Government programs provide funding for new development
Commercial real estate developers often use federal, state, and local tax incentives, including historic rehabilitation credits, brownfield redevelopment programs, and tax increment financing, to reduce their projects' costs. However, the arsenal of tax incentives is much more extensive than many developers realize. Some programs, such as empowerment, enterprise, and community renewal zones, have existed for a while but often are overlooked. Others, such as land banks, simply are not very well known.
Created during the Clinton administration, federal empowerment, enterprise, and community renewal zones are designated by the government. Most are located in urban centers, but there are rural zones as well. For a list of eligible areas, visit www.hud.gov/offices/cpd/economicdevelopment/programs.
The zones offer commercial real estate developers several financial incentives. For instance, enterprises conducting business in empowerment or renewal zones may qualify for a variety of employment credits, including tax credit for hiring individuals that live and work within the zone. Businesses can claim a credit of 20 percent of wages (up to $3,000 annually) for each employee. Renewal community zone employment credits are similar, offering a 15 percent credit annually capped at $10,000 of qualified wages.
In addition, businesses located within empowerment or renewal community zones can claim additional first-year depreciation — up to $35,000 in some cases. Capital gains from activities reinvested in enterprise zones may qualify for capital gains rollover exclusions. Renewal community zone rules also allow for the exclusion of certain qualifying capital gains.
Internal Revenue Service publication 954, Tax Incentives for Distressed Communities, provides a summary of the federal tax incentives applicable to all such zones.
Many states also have special enterprise and redevelopment zone programs. For example, Michigan's renaissance zones provide businesses with nearly complete exemption from state and local taxes. These zones typically are limited to areas that are severely distressed economically and, therefore, are unable to attract new businesses without powerful incentives.
Some states and cities have programs to counteract the problems associated with tax-delinquent properties. These programs generally permit government intervention before delinquent parcels become blighted and include mechanisms to return the property to the tax roll quickly by allowing relatively swift tax foreclosures, cancellation of past-due taxes, no minimum bid sales prices, and clear and marketable title. The clear title allows developers to work with property that otherwise would be impossible to use.
For example, Michigan enacted the Land Bank Fast Track Act to help government entities assemble and clear title to property to promote economic growth. The act permits the creation of governmental authorities with broad powers, including the ability to finance property acquisitions by issuing bonds, to clear property titles through expedited quiet title and foreclosure actions, and to facilitate the assembly of property for sale or lease to private persons. The power to clear title is especially important because the authority may foreclose and clear title to many properties in a single action instead of having to file separate quiet title and foreclosure actions against each property. The act also shortens the usual time period for entry of judgments and limits the remedies of persons challenging the action once a judgment has been entered. For example, the act does not provide for a redemption period and requires a person appealing the action to pay all delinquent taxes, penalties, and fees prior to a court hearing the appeal.
As development costs continue to rise, commercial real estate professionals must look for new ways to trim costs. Federal, state, and local renewal programs and land banks can help achieve this goal and, in some cases, make an impossible project feasible.