Loophole Allows Developers to Avoid Fair Share, Threatens to Raise Property Taxes for Everyone Else
Wake County Tax Assesor: “This is, in my opinion, the biggest threat to the revenue stream in this county that I could ever imagine,” Kinrade said.
A loophole in State Law could let developers avoid paying property tax on new AND existing developments.
The Mechanism of the "Loophole"
In North Carolina, state law allows for property tax exemptions for real estate held by non-profit entities for "charitable purposes," which includes providing housing for low-income residents. However, developers have found a way to utilize this intended benefit for for-profit gains:
Joint Ventures: A private, for-profit developer forms a partnership with a non-profit organization.
The "Paper" Non-Profit: In many cases, the non-profit holds a nominal interest (sometimes as little as 1%) but is designated as the "managing member" or "sole owner" of the underlying land.
The Exemption Claim: Because a non-profit is the technical owner of record, the entire multi-million dollar apartment complex applies for a 100% property tax exemption—even if the developer is collecting the lion's share of the profits.
Why It’s a "Drain" on Local Budgets
Property taxes are the primary engine for local government services in North Carolina. When a massive development is removed from the tax rolls, the impact is immediate:
Infrastructure Stress: A new 300-unit apartment complex brings hundreds of new residents who require road maintenance, police protection, and fire services.
School Funding: Property taxes are a major source of funding for local school districts. These developments bring in new students without contributing to the tax base that pays for their education.
The Burden Shift: Because the cost of providing these services does not disappear, the lost revenue must be made up elsewhere—usually through higher property tax rates for existing homeowners and small business owners.
The Legislative Conflict
Local officials, including many in Wake and Johnston counties, are pushing for the General Assembly to close this gap. The debate centers on two main perspectives:
The Developer View: Proponents argue that these tax breaks are the only way to make "affordable" housing projects financially viable in a high-interest-rate environment.
The Local Government View: Officials argue that many of these projects only offer a tiny fraction of units at "affordable" rates, while the rest are rented at market value, making the 100% tax break a massive corporate subsidy.
Proposed Solutions
To address this, North Carolina lawmakers are considering "The 51% Rule." This would mandate that a non-profit must own at least 51% of the project and receive a majority of the cash flow to qualify for the exemption. Others suggest a "proportional tax," where the exemption only applies to the specific percentage of units that are actually income-restricted.
Potential Scenario Impacts on Garner
1. The Revenue Gap and the "Burden Shift"
Garner’s $90 million budget is heavily dependent on property tax revenue to fund essential services. When a large apartment complex—potentially valued at $40 million to $60 million—successfully claims a 100% tax exemption through a non-profit partnership, the town loses hundreds of thousands of dollars in annual recurring revenue.
The Math: At current tax rates, a single large-scale development getting an exemption could represent a loss of $300,000 to $500,000 per year.
The Result: To maintain the same level of service for all residents, the town may eventually be forced to raise the tax rate on existing homeowners and small business owners to make up for the "missing" revenue from these large-scale exempt properties.
2. Service Demand Without Compensation
Growth in Garner brings an immediate need for expanded services. Apartment complexes, while providing housing, also increase the "call volume" for municipal services:
Public Safety: New residents mean more calls for Garner Police and Garner Fire-Rescue. If a property is tax-exempt, it is essentially receiving these services for free, while neighbors in single-family homes or standard commercial buildings pay the full cost.
Public Works: High-density developments put more wear and tear on local roads and require more frequent trash and recycling logistics.
3. Impact on Infrastructure and "Parks & Rec"
Garner is currently investing heavily in its "quality of life" infrastructure, such as the expansion of the greenway system and improvements to local parks. These projects are often funded by a combination of property taxes and municipal bonds.
If a significant portion of new growth is tax-exempt, the town has less "bonding capacity"—the ability to borrow money for big projects like a new community center or road widening—because the projected tax base is smaller than the actual population growth suggests.
4. Distortion of the "Affordable Housing" Goal
The primary concern for local officials is often that these loopholes don't actually produce "deep" affordability.
In Garner, where housing costs are rising, the town needs genuine affordable housing for its workforce.
If a developer uses a 1% non-profit partnership to exempt a 300-unit building, but only 20 of those units are actually "affordable," the town is effectively "trading" $500,000 in annual tax revenue for just a handful of discounted apartments. This is often viewed as an inefficient use of public "subsidies" compared to direct town-led housing initiatives.
5. Land Use and Zoning Pressure
Because Garner has significant land still available for development, the precedent set by one successful "sheep’s clothing" exemption can lead to a "gold rush" of similar applications.
If developers realize they can bypass property taxes in Garner by using this loophole, it may incentivize a wave of high-density residential projects that the town’s current $90 million budget is not yet equipped to support in terms of staffing (inspectors, planners, and police officers).
Summary for Garner
For a town of Garner's size, the impact is one of disproportionate growth. The town would be adding the "costs" of growth (more people, more traffic, more emergency calls) without the "benefits" of growth (an expanded tax base). For a $90 million budget, losing even 2-3% of potential revenue to these loopholes could mean the difference between funding a new park or hiring additional first responders without a tax hike
Town Council Approves Budget for FY 2021-22 That Supports Critical Services
The Town Council at its June 7 regular meeting voted unanimously to adopt a $43.2 million operating budget for fiscal year 2021-22, which begins July 1.
The budget funds a sidewalk maintenance pilot program, replacement of multiple bleachers at Town ballfields and numerous new positions, including four critically needed police patrol officers and a community risk captain for Garner Fire-Rescue.
The Town Council at its June 7 regular meeting voted unanimously to adopt a $43.2 million operating budget for fiscal year 2021-22, which begins July 1.
The budget funds a sidewalk maintenance pilot program, replacement of multiple bleachers at Town ballfields and numerous new positions, including four critically needed police patrol officers and a community risk captain for Garner Fire-Rescue.
The additional officers will allow the Police Department to respond to the Town’s growing population and maintain current service levels. The community risk captain will enable Garner Fire-Rescue to implement various initiatives designed to educate local residents about fire-prevention practices.
A municipal property-tax rate increase of 1.5 cents is included in the FY 21-22 budget, bringing the Town's rate to 50.21 cents per $100 valuation.
Even with the tax-rate increase, the adopted budget continues to ensure that Garner will have the lowest effective tax rate among Wake County municipalities (view comparison chart).
"I want to thank the staff that worked on this [budget], but particularly I want to thank this Council,” Mayor Ken Marshburn said at the June 7 Council meeting.
He said the Council made prudent decisions to restore to the budget several new positions that had been requested by departments but were not originally part of the recommended budget. Mayor Marshburn said the positions that were restored would help the Town meet important service needs and that failing to include them in the budget would have amounted to “kicking the can down the road—and that’s not a good thing.”
In addition to the four police officers and the fire community risk captain, new positions funded in the budget include a risk manager; a GIS mapping position for Planning; an IT/communications specialist; four park attendants; conversion of part-time Public Works grounds positions to full time; enhancements to the Public Works fleet management team and four positions that could help the Town manage a new bond program if approved by voters in November.
The projected Town-wide value of assessed property for fiscal year 2021-22 increased by $186.2 million, or 3.9 percent, over the projection for the current fiscal year. This rise was driven mainly by new home construction and the addition of $154 million in equipment at the Amazon fulfillment center on Jones Sausage Road.
View the original recommended budget.
View the changes approved by Council as part of the adopted budget.
Watch discussion and adoption of budget at June 7 Council meeting.
Post Date: 06/08/2021 2:55 PM