Commercial Real Estate Incentives: Unlocking Opportunities for Developers
Developing commercial real estate is a multifaceted and capital-intensive endeavor, which often requires creative financial solutions to overcome high costs and mitigate risk. To help offset the expenses involved in building or renovating commercial properties, governments at the federal, state, and local levels offer various commercial real estate incentives. These incentives are designed to encourage […]
Developing commercial real estate is a multifaceted and capital-intensive endeavor, which often requires creative financial solutions to overcome high costs and mitigate risk. To help offset the expenses involved in building or renovating commercial properties, governments at the federal, state, and local levels offer various commercial real estate incentives. These incentives are designed to encourage development, stimulate economic growth, and revitalize communities. Some of the most commonly utilized incentives include historic tax credits, low-income housing tax credits (LIHTC), Tax Increment Financing (TIF), tax abatements, and energy efficiency incentives.
Each incentive serves a specific purpose, addressing a particular challenge faced by developers. When used strategically, these incentives can not only reduce the financial burden on developers but also provide long-term benefits to the community, improve environmental sustainability, and create jobs. Below is a closer look at these commercial real estate incentives and how they work.
Commercial real estate incentives
Historic Tax Credits (HTCs)
One of the most significant incentives available to developers of older commercial properties is historic tax credits. These credits are designed to encourage the rehabilitation of historically significant buildings. The federal government, through the National Park Service, offers a 20% tax credit for the rehabilitation of certified historic structures. Additionally, many states offer their own version of historic tax credits, which can be used in tandem with the federal credit.
To qualify, the property must meet specific criteria, including being listed on the National Register of Historic Places or located in a certified historic district. The property must also be rehabilitated in accordance with the Secretary of the Interior’s Standards for Rehabilitation, which ensures the building retains its historic integrity.
The historic tax credit can be a powerful tool for developers, as it can significantly reduce or supplement the costs associated with restoring and updating older buildings. For many commercial developers, especially those working on adaptive reuse projects, HTCs help make renovation projects financially feasible, while also maintaining the project’s historical significance.
Low-Income Housing Tax Credits (LIHTC)
Low-Income Housing Tax Credit (LIHTC) is a federal incentive program designed to encourage the development of affordable rental housing. The program offers tax credits to developers who build or rehabilitate affordable housing projects for low-income tenants. The program is administered by the Internal Revenue Service (IRS), and state agencies allocate the credits to developers through a competitive process.
LIHTC is one of the most widely used programs for financing affordable housing in the United States. It provides a substantial return on investment for developers, making it easier to finance the construction and rehabilitation of properties in low-income neighborhoods. In exchange for receiving the credits, developers must agree to maintain the affordability of the housing for a specified period (typically 15–30 years).
Tax Increment Financing (TIF)
Tax Increment Financing (TIF) is a popular tool used by local governments to stimulate economic development in specific areas, typically urban or underdeveloped districts. TIF works by capturing the future increase in property tax revenue generated by new development within a designated TIF district. The local government issues bonds to fund infrastructure improvements (such as roads, utilities, or public spaces), and the additional property tax revenue generated by the increase in property values is used to repay the bond.
TIF is particularly beneficial in areas where infrastructure or public use improvements are needed to attract investment but where such improvements would not occur without external financing. By financing these improvements upfront, TIF helps create the necessary environment for development to occur. TIF requires careful planning and consideration to ensure it is used appropriately. A critical aspect of this process is determining whether the development would occur without the specific proposed improvements, a requirement often referred to as the “but for” test.
Tax Abatement
A tax abatement is a temporary reduction or elimination of property taxes granted to developers to incentivize development. The incentive is usually offered for a set period (often 5–10 years) and is designed to reduce the financial burden on developers during the early years of the project. Local governments frequently use tax abatements as a tool to attract developers to economically distressed areas or to encourage investment in specific industries or sectors.
Tax abatements are beneficial because they provide immediate financial relief, especially for projects with high upfront costs. However, these incentives must be structured carefully to ensure they benefit both the developer and the community. For instance, tax abatements that last too long or apply to too many properties may reduce local government revenues and potentially lead to a lack of investment in essential public services.
Energy Efficiency Incentives
As commercial properties become more energy-conscious, energy efficiency incentives are increasingly important for developers. These incentives include tax credits, rebates, grants, and loans designed to encourage the installation of energy-saving technologies, such as solar panels, energy-efficient HVAC systems, and green building certifications (like LEED).
At the federal level, programs like the Energy Efficient Commercial Buildings Tax Deduction (Section 179D) allow developers to deduct up to $1.80 per square foot for energy-efficient upgrades. Many states also offer their own energy efficiency incentives, such as Commercial Property Assessed Clean Energy (CPACE), which can significantly reduce the costs associated with improving a building’s environmental performance. These incentives not only help reduce the operational costs of commercial properties but also enhance their attractiveness to tenants, who may prioritize sustainability.
Maximizing the Impact of CRE Incentives
The commercial real estate landscape is dynamic, and the availability of various incentives plays a pivotal role in shaping development decisions. Historic tax credits, low-income housing tax credits, Tax Increment Financing, tax abatements, and energy efficiency incentives all provide valuable tools for developers looking to reduce costs, mitigate risks, and promote feasibility.
These incentives not only help developers unlock the potential of new or existing properties but also contribute to the broader economic health of communities by promoting investment, job creation, and sustainable development. By understanding and strategically leveraging these incentives, developers can navigate the complexities of commercial real estate and bring projects to life that might otherwise be financially unfeasible. Get in touch with us today to discover how Hageman Capital can support and enhance your real estate projects.