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Economic development cost a taxing riddle

Commissioners exempt five airport business properties from county tax

March 10, 2013|By ARNOLD S. PLATOU | arnoldp@herald-mail.com
  • Sierra Nevada office tower adjacent to Hagerstown-Washington County Regional Airport.
By Kevin G. Gilbert/Staff Photographer

Ten years ago, Washington County government signed the first of five agreements to lease land at Hagerstown Regional Airport to developer David Rider.

At his own expense, Rider erected four aircraft hangars and a three-story office building he now leases for profit to other businesses, all while thinking the county had pledged in its land lease agreements it would never tax the properties.

But it appears nobody ever told the Maryland Department of Assessments and Taxation that the buildings on county land were being used for profit. When the state agency discovered the for-profit arrangement on its own years later, it made the properties taxable.

Suddenly, Rider was faced with tax bills that some county officials feared might have jeopardized his long-term leases with businesses as large as Sierra Nevada Corp., a defense contractor with more than 470 employees here.

Six weeks ago, in action that might be the first of its kind here, the County Commissioners voted 4-1 twice in a two-step action to take immediate ownership of all five buildings and to exempt them from the county’s property tax.

State property tax still must be paid.

In their two-part, two-vote decision Jan. 29, Commissioners William B. McKinley, Ruth Anne Callaham, John F. Barr and Jeffrey A. Cline voted:

• In favor of a motion by Cline to change the leases to say that the county government now owns the five buildings.

• In favor of a motion by Callaham to make the buildings exempt from the county’s property tax for as long as Rider’s leases last.

In voting against both motions, Commissioner President Terry L. Baker told the other commissioners he did so because he did not know whether the action would have any financial impact on the community.


Impact: A blank line

The impact is hard to gauge.

The county’s own written “Agenda Report,” used to guide the commissioners on Jan. 29 in their decision about the properties, isn’t clear on that. After the words “Fiscal Impact (If Applicable):” the line is blank.

Based on the $154,570 county tax bill looming on all five properties this year, making them exempt will cost the county millions of dollars in lost property taxes over the three decades of Rider’s remaining leases.

But county officials said in interviews that the values the county gains completely make up for the loss.

McKinley, Callaham and Barr said it was important to them to honor and uphold the no-tax commitment they believe a former board of county commissioners made to Rider in 2003.

McKinley said that was his only reason for voting for the tax exemption.

“The commissioners before us put in writing that there would be no expectation of taxes on those buildings,” McKinley said. “I’m not sure why they did that ... but Dave Rider apparently built his business plans on that expectation. To me, it’s only fair that we continue what had been in place all those years.”

Important also, Callaham and Barr said, is that the county now owns the four hangars and the office building. Rather than waiting 30 or 40 years to take ownership as his original leases specified, Rider gave the buildings up now to make the tax-exemption possible, but will continue to maintain the buildings and lease them out for profit.

The commissioners did not increase Rider’s building and land lease rent from what he already was paying in land rent because Rider paid to erect the buildings.

“In my mind, forgiving the taxes, that’s our investment in the buildings, if you will, that Mr. Rider already paid for,” Callaham said. “... If you calculate the value of all the taxes through time versus the value of the buildings, we certainly don’t lose any money.”

Barr said the decision also ensures that unexpected property tax bills won’t jeopardize Rider’s long-term business lease agreements, without which the county might risk losing jobs.

“We had not only Mr. Rider come to us, but Sierra Nevada, who’s got nearly 500 people, come to us (saying), ‘Now all of a sudden, there’s property taxes. We’re not paying them,’” Barr said.

“It put some standing leases in real jeopardy. I know for myself, looking at the potential loss of employment and tenant decisions (about) those resources, all those other factors played into it,” Barr said. “For me, anyway, it made it very clear what we had to do.”

Cline and Baker didn’t return calls for comment for this story.

At the Jan. 29 meeting, as seen on the county’s online video, Baker urged the commissioners to wait two weeks so they could meet with officials of the state Department of Assessments and Taxation to discuss any financial impact.

But when Callaham asked whether there would be any harm in waiting two weeks, other officials at the meeting worried aloud about a delay of even that much time.

They said Rider had held off paying the current year’s tax bill and now was so close to county Treasurer Todd L. Hershey’s payment deadline that any further delay would risk one of Rider’s buildings being put up for sale to pay the taxes.

But in an interview Friday, Hershey said there was no such imminent danger on Jan. 29.

