ST. LOUIS — In the last three years, a new tax break has become a standard request of big developers: a sales tax exemption on construction materials.
The break can save developers millions on major projects. And like other tax incentives offered through the agencies staffed by St. Louis Development Corp., the city’s economic development arm, the incentive provides lucrative administrative fees to the SLDC that can reach hundreds of thousands of dollars on the largest projects.
In April, after years of collecting a fee worth 0.2% of the value of at least a dozen multimillion-dollar projects, the SLDC arm that issues the bonds — the St. Louis Land Clearance for Redevelopment Authority — instituted a new policy on the fees.
The fee will be raised to 0.3% of project costs, but instead of retaining all of it, the LCRA will keep just one-third on most projects. The other two-thirds will be directed to the city’s Affordable Housing Trust Fund or the St. Louis Local Development Co., an SLDC-administered agency that makes small business loans.
“I think what we were trying to do is make sure SLDC was not affording this option as a way to collect fees,” SLDC Director Otis Williams said this month.
Indeed, the sales tax incentive has been a boon for the development agency’s budget. The LCRA on Tuesday released figures showing it took in $400,000 more than it budgeted for this fiscal year because of a “flurry” of sales tax exemption bonds in recent months, according to SLDC Controller Charlie Hahn. But with the new affordable housing policy, “we expect that to taper off next year,” he added. The LCRA projects $1.5 million from bond and development fees in fiscal 2021.
The new sales tax incentive started just about the time the city began dialing back the amount of property tax abatement it offered developers. In practice, the incentive turns the city’s economic development arm into a pass-through for developers, buying the construction materials that usually would be subject to sales taxes had they been purchased by a private company. To facilitate the break, the LCRA has issued hundreds of millions of dollars in bonds — a task for which the SLDC retains prominent bond law firm Gilmore Bell — that are usually purchased by the developer as a way to route money through the public entity.
“At first, we only did it for a few projects and all of a sudden it became a request by every project,” Williams said.
A 2016 SLDC-commissioned report on development tax breaks noted that when incentives become routine, “developers come to expect them and are viewed more as an entitlement than a benefit to be garnered on a case-by-case basis.”
City officials maintain that the fiscal impact on the city from the sales tax breaks is relatively small because many materials are purchased from vendors outside the city, though some LCRA board members are pushing for a more thorough analysis.
The first project subject to the new rule is the $40 million, 225-unit apartment building planned in the Hill neighborhood by Chicago developer Draper and Kramer. Years after winning approval for a full decade of regular tax abatement in 2016, it returned to the LCRA to seek a sales tax exemption this year. The LCRA board approved it with the new fee structure.
The LCRA board, however, has discretion over how much of the fee it collects and where it sends the money. The board could keep all of the money, for example, if a project already has an affordable housing component or requests a small amount of regular tax abatement. The board could also send a part of the cash to other city initiatives.
Williams said the agency’s policy specifically identifies affordable housing because ”there has been an outcry” from some aldermen seeking more support for the trust fund.