FRANKLIN CORPORATE CENTER

Franklin Corporate Center — The Perfect Business Opportunity

Tree lined streets and boulevards that serve Franklin Corporate Center, Ann’s Choice and a township park add to the beauty and desirability of this business environment for a corporate headquarters or regional office.

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Franklin Corporate Center

KEYSTONE OPPORTUNITY ZONE OVERVIEW

At Franklin Corporate Center – Warminster, PA

 OVERVIEW

Effective on January 1, 1999, the Ridge Administration passed legislation known as the Keystone Opportunity Zone Program created 12 “Keystone Opportunity Zones” (“KOZ”) throughout the Commonwealth of Pennsylvania, each of which may contain no more than 5,000 acres of land.  In Bucks County there is only one site with a total of 202 acres of land, comprised of the 80-acre Franklin Corporate Center and the 122-acre site, for Ann’s Choice a residential retirement community.  The Franklin Corporate Center is Zoned BC-Business Campus and allows for the development of Office, Research & Development, and Light Industrial facilities.  We have completed the site improvements and infrastructure including utilities, roads, and water retention basins.  Our first building is scheduled for a spring 2004 completion.

The KOZ Program incorporates limited and clearly defined sites which have received all final approvals from all of the local applicable taxing bodies (i.e., Warminster Township, Centennial School District and the Bucks County) and which have received final approval from the Commonwealth of Pennsylvania.  In this regard, please note that the KOZ Zones are now finally established and no new lands can be added to the current Program.  Accordingly, we are dealing with a defined and limited number of KOZ-approved sites within the Commonwealth of Pennsylvania.  Obviously, the legislative intent of the Program is to create jobs and stimulate economic growth within the Commonwealth by offering certain tax abatements that would otherwise not be applicable to certain properties and the businesses that operate within them.  Furthermore, the goal of the KOZ Program is to attract businesses from outside of Pennsylvania to relocate to the Commonwealth and, further, to encourage existing Pennsylvania companies to expand their operations within the State by relocating to a KOZ and investing the KOZ Program savings into capital expansion and job growth.  The KOZ Program is designed to provide tax abatement on many State and Local taxes until December 31, 2010. 

LOCAL TAXES 

Because all of the applicable local taxing bodies had to first formally approve the inclusion of certain properties in the KOZ Application to the State, in so doing, they have agreed to abate the following Local Taxes that would otherwise be applicable: (i) all Real Property Taxes, (ii) Business Gross Receipts, Occupancy & Privilege Taxes & Mercantile Taxes, (iii) Earned Income/Net Profits Taxes, and (iv) Sales and Use Taxes for purchases used and consumed by the qualified business within the KOZ Zone.

Real Property Taxes

In the Commonwealth of Pennsylvania, real property taxes are imposed by three (3) local taxing bodies (real property taxes are not imposed by the State) within which the real property is located; namely, the County, the Local Municipality and the School District.  In Bucks County, the real property tax bills are sent to property owners two (2) times during the calendar year.  In the Spring of the each year (usually in April), the real property owner will receive one tax bill for the County and Municipal real property taxes that are due for the then current calendar year.  The assessment for a real property is comprised of two (2) components; the land component and the improvements component.  These (2) separate assessments are then added together to obtain the total real property tax assessment.  This assessment is then multiplied by the applicable mileage rate to determine the real property taxes due to each of the three taxing bodies from the property owner.

Under the KOZ Program, all of the subject taxes (including all real property taxes) are 100% abated through December 31, 2010 (the “KOZ Abatement Period”).  It is important to note that this KOZ Abatement Period is a fixed period of time irrespective of when the property is developed or when a KOZ applicant moves into the improvements located on a KOZ-approved site.  Obviously, the sooner a taxpayer could begin to reap the economic benefits of the KOZ tax abatements, then the greater total economic benefit the taxpayer will ultimately receive.

The following is an example of how a business can save on real estate taxes:  if the average total real property taxes for 2003 for land and improvements for a new commercial/flex building in Bucks County is approximately $.70 per square foot, a 100,000 square foot commercial/industrial building located in an improved industrial park could expect to pay approximately $70,000 in real property taxes in 2003.  Therefore, the property tax savings over the balance of the KOZ Abatement Period will be at least $560,000.  However, please note that, historically, real property taxes have increased in all markets in the United States and, Southeastern Pennsylvania would be no exception.  Under the KOZ Program, because all real property taxes are abated until December 31, 2010, all increases in the real property taxes would, therefore, also be abated and, therefore, the total economic benefit realized by the tenant would be greater than the product obtained by multiplying balance of tax abated years by the then current tax rates.  Accordingly, in our example above, the total economic benefit would be greater than $70,000 per year multiplied by 8 years, or $560,000, because this does not take into account the average annual increases in real property taxes in all areas.  Assuming an average annual increase in real property taxes of just 3% over the next 8 years, the $560,000 in saved real property taxes is actually approximately $622,453 in real property tax savings.