Indeed, Hershey said, that last year, during the July 1, 2011, through June 30, 2012, tax year, Rider didn’t pay the county property tax bill on his Rider Jet Center building on one of the five properties until April 30, 2012.

Hershey said he sends out notices to late payers beginning in October and “final notices” in March. When Rider paid the bill on April 30, 2012, that was “right prior to inclusion in the tax sale advertisement,” he said. He sends the newspaper the tax sale list of properties in early May, he said.

Hershey said Rider did pay the county and state taxes on all five properties in fiscal 2010 and 2011.

Then, during the current fiscal 2013 tax year, Hershey said, Rider paid the state property tax bills last September near the beginning of the tax year. But this past week, when Rider still hadn’t paid any of the five county property tax bills by March 7, Hershey said his office mailed final notices to the commissioners in care of Rider’s address.

Hershey said he had heard about the commissioners’ Jan. 29 decision to exempt the properties from the county tax, but he can only act accordingly if SDAT certifies them to be exempt — which, he said, it hasn’t done yet.

Meantime, at the commissioners’ Jan. 29 meeting, as seen on the county’s online video, some officials said they were worried about the impact of requiring Rider to pay tax bills he hadn’t planned on, as well as the subsequent impact on tenants such as Sierra Nevada if Rider passed the bills through to them.

“If we didn’t have an Enterprise Zone right now, he’d be paying (the full tax of) $155,000,” County Administrator Gregory B. Murray said. “... Would he be there — with his business paying $155,000?”

In an Enterprise Zone, property owners pay a percentage of the taxes that normally would be due.

“Or,” someone else off-camera said, “would Sierra Nevada be occupying his facilities?”

“Right,” Murray replied. “If the rent goes up on a building we don’t own, that’s the nonquantitative” side of the problem.


A payment agreement

In an interview Feb. 22, Murray said there was another big reason for the commissioners’ vote.

Murray, who became administrator in 2007 after 10 years as director of the county Department of Water Quality, said the commissioners in office back about 2003 also had adopted a payment agreement — that Murray called a “Payment In Lieu Of Taxes” — with Rider’s jet center company “because at the time, there was no tax on the properties and there was anticipation there’d be no taxes.”

In an email later, Murray clarified that although the county does not have a formal Payment In Lieu of Taxes (PILOT) agreement with Rider, the existing payment agreement functions as a PILOT equivalency.

But former commissioner William J. Wivell, who was the board’s president in 2003, said in an interview Thursday that the commissioners did set fees Rider’s jet center company was to share with the county, but they were not considered to be a tax substitute.

Rider opened the jet center, a fixed-base operation selling aircraft fuel and providing other services, in a hangar he built in 2003 on the first property he leased from the county.

Because of the payment agreement, the jet center — which Rider still owns — has since 2003 been paying the county a portion of the special fuel, landing and maintenance fees that the business charges customers, Murray said.

To charge Rider a property tax in addition to a share of the fees would amount to double taxation, Murray said.

Assistant County Administrator Sarah Lankford Sprecher said the county’s share of the fees now totals nearly $140,000 per year.

That is almost as much as Rider would be charged if he had to pay taxes on all five properties, Murray said.

“It closely mirrors what the full tax revenue would be,” Murray said.

He said charts labeled “Rider PILOT Equivalent Revenue” that Sprecher prepared and emailed to the newspaper use “conservative” projections in comparing the growth of the shared fees and of tax bills through the year 2045. PILOT stands for Payment in Lieu of Taxes.

According to the charts, the “PILOT Equiv.” revenue over that time would total $8,152,916 and the total tax revenue would be $6,948,768.

Asked on Feb. 22 why the PILOT Equivalent revenue paid by the jet center should justify making all five properties tax-exempt, Murray said, “Everything is tied to that FBO operation because that’s the one that generates revenues that can be shared with us. The other buildings do not generate (the) revenue that he generates that comes directly to us.”


State in the dark

Rider talked to a reporter about the various buildings, but declined comment about the leases and the tax situation, referring questions to his attorney, Jason Divelbiss.

Divelbiss was Rider’s representative in 2011 and 2012 when the attorney sent letters to the commissioners asking them to help relieve Rider of his unexpected tax bills.

In letters dated Aug. 31, 2011, and March 7, 2012, Divelbiss makes no mention of a PILOT or PILOT equivalent, instead focusing solely on the original lease agreements. He noted that from 2003, when the first lease was signed, through 2010, “the leased properties were treated as exempt from real property tax, both State and County.”

Then, he draws the commissioners’ attention to a section of the lease that says that Rider would be responsible for paying all taxes on the property, but on which both parties assumed there wouldn’t be any.

