A financing deal and tax abatement was approved Tuesday night for Covington’s Bavarian Flats project, a $27 million apartment complex that will sit atop the Kenton County Government Center parking garage.
Both the Covington City Commission and the Kenton County Fiscal Court discussed the project in their meetings this week, approving a PILOT program, or Payment in Lieu of Taxes.
The 125-unit multifamily residential complex will be located at 1840 Simon Kenton Way. Covington’s Economic Development Department has estimated the overall cost of the project to be around $27.5 million, according to previous LINK nky reports.
Cincinnati-based design-build company Merus, formerly known as Al. Neyer, and Urban Sites are the firms working on the project. The firms have a history of collaborating on real estate projects in Covington. Their latest joint project was The Hayden, which transformed the former Kenton County Administration Building and Detention Center into a 133-unit apartment complex at 103 E. Third St.
To help finance the project, the City of Covington will issue up to $20 million in Industrial Building Revenue Bonds, or IRBs. Industrial Revenue Bonds are debt instruments issued by a municipality on behalf of a private developer. These bonds finance local construction projects, but repayment is the responsibility of the developer, not the government.
In this case, Merus will receive a temporary abatement of real estate property taxes. In exchange, they must make annual PILOT payments to the city, county and school district.
Kenton County Judge/Executive Kris Knochelmann said at the Kenton County meeting that the construction of the parking garage is well underway, with much of the concrete foundation visible from street level.
“As you’ve seen, the garage is nearly finished,” Knochelmann said. “And now, it’ll be on Merus’ team to get the apartments built up top.”
At the Covington meeting, resident Tom Hull expressed concerns that the financing could have detrimental financial impacts.
“I do have concern … that there could be a high likelihood the project could change hands very quickly and very frequently while people are trying to get access to the increased profit from the lower tax level,” Hull said.
Hull was referring to the PILOT payments, which were coupled with the issuance of up to $20 million in industrial revenue bonds.
When a city, or another taxing entity like a school or a county, agrees to issue an IRB, it serves as a kind of conduit of capital financing for a project. The developer will seek financing from an underwriting institution, such as a bank, as a means of injecting capital into the project.
The city then takes on an owning interest in the property, at least on paper, so the developer can use the city’s credit score as a way of obtaining private investment. In exchange, the city grants the developer a tax incentive, the details of which vary depending on the deal. This often takes the form of a PILOT.
PILOTs ensure the city still makes money on the property while reducing the developer’s early investment expenditures. Developers and cities like IRBs because the developers defray their investment costs, and cities get to make money on a property or lot that might otherwise sit unused, thus generating no tax revenue.
The financing debt itself is held by the developer, meaning the city isn’t on the hook for paying back the debt. Usually, when an IRB period ends, the incentives disappear, and the legal ownership of the property reverts back to the developer. If a project fails or the developer goes out of business, the property can be sold to settle the debt.
The PILOT agreement approved this week calls for a graduated payment schedule over the 20-year term of the bonds. Specifically, the developer would pay 30% of property taxes for the first 10 years, 50% for the subsequent five and 80% for the last five.
After the Covington Commission meeting, Hull elaborated on his points to LINK nky. He was skeptical the project would not occur in the absence of city help — the project is connected to a county project, which is, in turn, connected to the Brent Spence project.
“If the project can be done without getting a PILOT, then why would we not take it from a non-tax producing property to 100% tax producing property instead of 30% for 10 years?” Hull asked.
Hull also leveled criticism at the City’s economic development department, which said last week it was targeting potential tenants at the area’s median income, which Assistant Economic Development Director John Sadosky put at $73,000 a year for one person and $84,000 a year for a two-person household. Hull argued that this was an error, closer to the area’s mean, or average, income than the median, which indicates the middle of the income range. The Census Bureau puts the average income of all Covington households at $79,569, as of 2023.
The City’s publicly available internal data puts the median income of all households at about $58,600, roughly in line with U.S. Census Data.
In his comments, Hull indicates there is an outsized proportion of Covington residents with incomes between $100,000 and $250,000 a year.
Covington Mayor Ron Washington addressed Hull’s concerns toward the end of the Covington Commission meeting.
Washington said that all financing proposals go through a vetting process to determine if its necessary to seek bonding to bankroll a project. He added that any additional analyses from third-party professionals are charged to the developer, not the city.
“[The mayor] looks at it from the whole of the city: Is this something that would fit well into our city? Should it be given an industrial revenue bond?” Washington said. “This particular property, it was not producing any taxes, whatsoever, because it was county-owned. So, that’s one things that factored into my decision.”
In the strictest sense, the County will still own the land, but the developer will own the building. The County approved the construction of the apartments along with a 99-year lease agreement for the land in March, according to County documents.
Construction on the apartments is expected to begin once the parking garage is finished, and the companies hope to have the apartments finished by February 2027, based on previous comments they made to LINK nky.