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$1 Billion of tax-exempt Tennessee commercial rental properties owned outside state

Associated Press • Mar 5, 2009 at 12:00 AM

NASHVILLE - State records show $1 billion worth of commercial rental properties that qualify for a controversial tax break are owned by investors who live outside Tennessee.

State Revenue Department figures obtained by The Associated Press show a total of about 3,200 businesses are registered as family-owned noncorporate entities, or FONCEs. They own a total of about $5.1 billion in properties that are exempt from corporate taxes.

Democratic Gov. Phil Bredesen wants to end the exemption because he considers it unfair to give family-owned rental properties special treatment not extended to similar businesses controlled by unrelated investors.

"These are just huge tax-avoidance schemes," Bredesen said Wednesday. "And particularly at a time when middle-class working people are struggling, I think giving this pass to wealthy people is wrong."

Republicans in the state Legislature have vowed to fight Bredesen's effort to end the exemption, arguing that ending the FONCEs would be akin to a tax increase for existing businesses.

"I don't think we should call this a tax break," said Senate Speaker Ron Ramsey, R-Blountville. "It's always when you're trying to raise taxes on someone that (you say) all you're doing is trying to close a loophole."

Commercial rental properties that qualify for the tax break are owned in 43 states outside of Tennessee, records show. California leads the way with 189 investors owning nearly $470 million worth of tax-free properties in Tennessee.

"This exemption has made Tennessee a tax haven for wealthy investors," said Revenue Department spokeswoman Sophie Moery. "People are putting their high-dollar investments in Tennessee, and they're not living here."

State law prohibits the department from identifying individual FONCE owners.

About 85 percent of the money invested in FONCEs, or $4.37 billion, is in commercial properties worth more than $1 million. The largest 149 FONCEs involve properties worth more than $10 million each.

Bredesen said he'd be open to keeping the exemption for smaller investors, like those holding less than $500,000 worth of rental properties.

House Democratic Leader Gary Odom, who opposed ending the exemption last year, said he's encouraged the administration has done a thorough investigation into how many FONCEs there are in the state. He said he agrees that there should be a threshold to protect smaller investors.

"I'm open to discussing it like we should," said Odom, of Nashville.

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