–100.200, RSMo), takes title to the project, and leases it back to the developer.

Structuring the Transaction

1. Conveyance. The developer conveys the project — land and improvements — to the municipality.
2. Issuance of bonds. The municipality issues Chapter 100 revenue bonds in an amount equal to project cost, ordinarily purchased by the developer itself. No public funds are placed at risk; the municipality acts as a conduit. §§ 100.100, 100.150.
3. Lease back to the developer. The municipality leases the project to the developer for the term of the bonds, at rent set equal to debt service. § 100.180. The developer’s rent payments, as bondholder, return to the developer.
4. Repurchase. At maturity the developer repurchases the project for a nominal sum (commonly $100); the bonds are retired and title returns to the developer. §§ 100.190, 100.200.

Throughout the term, the developer possesses and operates the project as an owner would. Title rests with the municipality, so no property tax is assessed, and the municipality’s purchases of construction materials are made under a project exemption certificate (Form 5060, § 144.062), with qualifying equipment and machinery exempt under § 144.054.

The Abatement Is Not Absolute

The leasehold remains taxable. The municipality’s fee interest is exempt, but a private tenant’s leasehold interest in exempt public property is itself taxable as real property unless it carries no “bonus value.” Iron County v. State Tax Comm’n, 437 S.W.2d 665 (Mo. 1968); 480 S.W.2d 65 (Mo. 1972). Setting rent equal to debt service, so that the lease confers no bargain element, eliminates that exposure.

The PILOT. A payment in lieu of taxes (PILOT) is generally required and is almost always part of a Chapter 100 transaction. It is negotiated, and it funds essential local government services — the school district, county, municipality, library, road, fire protection, and ambulance districts — that the abated taxes would otherwise support. Before approval, the municipality must prepare a cost-benefit analysis and notify each affected taxing jurisdiction (§§ 100.050, 100.059); since 2018, fire protection and ambulance districts must be reimbursed between 50% and 100% of their foregone revenue (§ 100.050).

Application to Residential Development

Missouri municipalities have for years used Chapter 100 for market-rate apartment projects. The justification is constitutional. Article VI, Section 27(b) of the Missouri Constitution provides:

Any county, city or incorporated town or village in this state, by a majority vote of the governing body thereof, may issue and sell its negotiable interest bearing revenue bonds for the purpose of paying all or part of the cost of purchasing, constructing, extending or improving any facility to be leased or otherwise disposed of pursuant to law to private persons or corporations for manufacturing, commercial, warehousing and industrial development purposes, including the real estate, buildings, fixtures and machinery. The cost of operation and maintenance and the principal and interest of the bonds shall be payable solely from the revenues derived by the county, city, or incorporated town or village from the lease or other disposal of the facility.

The operative words for residential development are “commercial … purposes.” A market-rate apartment complex is a commercial real estate enterprise — acquired, constructed, leased, and operated for profit — and so falls within the constitutional grant even though it is plainly not a manufacturing, warehousing, or industrial use.

The Missouri Supreme Court has construed “commercial” in § 27(b) broadly. In StopAquila.Org v. City of Peculiar, 208 S.W.3d 895 (Mo. banc 2006), the Court framed the determinative issue as the meaning of “commercial purposes” as used in § 27(b), rejected the attempt to read the term narrowly, and applied the ordinary meaning of “commercial” — any operation having financial profit as a primary aim. Under that reading, a revenue-generating apartment project sits comfortably within the constitutional authorization for facilities devoted to “commercial … purposes.”

Citations

Constitution and statutes

• Mo. Const. art. VI, § 27(b) (revenue bonds for facilities leased to private persons for manufacturing, commercial, warehousing and industrial development purposes). https://law.justia.com/constitution/missouri/article-vi/section-27-b/
• Mo. Const. art. X, § 6; § 137.100(2), RSMo (property of political subdivisions exempt). https://revisor.mo.gov/main/OneSection.aspx?section=137.100
• §§ 100.010–100.200, RSMo (Industrial Development); esp. § 100.010(6) (definition of “project”), §§ 100.050, 100.059 (approval, cost-benefit, PILOT, notice, 2018 fire/ambulance floor), §§ 100.100, 100.150 (revenue bonds), §§ 100.180, 100.190, 100.200 (lease, repurchase). https://revisor.mo.gov/main/OneChapter.aspx?chapter=100
• §§ 144.062, 144.054, RSMo (sales/use tax exemption; project exemption certificate / Form 5060). https://revisor.mo.gov/main/OneSection.aspx?section=144.062

Cases

• StopAquila.Org v. City of Peculiar, 208 S.W.3d 895 (Mo. banc 2006) (§ 27(b) bonds upheld; “commercial” read broadly). https://www.courtlistener.com/opinion/1762334/stopaquila-org-v-city-of-peculiar/
• Iron County v. State Tax Comm’n, 437 S.W.2d 665 (Mo. 1968) and 480 S.W.2d 65 (Mo. 1972) (Chapter 100 deal; city’s fee exempt, but lessee’s leasehold taxable / “bonus value”). https://www.courtlistener.com/opinion/2457694/iron-county-v-state-tax-commission/
• State ex rel. Keystone Laundry & Dry Cleaners, Inc. v. McDonnell, 426 S.W.2d 11 (Mo. 1968) (statutory “project” limit enforced). https://www.courtlistener.com/opinion/2463052/state-ex-rel-keystone-laundry-dry-cleaners-inc-v-mcdonnell/