Economic and Community Development Resource Center
Real estate developers in the commercial sector who are passionate about fostering economic and community progress have access to various avenues of assistance. The federal, state, and local governments provide tax incentives, financial grants, and subsidies aimed at promoting economic expansion, particularly in underserved areas. Simultaneously, these initiatives aid developers in securing funding for significant undertakings, often by reducing their tax obligations.
What’s the Difference Between Commercial Development and Economic Development?
Commercial and economic advancement are interconnected facets of the same coin. In essence, the former contributes to the latter's progress. Commercial development encompasses any venture constructed on privately owned land, aiming for profit, and excludes heavy industrial or residential endeavors. Examples within this category encompass hospitals, shopping centers, and office complexes.
Economic development, on the other hand, revolves around initiatives designed to enhance both the welfare and economic prosperity of a city or neighborhood. In urban areas, mixed-use developments that incorporate retail, residential, and cultural elements often serve as catalysts for economic growth. When a corporation expands its offices into a new city, generating hundreds of new job opportunities, commercial and economic development synergize to yield complementary advantages.
Tax incentives, financial support, and grants are available to bolster a wide spectrum of projects, spanning from housing to technology to small-scale enterprises. Here are a few resources worth considering when strategizing a new project.
New Markets Tax Credit Program
The Community Development Financial Institutions Fund (CDFI) of the United States Department of the Treasury explains how the New Markets Tax Credit (NMTC) Program utilizes tax credits to incentivize private investments in underserved communities.
Under this initiative, investors receive a tax credit against their federal income tax in exchange for making equity investments in Community Development Entities (CDEs), which serve as financial intermediaries that provide funding to businesses in low-income areas.
The tax credit is equivalent to 39 percent of the initial Qualified Equity Investment (QEI) made in the CDE, spread out over a seven-year period, resulting in substantial savings for investors. Moreover, the program contributes to the advancement of economic development in areas where it is most needed.
Notable examples of projects that have thrived through the NMTC program include the Firelake Arena, a 52,000 square-foot entertainment venue located in Shawnee, Oklahoma, and the Cade Museum for Creativity and Invention, which now has the capacity to offer STEAM (science, technology, engineering, arts, mathematics) education to disadvantaged students in Gainesville, Florida.
Investors and CDEs have access to diverse financing structures within the NMTC Program. It is advisable to seek guidance from a lawyer experienced in the program to determine its suitability for your business.
Another federal initiative aimed at fostering economic development is the Opportunity Zones program. Businesses that are willing to invest in low-income Opportunity Zones can receive tax incentives as a reward.
At present, investors have the option to postpone taxes on their capital gains until the year 2026, on the condition that these gains are reinvested in an Opportunity Fund within a 180-day window to maintain compliance. There is no limit to the amount of capital gains that can be reinvested in such a fund.
This approach offers a twofold advantage: Investors can sidestep capital gains taxes, while economically disadvantaged areas gain access to resources for growth. While all types of properties can potentially benefit from the Opportunity Zones program, the specific property types available may vary depending on the location.
The IRS maintains a comprehensive list of Opportunity Zones, so interested investors should conduct thorough research to identify an informed fund manager who can assist in selecting suitable properties. Additionally, it's advisable to explore Opportunity Funds with the most competitive fee structures.
Capital Magnet Fund
Real estate developers with an interest in affordable housing have the opportunity to seek grants through the U.S. Department of Treasury's Capital Magnet Fund. This program provides grants to support the financing of affordable housing and community revitalization initiatives that specifically aid low-income individuals and neighborhoods.
The recipients of these grants, primarily nonprofit developers and Community Development Financial Institutions (CDFIs), are empowered to utilize the funds for various purposes, including the establishment of loan loss reserves, loan funds, equity funds, risk-sharing loans, and loan guarantees. It's noteworthy that a minimum of 70 percent of the grant funds must be earmarked for affordable housing endeavors, while the remaining 30 percent can be allocated to finance projects associated with affordable housing.
The advantages of the Capital Magnet Fund program extend beyond the initial grant. When recipients invest in affordable housing, it triggers positive impacts on the community. As the community thrives, it becomes more appealing to private investors, thereby further bolstering economic development.
Low-Income Housing Tax Credits
Another incentive aimed at supporting affordable housing is the Low Income Housing Tax Credit (LIHTC), which provides funding for the purchase, renovation, or construction of rental housing for lower-income households. Enacted in 1986 and subject to several modifications, this program, according to estimates by the U.S. Department of Housing and Urban Development, has contributed to the creation of over three million homes between 1987 and 2017.
Here's how it operates: The federal government allocates tax credits to state and territorial governments. These state agencies, in turn, distribute the credits to private developers involved in affordable housing projects. Developers often opt to sell these credits to private investors to secure the necessary funding. Once the project is completed and tenants move in, investors can claim the tax credit over a span of ten years.
The regulations governing the calculation and allocation of these tax credits can be intricate, which is one of the drawbacks of participating in the program. Critics also contend that state financing authorities tend to approve projects primarily in economically constrained regions. However, the introduction of Opportunity Zones may potentially alter this landscape.
State-Based Tax Subsidies and Credits
State tax incentives play a crucial role in stimulating economic development initiatives. States leverage these incentives as integral components of their strategies to attract new businesses. These incentives can be deployed to foster growth in specific geographic regions or to bolster industries of strategic importance.
Supporters contend that the creation of new jobs and the resultant increase in economic activity outweigh the costs associated with tax concessions. Conversely, critics argue that these incentives represent an inefficient allocation of resources. Nevertheless, nearly every state offers a variety of tax subsidies and credits.
For instance, Nebraska provides a credit to landlords who rent to new farmers as a means to promote agriculture. Numerous states extend incentives to high-tech facilities and data centers.
The impact of incentives can escalate significantly when major corporations become involved. As an illustration, the Commonwealth of Massachusetts and the City of Boston offered General Electric a comprehensive package, often referred to as a "mega deal," which encompassed $25 million in property tax incentives, $1 million for employee training, and additional investments in infrastructure and transportation upgrades.
Given the ongoing debate regarding whether states receive a favorable return on their investment in such incentives, there is a call for enhanced reporting and evaluation. Nevertheless, states are likely to persist in offering incentives to companies that demonstrate the potential for economic growth.
For commercial real estate developers, there is a wealth of resources available, particularly if they are open to investing in economically disadvantaged communities. It is advisable to explore opportunities at the federal, state, and local levels to identify ways to achieve cost savings.