By Scott Robertson
The Washington County Industrial Development Board (IDB) Tuesday morning approved a payment-in-lieu-of-tax agreement with JCM International Inc., a holding company for Tulsa Dentsply, that would keep the company’s 189 local jobs in place, while obligating the company to create 25 new jobs and make a taxable capital investment of $16.6 million over the course of a new 15-year lease.
The county will put $700,000 into the agreement, but will recoup every penny of that through facility rental payments, said Mitch Miller, CEO of the Washington County Economic Development Council.
The agreement, while complicated, works for both sides, said attorney Tom Trent, who represented the county in negotiations. “Dentsply has approved everything in this agreement.”
Under the terms, $700,000 will flow from the county commission in the form of a grant to the IDB, which will then grant the money to the company. The company will then lend the funds back to the IDB, making the company a lender. The IDB will then charge the company rent, which will allow the payment to service its own note.
This is done, according to Trent, to allow the company to avoid paying certain taxes as an incentive to remain and grow at its current location.
“When an exempt entity such as the IDB leases to a non-exempt entity such as the company, that lease is subject to property tax. That’s what we’re avoiding by doing this,” Trent said. “In Tennessee, to do a payment-in-lieu-of-tax agreement, the property must be conveyed to the IDB and then leased back to the company, because property owned by the government is not subject to property tax. A lease of real estate can have value and that can also be subject to tax, so you can either do an imputed rent or you can do a note. We do an industrial development note, in this case the Series A note, so the county is going to give a grant to the IDB for $700,000. The IDB will enter then into a grant agreement with the company for $700,000. You’ll wire it to the closing table when they’re ready to acquire the property. They’ll then put the rest of their money in for expenses and things. Then they will immediately deed the property to the IDB and the IDB will enter into a facility lease back to the company. All that happens at once. We end up having title at the IDB, which takes it off the tax roll, a lease back to the company, which gives them a building to use.”
Trent explained that the Series A note is for $1.35 million instead of $700,000. “The reason is that the company is going to be putting their own money into the building. Over the course of this up-to-15-year period, they may spend up to $650,000. This way, that is evidenced by the note and increases that basic rent.”
Dentsply, a publicly-traded multi-national company, currently operates locally in the building at 608 Rolling Hills Drive in Johnson City. Under the terms of the agreement approved by the IDB Tuesday morning, the county would, through the IDB, grant $700,000 for the company to purchase the building from current owner Caroline Scharfstein. The company will, after ceding the building to the IBD, then pay rent to the IDB beginning in the fourth year of the 15-year lease. Should the company be within 80 percent of its stated goals for job creation and capital investment through the end of year four, the company will begin paying $2,100/month in rent. Each year after that, through the 11th year, rent will rise by $1,000/month. In the 12th year, rent will peak at $10,000/month, where it will remain through the course of the lease.
Trent said while the agreement allows the company freedom from some taxes, the company’s equipment remains taxable by the county. “The personal property will be on the tax roll. That was part of the arrangement worked out between the community and the company.
“The rent has two components, which is a little unusual,” Trent continued. “Normally we would structure it so the rent the company pays under the lease is equal to the debt service under the note, so the company pays rent to the IDB equal to what the IDB owes the company under the note, so it’s a wash.” The company as tenant essentially pays the rent to itself in its role as lender. That arrangement keeps the lease from having value, said Trent. “That’s in here and it’s what we describe as the basic rental payments. But in addition here, the company is actually going to pay real rent which we call facility rental payments.”
The county is also protected by penalties that automatically kick in should the company fail to meet its stated goals for new job creation and capital investment. Should Dentsply fail to reach either of those goals by the end of the fifth year, the rent rises dramatically, almost doubling in year six and reaching the $10,000/month mark in year eight. Should the company cut jobs to half the stated goal rather than creating new jobs, or should the capital investment be less than half the stated goal of $16.6 million after five years, the rent would immediately jump to $10,000/month and continue rising to $11,487/month by year 15.
At the end of the 15-year lease, Dentsply has the option to purchase the property from the county for one dollar, provided it has come within 80 percent of its goals for job creation and investment and guarantees it will not cut jobs at the facility within the next five years. Should the company meet its goals but fail to make that guarantee, the buyout cost increases to $193,000. Should the company not meet its goals or guarantee the additional five years of steady employment, the buyout cost reaches $314,000.
Chuck Mason, the IDB member who made the motion to approve the agreement, which was approved without dissent, said the county’s investment, by keeping 189 existing jobs on the books likely saved a significant hit to the taxpayers of the county. “That would be in the 50 to 60 cent range (in property tax),” said Mason.
“I’d have to put pen to paper to come up with the exact number, but it is significant,” agreed Eldridge.
All terms of the agreement were published on the Washington County government website prior to the Tuesday morning IDB meeting. That meeting was open to the public and was advertised seven days in advance.
Creation of the agreement was delayed while the numbers were refigured after the company negotiated a lower purchase price from Scharfstein. The property, which is appraised for tax purposes at $1,331,500, was originally valued for the purpose of the transaction at $1 million. That was the amount approved by the Washington County Commission for the project in a 19-4 vote Jan. 26. When Dentsply bargained for the $700,000 price over the last few weeks, the county adjusted the plan accordingly.
The company is expected to close on the sale of the property at mid-year. “That will happen around the end of June or beginning of July,” said Eldridge.
“That a strong company like Dentsply is committing to Washington County is significant,” Miller said. “It’s a great company and this is a great deal. This will not only keep jobs here but also help a company grow here in Washington County.” The county successfully competed against three communities in the state of Oklahoma for the Denstply expansion.
Eldridge, who negotiated a good deal of the final language with the consultant, said he regretted the fact that some media coverage created a sense of uncertainty for the company’s local employees. He said those in the community who saw the project as a giveaway never understood what the county would receive in return over the course of the lease, and that those who thought the county was being blackmailed to keep existing jobs never understood that the incentive package was offered to encourage the company to bring new jobs and investment to the community.
“I’ve been asked what we’d do if another company wants us to do a deal like this to keep their jobs here,” Eldridge said. “If they’re offering to create new jobs and bring new capital investment, I would welcome the opportunity to do something like this again.”
Said Miller, “I would hope that the county commission and the taxpayers would be very comfortable knowing that they’re going to have to put out less than what they thought they were going to have to put out there. There are performance measures in place regarding job growth and taxable capital investment. Everything here should give the county extreme comfort.”