By Andrew Hanzl
When was the last time you checked your city’s economic development website? If it has been a while or you have never seen what the city has to offer, you are missing out. Incentive packages might be available to help substantially reduce the initial construction/renovation costs of your commercial real estate project, as well as increase your project’s ongoing NOI. Cities are also motivated to award these economic incentives as they lead to new projects and redevelopment of older projects, which translates to job creation, more tax dollars, and a better quality of life for the residents. Just look at the craze Amazon has created by announcing their intention to build a $5 billion headquarters somewhere in the United States. The thought of creating 50,000+ new jobs, and the following ripple down economic stimulation has caused major cities throughout the United States to throw billions of dollars of incentives at Amazon. And for good reason, because it has been estimated that Amazon’s new headquarters will add $17 billion in economic benefit per year.
There are a handful of ways that these public incentives work. Typically, they revolve around the abatement, or reduction, of taxes otherwise payable in connection with a development. A typical menu of abatements might consist of real property ad valorem taxes, sales taxes, income or franchise taxes, and impact fees. Public incentives can also involve low-interest loans, tax-exempt financing, and direct grants for infrastructure purposes. Various incentives are often combined to structure a package that best benefits the city and the developer.
In general, public incentives are restricted to covering the costs of infrastructure that are considered “public improvements,” meaning streets, curb and gutters, sidewalks, cross drainage, water supply systems, traffic control, etc. However, most development budgets are filled with line items that would be considered public improvements, so the potential for savings is huge.
Now that you are aware incentives are available, you might be thinking, what’s the next step? Perhaps the most important step is focusing on meeting the right people and gathering the necessary support to be awarded with the incentives. Amazon aside, most developments are too small to cause competition between multiple states. This means identifying one or more key local officials and recruiting them to support your cause. These officials make their decision to support a project by considering the positive and negatives effects of the undertaking. In preparation, the developer should have adequately thought out how their project will positively benefit the city, and counterarguments of any negative effects. Some of the direct benefits to consider include quantifying the number of jobs created (during construction and permanently during operations), additional property taxes and sales taxes collected, etc. In other words, how much direct economic activity will be created if the project is completed? Although harder to quantify, the city will also consider indirect effects, also referred to as multiplier effects. For example, how the surrounding businesses, suppliers, and residents will be positively affected. Once the developer has an estimation of the positive impact they would be creating, they are now able to make their case to the city in hopes of being awarded economic incentives.
At Metropolitan Capital Advisors, we are currently working on a high-profile deal where our client just successfully navigated the Dallas City Council process and was awarded $22 million in incentives to help transform the Red Bird Mall in South Dallas into a live, work, play mixed-used development. Of the $22 million, $10 million was awarded in grants, which do not have to be repaid, and $12 million was awarded in the form of a low-interest loan that will be repaid by tax rebates from the city’s mall area redevelopment TIF district. That is real savings that our client earned by doing his research, meeting the right people, and proving to the city how the funds will be put to good use.
If you would like more information about economic development incentives or would like assistance in securing financing alongside incentive packages, please contact Andrew Hanzl at email@example.com.
The Author, Andrew Hanzl, is a Senior Analyst in the Dallas Office of Metropolitan Capital Advisors.