Attorneys for the state and a development authority told a Georgia Court of Appeals panel Wednesday that a local judge overstepped her bounds last year by striking down property tax breaks for Rivian, and urged the appellate body to act fast to approve the deal.
The clock is ticking as Rivian would have the option to back out of its plans if key components of the deal aren’t settled by the end of April.
The nearly hour-long hearing delved into arcane aspects of bonds and real estate leases and the appropriate role of local judges in approving complicated incentive deals. If the local ruling stands, it could not only give Rivian the ability to back out without penalty, but upend how the state competes for jobs and investment through controversial property tax breaks to corporations and developers.
In September, Ocmulgee Judicial Circuit Chief Judge Brenda Holbert Trammell declined to validate bonds that underpin some $700 million in local property tax breaks. She also ruled that a long-term lease of the property amounted to an “estate for years” that should be taxed and not a more limited lease known as a “usufruct” that can avoid property taxes.
The ruling threw a wrench into the proposed $5 billion factory an hour east of Atlanta, the second-largest economic development project in Georgia history.
Credit: HYOSUB SHIN / AJC
Credit: HYOSUB SHIN / AJC
Harold Melton, a former chief justice of the Supreme Court of Georgia and an attorney representing the appellants, said Trammell erred when she ruled the Joint Development Authority of Jasper, Morgan, Newton and Walton Counties (JDA) “failed to establish” that the bonds “are sound, feasible and reasonable.” He said economic feasibility is a decision for politicians and local leaders — not judges.
“There’s no question that a manufacturing plant advances the statutory goals of economic development,” Melton said. “And frankly, that’s where the analysis should have ended... but the trial court pressed forward and went sideways.”
John Christy, an attorney for seven Morgan County residents who oppose the EV project, said the JDA failed to justify Rivian’s economic viability.
“What they’re advocating for is a rubber stamp,” he told Appeals Court Judges Anne Elizabeth Barnes, Christopher McFadden and Kenneth B. Hodges III.
Melton told the appeals court panel that time is of the essence, urging them to not only side with the state and JDA but to avoid sending the case back to the lower courts.
Rivian would be able to pull out of the deal May 1 if certain provisions of their agreement with the state and JDA are not met, including the bonds’ validation. The Rivian factory is slated for a 2,000-acre site in Morgan and Walton counties, and the company previously committed to employing 7,500 workers.
Rivian declined comment citing the pending litigation.
The appeals court judges questioned Melton’s brisk timeline, since a ruling in either direction could be appealed to the state Supreme Court.
Often called “bond-for-title” deals or “phantom bonds,” these complicated transactions act as a sort of legal workaround of the Georgia Constitution’s gratuities clause, which forbids government from providing a good, service or property without an equitable return.
A development authority will issue bonds and in exchange hold title to the property. The bonds represent the potential future value of the project, which in Rivian’s case is $15 billion. While it’s an eye-popping figure, the bond value is not an amount of money that changes hands, and neither the JDA nor Rivian planned to publicly sell the bonds.
Instead, in exchange for the phantom bonds, a development authority will hold the title for the property while the company makes rent payments to the authority. Since development authorities do not pay property taxes, they can lease the property back to the project’s developer at a discount, effectively providing a tax break.
As part of this arrangement, a judge must validate or approve the phantom bonds as “sound, feasible and reasonable,” just like any other local government bond deal.
“This whole bonds-for-title fictional scheme is problematic and probably something the Legislature needs to deal with,” Christy said. “But as the law stands now, there’s no difference in evaluating bonds-for-title (from) bonds backed by the government.”
Trammell questioned Rivian’s financial stability in declining to validate the deal. Rivian posted losses of roughly $5 billion through the first nine months of 2022. The California-based company had roughly $14 billion in reserves as of last September. Cox Enterprises, owner of The Atlanta Journal-Constitution, owns about a 4% stake in Rivian and holds a board seat.
Melton said Trammell is likely the first judge to ever deny validating a bond-for-title deal. He argued judges should decide whether a project backed by these bonds is “capable of being done,” not whether it’s a wise or popular policy decision by local officials.
“The courts are not called in to say, ‘Let me see if this is the kind of risk that we are comfortable accepting,’” Melton said. “The elected officials are the ones who have already decided what is acceptable.”
Christy said the JDA had a chance to convince Trammell the Rivian investment was sound, but failed.
Is this taxable land?
Another critical aspect of the case is whether the lease for the Rivian site can be structured as a usufruct, a common type of lease in which the tenant has limited rights and isn’t subject to property taxes.
The Morgan County Board of Tax Assessors ruled last year the land lease agreement constituted a usufruct.
Credit: Curtis Compton / Curtis.Compton@
Credit: Curtis Compton / Curtis.Compton@
Instead of paying typical property taxes, Rivian and officials with the JDA reached a payment in lieu of taxes agreement or PILOT in which the automaker would pay a reduced tax bill of more than $300 million to local governments and school systems over 25 years.
Trammell ruled that the lease was not a usufruct, but an “estate for years,” and should pay taxes. But Melton argued the top factor in determining which type of lease is used is “the stated intent of the parties.”
Christy countered that the lease’s structure resembles an estate for years with Rivian holding greater rights but the state wants to call it a usufruct.
“It reminds me of that old expression that if it quacks like a duck, if it looks like a duck, it must be a duck,” Christy said. “This is (the opposite). It doesn’t look like a duck, it doesn’t quack like a duck, but we’re calling it a duck, so it’s a duck.”
Why this matters
Rivian’s planned $5 billion electric vehicle factory is the second largest economic development announcement in state history, according to Gov. Brian Kemp. But Rivian would have the ability to back out of the project May 1 if certain conditions of their agreement with state and local leaders are not settled.