Department of Revenue Issues Draft Ruling Addressing Critical FILOT Timing Requirements
The interplay of two important definitions has long created uncertainty with respect to projects with extended development schedules. Those definitions are as follows:
- “Investment Period” means the period beginning with the first day economic development property is purchased or acquired and ending five years after the “Commencement Date,” provided that the FILOT statutes allow for longer investment periods and extensions in certain circumstances.
- “Commencement Date” means the last day of the property tax year during which economic development property is placed in service, except that this date must be not later than the last day of the property tax year which is three years from the year in which the county and the sponsor enter into a FILOT agreement.
The open question has been whether a failure by the taxpayer to place any assets in service on or before the last day of the property tax year that is three years after the FILOT agreement is entered into results in (A) termination of the FILOT agreement, or (B) the beginning of the “Investment Period” (even though no assets have been placed in service yet). As an example, if a taxpayer (with a 12/31 fiscal year) and a county entered into a FILOT agreement in 2023 and the taxpayer had not yet placed any assets in service by December 31, 2026, what are the ramifications?
In the proposed ruling, DOR has answered (B). In the example above, the “Commencement Date” would be December 31, 2026, meaning the “Investment Period” would run through December 31, 2031. The FILOT agreement itself would not be terminated absent a specific, contractual basis for termination.
Provided the ruling is finalized, this interpretation offers greater certainty to companies and counties in the context of projects with development timelines exceeding three years. The issue has been especially common with solar farms, which often involve development schedules in excess of three years. According to the interpretation in the draft ruling, a taxpayer who enters into a FILOT agreement will not be subject to termination if it does not place assets in service by the end of the third year following the year the FILOT agreement is entered into. Rather, the “Investment Period” begins on the deemed “Commencement Date” at the end of that third year, and in FILOT agreements with a standard “Investment Period,” only investments placed in service during the next five years will be eligible for inclusion.
Of course, counties and companies can negotiate different contractual terms in FILOT agreements, and the draft ruling makes clear that the company and county can always mutually agree to termination. However, where FILOT agreements follow the traditional statutory definitions of “Investment Period” and “Commencement Date,” a failure to place assets in service by the applicable three-year “Commencement Date” deadline does not give the county the right to unilateral termination. Instead, it simply starts the clock on the running of the “Investment Period.” Accordingly, the draft ruling provides much greater certainty regarding timing issues, which is a welcome clarification for both counties and companies that have struggled to reconcile this language.
Please contact Will Johnson or a member of the HSB Economic Development Team with any questions.