Business Gross Receipts, Occupancy & Privilege Taxes & Mercantile Taxes

The Business Gross Receipts, Occupancy & Privilege Taxes & Mercantile Taxes are also abated on the local levels under the KOZ Program for the KOZ Abatement Period.  These taxes are local taxes based upon the gross sales from a business, which is located within a jurisdiction that imposes these taxes. 

Local Earned Income/Net Profit Taxes

Similarly, the Local Earned Income/Net Profits Taxes are also abated, under the KOZ Program, for the entire KOZ Abatement Period.  This is a personal income tax imposed upon the income of an individual by the jurisdiction in which an individual resides.  In order to obtain the benefit under the KOZ Program for the abatement of these taxes, the individual must reside within a KOZ Zone and not simply work within a KOZ Zone.

Local Sales and Use Taxes

Lastly, the Local Sales and Use Taxes applicable to purchases used and consumed by businesses in the KOZ Zone are exempt. 

STATE TAXES

The following State-imposed taxes which are the subject of the KOZ tax abatement: (i) Corporate Net Income Taxes, (ii) Capital Stock/Foreign Franchise Taxes, (iii) Personal Income Tax, and (iv) Sales and Use Taxes for purchases used and consumed by a qualified business located within the KOZ Zone.

Corporate Net Income Taxes

In the Commonwealth of Pennsylvania, there is a Corporate Net Income Tax of 9.99% on all “Pennsylvania Taxable Income” generated by a corporation.  (This Tax does not apply to Subchapter “S” Corporations or Limited Liability Corporations in the Commonwealth of Pennsylvania, but rather is applicable only to “C” Corporations.)  Under the KOZ Program, this Corporate Net Income Tax is abated for the entire KOZ Abatement Period.

Capital Stock & Foreign Franchise Taxes

The Pennsylvania Capital Stock and Foreign Franchise Tax savings under the KOZ Program can result in a tremendous savings to a Company doing business in a KOZ Zone.  These taxes are determined by first looking at a five (5) year average (i.e., that of the then current tax year and the four (4) immediately preceding years) of a Company’s “book earnings” (not taxable income) and then “capitalizing” that average at a 9.5% capitalization rate (i.e., divide that average by 9.5%).  In addition, take the stockholders’ equity (i.e., the stockholders’ book value) and multiply this by .75.  These totals are then added together and then divided by 2.  The quotient so obtained is the “Net Capital Stock Taxable Value” upon which this Tax is based.  Each Company is entitled to a $125,000 exclusion each year and any balance is then multiplied by .01199 which is the Capital Stock Tax due.  Unfortunately, this Tax has no tie to the Company’s ability to pay and for a growth company that is re-investing a good portion of its capital back into assets, it seems to be particularly burdensome.  There are, again, a number of statutory exemptions from this tax, such as a manufacturing business that is exempt from the Capital Stock Tax (it would only be required to pay the $200 Minimum Capital Stock Tax in lieu of what would otherwise be due).  In addition, these Capital Stock and Foreign Franchise Taxes do apply to both “C” corporations and Subchapter “S” corporations in the Commonwealth of Pennsylvania.  The Foreign Franchise Tax is the same as the Capital Stock Tax, but is applicable to non-Pennsylvania businesses (i.e., out-of-state corporations) which are doing business within the Commonwealth of Pennsylvania.  Of course, any business that operates in more than one State would use apportionment in calculating these taxes.  In summary, those companies with large retained earnings and a propensity to re-invest their capital for growth, as well as those companies which have experienced unusually high earnings in a given year or two (i.e., especially from the occurrence of an out-of-the-ordinary transaction) would benefit most from the abatement of this Capital Stock and Foreign Franchise Tax under the KOZ Program.  Again, because of the “5 year car forward” aspect of the Capital Stock and Foreign Franchise Tax, the impact of this tax upon a Company from an extraordinary occurrence “lingers” for 4 to 5 years and, therefore, the abatement of this Tax under the KOZ Program could have a significant impact upon a Company’s bottom line.

Personal Income Taxes

In Pennsylvania, the Personal Income Tax is a flat 2.8% of “Pennsylvania Taxable Income.”  The Pennsylvania personal income tax is based upon a number of different “classes of income” received by an individual in a tax year (i.e., Interest Income, Dividends, Income from Business, Farm and Professions, Income Taxes for the entire KOZ Abatement Period, this benefit could only be applicable to those individuals who reside in a KOZ Zone and not to those who work within a KOZ Zone.  The foregoing notwithstanding, the owner of a business located within a KOZ would receive the abatement of personal income taxes from profits derived by the business from within the KOZ.

