Chapter 4 Economic Development, Governmental Incentives, Fees in Lieu and Related Issues

• Library: Practical Guide to Commercial Real Estate in South Carolina (SCBar) (2024 Ed.)

Chapter 4 Economic Development, Governmental Incentives, Fees in Lieu and Related Issues¹

J. Philip Land Jr.

The State of South Carolina and its political subdivisions are devoted to attracting and encouraging private investment and infrastructure development. This chapter seeks first and foremost to outline some of the major constitutional provisions, laws, cases, and secondary authority which have contributed to the expansion of economic development in South Carolina. The chapter also uses examples and practice-oriented insights throughout, in the hope that they will make these concepts more clear and concrete for the reader.

Property taxes in this State are generally higher than other surrounding states. The property tax regime is outlined in detail in Section B, which explains the application of millage rates and abatements in determining a taxpayer's liability. The section then outlines various statutes that provide relief directly to taxpayers by reducing their property tax burden. The major incentives considered are fees in lieu of taxes (FILOTs), Multi-County Business or Industrial Parks (MCIPs), and Special Source Revenue Bonds (SSRBs) or Special Source Revenue Credits (SSRCs), which may operate within the context of a FILOT or MCIP.

Finally, Section C considers financing incentives. Some of these incentives are important, and different from property tax relief, in that they are often allocable—in exchange for money—and stackable. As such, these financing incentives allow taxpayers to reap their benefits independently of any underlying property tax liability. Tax Increment Financing Districts (TIFs), Municipal Improvement Bonds (MIDs), and County Improvement Bonds (CIDs) all allow government entities to improve infrastructure connected with property in their jurisdictions. New Market Tax Credits (NMTCs) stimulate the creation of jobs by rewarding companies for doing so. Finally, Historic Tax Credits (HTCs) incentivize the redevelopment of old property while Extraordinary Retail Establishment Credits promote tourism.

In sum, this chapter seeks to give practitioners, regardless of their field of expertise, a better understanding of the intricacies associated with current economic development, governmental incentives, fees in lieu and related issues in South Carolina. When effectively planned for and implemented, projects which take advantage of the benefits outlined herein are ultimately remunerative for the client, the State and its political subdivisions.

A. Economic Development as Public Purpose

1. Introduction

Both the State of South Carolina (the "State") and the political subdivisions of the State have had to deal with statutory and constitutional constraints pertaining to economic development. Economic development in the State is now an institution. The State and its political subdivisions are looking for innovative means to compete with other states and political subdivisions to attract industry, development, and business to their region. The most common strategies adopted by the State and its subdivisions are outlined below.

At the same time, companies are becoming more aware of the fact that states and political subdivisions are utilizing incentives to induce investment and employment. Businesses are now more sophisticated, utilizing consultants and other experts to not only analyze the site, but to maximize the incentives made available to the company. The State legislature has promulgated incentive-based laws to induce companies to locate in the State. Political subdivisions likewise are finding themselves in positions where they, too, must use innovative means to attract investment.

As a result of this heightened awareness, the courts have been asked to determine the constitutionality of several incentive-based issues. This Section A identifies how the courts have addressed those constitutional constraints as they pertain to the most prominent issues. By way of summary, courts have interpreted the definition of "public purpose" to allow the State and its political subdivisions more flexibility in dealing with economic development issues, but many questions remain unanswered.

In Public Interest Foundation v. City of Columbia, the South Carolina Court of Appeals upheld a ruling that student dormitories are commercial enterprises that fall within the definition of "business." S.C. Pub. Int. Found. v. City of Columbia, 847 S.E.2d 257, 258 (S.C. Ct. App. 2020). This allowed student dormitories to be built within MCIPs. Because the dormitories engage in continuous commercial activity, were not owner occupied, and were zoned commercially, the court found this type of activity to be commercial in nature.

