Don't Overlook Economic Incentives

Since the 1970s, there has been an increasing proliferation of federal, state and local economic development programs that encourage investment and job creation in certain industries or geographic areas. While numerous such programs apply to real estate, many developers are missing out. Why? In many instances, they're not aware of the available programs or they're not familiar with the application process.

As an example, tax credits and grants amount to hundreds of millions of dollars just in the redevelopment of brownfields and blighted properties. A recent survey of federal redevelopment programs for brownfield and other blighted areas identified more than 100 incentive programs involving 24 government departments and agencies. However, many of these dollars go unclaimed. Experience tells us that the total utilization of such programs is typically less than 50%. In some states there are only a handful of applicants.

Seizing the Opportunity

Many programs can be used in combination. In Detroit, for example, there are numerous situations in which brownfield developments have benefited from multiple programs. The following scenario is typical of several recent development projects: A developer received a $1 million business tax credit for a $10 million, multi-tenant office building that qualified as a brownfield project. The brownfield district and city spent more than $350,000 for site assessment and remediation.

The brownfield district is using tax increment finance revenue captured from the project to pay for some of the remediation costs. The project also offered some leasing incentives. First, given its location in a special state zone, building tenants considered to be start-ups receive free technical assistance and other incubator services. Second, since the area also was designated a federal enterprise zone, building tenants receive an annual employment tax credit of up to $3,000 per employee for workers that live in the zone.

Persistence and Patience Pay Off

The term “government program” often conjures up images of red tape, unnecessary forms and long delays. Participation in some programs may have nuances of politics, particularly at the local level. These images often scare people off. While some programs still inflict an administrative burden on the applicant, state and local economic development agencies usually try to make the process as painless as possible.

In addition, for programs requiring ongoing compliance, such as some of the employment credits, private companies can handle the administrative requirements for a percentage of savings.

Given the number of economic development programs, real estate companies may have a difficult time understanding their options. Not only are there too many programs to keep track of, but it also is important to understand how they might relate to one another. In some cases, participation in one program may disqualify a project from eligibility in another.

Case in point: to qualify for the federal historical preservation tax credit, a rehabilitation project may not be financed with tax-exempt bonds. This is one area in which it may be useful to have legal or other professional assistance.

Some programs can be pretty obscure such as the Department of Defense's community redevelopment support for closed military bases. In addition, qualification for some programs is often not based on a formula, but rather is the result of negotiation with legislators in the district. In many cases, areas attractive for development fall within a zone or district in which special financing or tax incentives are available. Maps and software illustrating these areas are often available from state and local development agencies.

Do Your Homework

Go into this process with an understanding of what types of federal, state and local programs are available and how they interact. In addition, become familiar with the unit's history in awarding discretionary incentives for specific projects.

As noted, all states and most municipalities have an economic development department or agency. In most cases, these agencies are business friendly and are organized to shepherd applicants through the process. However, the quality of the advice will vary, including the knowledge they have of different programs and the latest changes.

Also, remember that state and local agencies are designed to attract development and new business to their particular jurisdiction with the smallest incentives necessary.

For more info on available economic incentives, visit these Web sites:

Links to State Economic Development Agencies

HUD's Economic Development Web Page

Historic Preservation Tax Credits

Small Business Administration Loan Program

The Catalogue of Federal Domestic Assistance

Mark Hilpert is the tax and government affairs manager for Dykema Gossett PLLC, and heads the firm's economic development practice. He is based in the firm's Lansing, Mich., office. Hilpert can be reached at [email protected]

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