Sales and Use Taxes

The Commonwealth of Pennsylvania currently has a 6% sales tax on all purchases (with certain statutory exceptions, such as the purchase of groceries, clothing and other items).  Accordingly, all furniture, fixtures and equipment purchased by a business are subject to the imposition of a 6% sales tax imposed at the time of purchase.  Obviously, a company, which is relocating to a new building and purchasing furniture, fixtures and equipment in connection with its new facility would incur this 6% sales tax (i.e., the amount of sales tax would be $60,000 on a $1 Million equipment purchase).  Similarly, if a corporation which is doing business in the Commonwealth purchases non-exempt goods and services from a seller located outside of the Commonwealth, then that purchaser must pay a 6% “use tax” in lieu of the sales tax.  Under the KOZ Program, all sales at retail of services or tangible personal property (other than motor vehicles and other than certain personal property which will become a permanent part of the real property) to a qualified business for the exclusive use, consumption and utilization by the qualified business at its facility located within the KOZ Zone are exempt from the 6% Sales and Use Tax.  The ultimate benefit of this sales and use tax exemption will, obviously, vary greatly from business to business depending upon the goods and services used and consumed by such business from their facility within the KOZ Zone.  Accordingly, we encourage each user to attempt to identify its anticipated initial capital purchases, as well as its on-going annual operational purchases, in order to project, and more fully appreciate, the ultimate advantages to be obtained from a business’ participation in the KOZ Program with respect to Sales and Use Tax abatements.  In addition, there are certain goods and services upon which sales and use taxes are imposed that may not be typically considered when considering the savings of sales taxes under the KOZ Program.  For example, certain utilities are typically assessed a sale tax in the Commonwealth of Pennsylvania and, therefore, a high consumer of these utilities (such as electric power, gas and telephone, but not including water and sewer which is not subject to sales tax) will save the Pennsylvania sales taxes otherwise imposed upon these services.

PROCEDURE TO QUALIFY FOR KOZ BENEFITS

Based upon our discussions and meetings with the State Department of Revenue, the State’s KOZ Coordination teams, the Pennsylvania Bureau of Sales Tax, Local KOZ Coordinators and others, we understand that because the real property taxes are imposed, by law, on the owner of the real property, that each owner of KOZ-approved lands must submit a formal Application to the State for inclusion of the KOZ-approved lands into the KOZ Program. The State will then conduct a check to be sure that the owner is a “tax compliant taxpayer” with respect to all of its other Pennsylvania-imposed tax obligations.  If the landowner is, in fact, tax compliant (i.e., it is not delinquent with respect to its payment of other taxes to the Commonwealth), then the owner is provided with a KOZ Account Number.  Each year thereafter, so long as the owner is otherwise tax compliant, his KOZ approval status will be renewed.  If the owner becomes non-tax compliant for any reason (i.e., it fails to pay other State taxes), then that owner will not receive the benefits under the KOZ Program until the owner becomes tax compliant.

This same process applies to businesses that do not own the real property, but through a lease or otherwise, will do business within the KOZ Zone.  Namely, this business would submit an Application to the State in order to be qualified as an approved business for a KOZ Zone.  Similarly, the State would review that business’ tax compliance and, if tax compliant, would issue to the business a KOZ Account Number to be used when filing all State and Local Tax filings.  The qualification process for a business locating into a KOZ Zone differs between those businesses which are relocating to a KOZ Zone within the Commonwealth of Pennsylvania and those that are relocating from a non-KOZ Zone within the Commonwealth of Pennsylvania and the different qualification requirements are discussed further below under the Section entitled “Relocating to a KOZ Site”.

RELOCATING TO A KOZ SITE

A company which is currently doing business in another State and which is interested in relocating to a KOZ-approved site within the Commonwealth of Pennsylvania may do so (and obtain the benefits of the KOZ Program) once it receives its KOZ Account Number from the State.  We have been told that the only requirement for KOZ approval will be a certification from the Department of Revenue with respect to tax compliance both initially and each year thereafter.  That business must, of course, own or lease real property in the KOZ Zone and must actually conduct a trade, profession or business therein.  The Department of Revenue’s annual certification will also indicate that the business is located, and is in the active conduct of a trade, profession or business, within the KOZ Zone.

With respect, however, to a business relocating to a KOZ Zone from a non-KOZ Zone within the State, that business (in addition to owning or leasing real property in the KOZ Zone and in addition to locating in, and actually conducting a trade, profession or business, within the KOZ Zone) must also either increase full-time employment by at least 20% in the first full year of operation with the KOZ Zone, or must make a capital investment in the property located within a KOZ Zone equivalent to 10% of the gross revenues of that business in the immediately preceding calendar or fiscal year.  Again, once a business initially qualifies (and is certified as a qualified KOZ Program participant by the Department of Revenue), the annual certifications thereafter will be determined only by continued tax compliance and whether the business is located within, and actually conducting a trade, profession or business within the KOZ Zone.  If so, the annual certification should be granted routinely.

PREFERENTIAL TREATMENT OF OTHER PROGRAMS

The project located within the KOZ Zones will also receive “priority consideration” for other State assistance under various other State programs.  Accordingly, other State grants and low-interest rate loans shall continue to be available to KOZ Program participants and, in fact, projects that are located within KOZ Zones that are approved by the Pennsylvania Industrial Development Authority (PIDA) and/or other State agencies shall receive the lowest interest rates extended to borrowers.  Again, as part of an overall State-wide economic development strategy, the State is interested in seeing this Program be successful and, therefore, provides this “priority consideration” to KOZ participants for other State assistance programs.

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