Four of the five leases, signed by the county and Rider, read that the decision on whether any tax would be levied “will be in the sole discretion of the Maryland Department of Assessments and Taxation, although it is anticipated that the Leased Premises will be exempt from real property tax.”

Based on that statement, Divelbiss told the commissioners in his March 7, 2012, letter, Rider “based its business plan and structured its sublease agreements at the Airport on the anticipation and expectation that there would be no real property tax liability. Until tax year 2010, that expectation held true.”

In an interview Friday, Divelbiss said the reason he didn’t use the PILOT or PILOT equivalency to justify his request is, “I wasn’t involved when the leases were executed. I was not aware of even an informal, much less a formal, PILOT type of agreement or arrangement.”

In an interview later Friday, an SDAT official told the newspaper his agency never was told that the county has a PILOT or a PILOT equivalency with Rider.

Adam Lewis, who is SDAT’s supervisor of a 10-county region that includes all of Western Maryland, said that just as his agency should have been notified years ago about the county’s leases with a for-profit business, SDAT should have been told of the PILOT or PILOT equivalency.

As a practical matter, Lewis said, local government is supposed to tell SDAT about any payments that the government considers to be money it’s getting instead of taxes. He said the government is supposed to send SDAT a copy of any such agreement and “detail the calculation method or amount of payment in lieu of taxes.”

If SDAT had had that information years ago from the county, “we wouldn’t have been taxing it all along,” Lewis said.

Lewis said he didn’t even know about the county’s decision Jan. 29 to exempt the five properties from the county property tax until he heard about it in mid-February from the newspaper.


What was the intent?

So what did the commissioners in office in 2003 really intend?

Looking back now, in interviews 10 years later, it’s not clear.

Two of the former commissioners — board President Gregory I. Snook and James F. Kercheval — said yes, it was their intent that the five properties be exempt from county tax. And two of the others — Doris J. Nipps and Wivell — said no, it definitely wasn’t their intent.

Snook said the federal funds the county used to buy the airport lands complicated the question in 2003 of whether the properties were taxable.

“I don’t believe we had a clear understanding... and that’s why we put language in (the lease) like that,” he said.

Snook said his board “wanted to create those incentives to bring businesses into the airport business park. I would say, based upon that, they (the current commissioners) were” correct in thinking the 2003 board intended to make the properties exempt from the county tax.

Kercheval said the commissioners in 2003 never discussed whether the properties should be taxable or not because that was SDAT’s decision to make.

“The whole conversation never came up,” he said.

Instead, he said, his board maybe was the first to require developers at the airport to pay a land lease fee.

“I would say it this way: The overall amount of revenue we were expecting to get from Dave, that reflects the overall amount of revenue we did in that deal,” Kercheval said. “We expected to not get any taxes.”

“But what we did get is a multimillion-dollar building. It’s like getting a renter, but the renter builds the building. That’s really important,” Kercheval said. “When Dave did the first building, I don’t even think the runway was finished. We were hoping there’d be this future windfall. ... The overall value of the land and buildings would go up, we were speculating.”

Thus, Kercheval said, “I certainly understand” the current commissioners’ Jan. 29 decision.

But Wivell and Nipps said in separate interviews that making the properties exempt from the county tax wasn’t their intent at all.

In the original 2003 lease, “we clearly stated that there was a tax consequence,” Wivell said.

“I don’t believe we ever made the assumption that there wouldn’t be any taxes paid on those buildings by the for-profit entity who was using them for for-profit purposes,” Nipps said.

Nipps, who was the commissioners’ representative on the county’s Airport Advisory Commission for three of her four years as commissioner, said the lease was written to say that Rider is responsible for any property taxes and that SDAT determines whether the land is taxable because the tax decision wasn’t the county’s to make.

“We, the county, assume it won’t be (taxable), but the state is the final authority on that. That’s the way I read that,” she said.

Wivell and Nipps said that making Rider’s five properties exempt is unfair to other businesses renting county-owned land and/or buildings.

“What about everybody else out there?” Wivell asked. “I think we’re going down a slippery slope.”

Wivell said he cannot understand either why Murray would be justifying the current board’s decision to benefit all five properties because of the fees Rider shares with the county from just his fixed-base operation.

“So all of Rider’s buildings are associated with the FBO?” Wivell asked. “I mean, quite honestly, I don’t see that as a valid link or excuse. I think you need to be consistent. ... In my view, it’s favoritism. Why would you do that, why would you not extend that (tax exemption) to all your tenants?”

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