2. Public Purpose as a Constitutional Requirement

The South Carolina Constitution (the "State Constitution" or "Constitution") has a number of provisions which have been addressed by the Supreme Court of South Carolina ("Supreme Court" or "Court") in analyzing economic development schemes. Perhaps the most cited provisions are Articles III and X. For example, the Constitution requires that "[g]eneral obligation debt may be incurred [by a political subdivision of the State] only for a purpose which is a 'public purpose' and which is a corporate purpose of the applicable political subdivision." S.C. Const. art. X, § 14(4). Furthermore, the State may not donate lands belonging to it or under its control "directly or indirectly, to private corporations or individuals, or to railroad companies." S.C. Const. art. III, § 31. Additionally, Article VIII provides that provisions enacted by local governments shall not set aside general law provisions applicable to "(3) bonded indebtedness of governmental units; . . . and (6) the structure of the administration of any governmental service or function, responsibility for which rests with the State government or which requires statewide uniformity." S.C. Const. art. VIII, § 14. The S.C. Supreme Court has also addressed, inter alia, the requirements of Article I, Section 3; Article VIII, Section 13; Article X, Sections 3, 4, 5, 6, 11, 13, and 14; and Article XI, Section 3 in various economic development cases. As such, governments must comport their economic development strategies and schemes with the strictures of the Constitution.

In analyzing constitutional provisions, it is important to determine the scope of the text. In McKinney v. City of Greenville, 262 S.C. 227, 244, 303 S.E.2d 680, 689 (1974), the S.C. Supreme Court recognized that Article III, Section 31 of the State Constitution, which limits the activities of "the State," does not apply, by inference, to the actions of a county. See also Haesloop v. City Council of Charleston, 123 S.C. 272, 278-79, 115 S.E. 596, 598 (1923); Bobo v. City of Spartanburg, 230 S.C. 396, 402, 96 S.E.2d 67, 69-70 (1956). Thus, when considering the constitutionality of a proposed action by a county, one must examine whether the applicable constitutional provision addresses "the State," or whether, as is often the case, it also explicitly includes "political subdivisions" of the State. Only in those cases where constitutional constraints specifically include the counties as well as the activities of the State will it be necessary to analyze the validity of the public purpose.

The S.C. Supreme Court's decision in Nichols v. S.C. Research Auth., 290 S.C. 415, 351 S.E.2d 155 (1986) recognized the need for, and began the process of, the Court's move to relax the constitutional constraints on the means by which the State, and its political subdivisions, can use innovative and incentive-based methods to attract business. Although many constitutional provisions are invoked as potential barriers to the programs discussed below, South Carolina courts' analyses tend to focus on the extent to which the proposed program serves a valid "public purpose." Since Nichols, state courts have been quick to find that such a "public purpose" exists and have in large part deferred to the judgment of the State legislature (the "legislature" or "General Assembly") on the issue. Id. at 424-25, 351 S.E.2d at 160-61.

3. Supreme Court Cases: Defining Public Purpose

Over time, the S.C. Supreme Court has demonstrated increased willingness to recognize economic development as a "public purpose" permitted by the Constitution. In doing so, the Court has considered various State and County incentives and outlined a four-point test which it uses to determine whether or not a government's action does in fact serve a public purpose. Notwithstanding the Supreme Court's trend, taxpayers continue to bring suits challenging government actions. The most relevant cases, which highlight the evolution and relaxation of the State Supreme Court's jurisprudence on this front are summarized below.

a. Byrd v. County of Florence, 281 S.C. 402, 315 S.E.2d 804 (1984)

In Byrd v. Cnty. of Florence, the Plaintiff challenged a Florence County Ordinance authorizing the issuance of general obligation bonds for the acquisition and development of an industrial park. 281 S.C. 402, 403, 315 S.E.2d 804, 804 (1984). The S.C. Supreme Court found the ordinance in violation of Article X, Section 14(4) of the Constitution, which requires that "general obligation debt may be incurred [by a political subdivision of the State] only for a purpose which is a public purpose and which is a corporate purpose of the applicable political subdivision." Id. at 404, 315 S.E.2d at 805 (quoting S.C. Const. art. X, § 14(4)). The Supreme Court struck down the ordinance, pointing out that the industries to be located in the park were, as yet, unknown and that no commitments or contracts by any industry had been negotiated to ensure that industries would locate in the parks. Id. at 407, 315 S.E.2d at 806-07. In addition, the Court found that the primary beneficiaries, if any, would be private businesses, while benefits to taxpayers were highly speculative. Id. at 407, 315 S.E.2d at 807.

In striking down the...