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The Value of Economic Development Incentives

We recently talked about the growing trend of commercial redevelopment projects and briefly touched on why cities love reuse projects. Simply put, they help drive economic growth and activity. And that’s why so many municipalities are providing vehicles to drive, promote, and enhance redevelopment projects.

Incentives vary in a number of ways, from commercial redevelopment grants to property tax abatements and are unique from city to city and state to state.

Types of Incentives

  • Tax Increment Financing (TIF) - Cities also use tax increment financing, or TIF, as public financing to subsidize redevelopment, infrastructure, and community improvement projects. This incentive refunds or diverts a portion of a businesses’ taxes to help finance a project.

  • Government Property Lease Excise Tax (GPLET) - This is another driver for redevelopment as it reduces a project's operating costs by replacing the real property tax with an excise tax.

  • Capital Improvement Plan (CIP) - Public funds established for capital improvement projects such as infrastructure can also be used for economic incentives for private developments.

  • Permit/Impact Fee Waivers and Rent Abatement - Fee waivers and rent abatement incentives can simply reduce the occupancy costs for the targeted business.

How They’re Driving Smart Commercial Development

With corporate investment decisions being cost-obsessed, incentives are becoming more critical to location decisions, and in some cases, can make a difference to whether a project is approved at all.

construction activity.jpgThe most useful incentives will be those that enable corporations to justify their investments either by driving down initial project costs or by achieving favorable long-term economics.

The start-up period of a new operation is where incentives such as cash incentive payments have the most value. The biggest transition point for a company is when a facility is being constructed or renovated. Those cash incentives go a long way in assisting with site improvement costs and equipment purchases.

Additionally, measures such as TIF were originally intended for use only in areas deemed “blighted” or “distressed” where investment would not otherwise occur. The ultimate goal is to introduce projects that meet some type of community need or benefit.

Incentive programs are not established to merely draw on a singular commercial development objective but are used as a promoter of continual, organic economic development.

The Competition

In some ways, incentives are the cost of doing business in today’s marketplace. For communities and states that offer incentives, it allows them to remain competitive, attract new business and can help spawn additional economic development. It also helps establish guidelines and policies for municipalities to use on multiple occasions, helping to streamline processes.

5-Things-Driving-Investment.pngHowever, those cities that either don’t offer incentives or provide weaker incentives can be at a competitive disadvantage when it comes to development appeal. Businesses are going to favor cities with tax incentives. Or, favor a city offering 10 years of tax abatement versus 5 years.

When initially opening a new store, facility, etc, operating costs tend to run higher than average. So, businesses that DO receive commercial development incentives likely see lower tax liability which helps offset those higher costs.

And for businesses that don’t receive incentives, it can create competitive disadvantages as they take on greater tax burden than those receiving incentives. Couple that with somewhat lingering credit access problems, and it becomes rather difficult for some companies to maintain operations.

They may even experience additional financial burden, considering the financial shifts away from businesses receiving incentives.

Tags: Redevelopment Commercial Real Estate Development Trends Commercial Real Estate Development

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