NC tax loophole lowers what developers pay. How ending it could help Charlotte
For-profit North Carolina companies have been sidestepping property tax payments through a loophole that continues to grow in popularity, chipping away at the tax base for local governments like Mecklenburg County.
The state legislature could soon curb that behavior.
House lawmakers in March pitched a change to affordable housing exemptions that have cost localities across the state a combined $60 million annually, The News & Observer reported. The proposal would tighten exemption requirements for companies that provide charitable nonprofit low- and moderate-income housing.
Exemptions were widely understood to be an incentive for nonprofits to create new affordable housing developments, said Christopher McLaughlin, a public law and government professor at the UNC School of Government. But vague language in the current law has allowed for looser eligibility interpretations — since reinforced by the courts.
“The concern is there’s so many of those (for-profit companies) out there that if they did just a few organizational gymnastics to associate with a nonprofit … you could remove a material chunk of our tax bases in various counties without increasing the inventory of affordable housing,” McLaughlin said. “All they’re doing is slapping a veneer, a facade of nonprofit involvement, and suddenly they’re benefitting from this exemption.”
Mecklenburg County alone exempted about $2.6 billion in property value from its tax rolls last year, up from $700 million in 2020. That marks a 267% increase.
Those properties would have been taxed at a rate of 49.27 cents per $100 of assessed value for the county, meaning Mecklenburg County could have collected nearly $13 million from the affordable housing properties had they not been exempted. It’s not clear how much of that money might be the result of the tax incentive loophole.
Individual municipalities also have their own tax rates on top of that. For Charlotte, the property tax rate is 27.41 cents.
“The proposed changes would presumably generate additional revenue for Mecklenburg County,” the county assessor’s office and finance department said in a joint written statement to The Charlotte Observer. “While the County is generally supportive of additional revenue sources, we have not fully evaluated the impact of the proposal.”
What is the ‘Blue Ridge loophole’?
Under the current law, developers must satisfy two requirements to qualify for an affordable housing property tax exemption. They cannot be owned and operated for profit and the property must be used exclusively by the owner for charitable purposes.
However, state law does not define what constitutes ownership or what percentage of the property must be owned by a nonprofit. As a result, for-profit companies with almost complete ownership over an affordable housing property can receive tax exemptions.
The North Carolina Court of Appeals upheld this use in 2013 when it ruled the Blue Ridge Housing of Bakersfield company satisfied the ownership requirement even though a nonprofit owned only 0.1% of the property.
This is now referred to as the “Blue Ridge loophole,” and it’s costing counties including Mecklenburg money that would otherwise go toward public services such as schools and infrastructure.
The county tax assessor’s office grants the exemptions, but it cannot reject an application as long as a company meets the criteria upheld in court.
The number of properties using this exemption has dramatically increased since the ruling, especially in the past few years, according to David Baker, the director of tax and revenue outreach for the North Carolina Association of County Commissioners.
“There’s nothing really being gained by the public by those revenues being lost because these properties were already in existence and already low incomes. It just happened their rents were low enough that they met the threshold,” Baker said. “Any time you exempt something or remove something from the tax base, all the properties that are taxed will have to make up the difference.”
The draft bill specifies that a property must be 100% owned or operated by a nonprofit that has already operated affordable housing rentals for at least five years.
Otherwise, joint ventures involving for-profits are eligible for exemption only if they finance affordable housing with government support.
“If they don’t qualify under the new law, it will put them back onto the tax roll,” Baker said.
Attorneys and investors involved in these tax exemptions would likely characterize it in a different way, McLaughlin said. Even if for-profit companies are not investing in new affordable housing, receiving tax exempt status increases the likelihood their existing properties will remain affordable.
“And that’s a good thing, too,” McLaughlin said.
