As the credit crisis intensified and the U.S. economy struggled in late 2008, state and local governments faced a critical task: addressing the decline in incoming revenues necessary to support their states and communities. While the federal stimulus package provided a boost, states and local governments turned to additional economic reforms – including incentive programs and other policies – to address the full scale of their economic and fiscal needs. However, as the economy has improved, state and local governments have shifted from incentives back to mandates which often directly and negatively impact the private sector, including commercial real estate.
In 2009, the federal government offered assistance to state and local governments with the passage of the nearly $800 billion stimulus package, known as the American Recovery and Reinvestment Act of 2009 (ARRA). The ARRA was intended to stimulate economic activity through government spending and provide state and local governments with additional federal resources and subsidies to address spending gaps as the economy slowed. The additional resources were provided to states and local governments through increased funding for the Community Development Block Grants and other similar programs.
The infusion of federal spending helped, but it did not prevent state and local governments from having to implement reforms in order to manage resources and deal with the economic downturn. The economic crisis provided an opportunity for state and local elected officials to work with the private sector – including the commercial real estate industry, labor unions and interest groups – in the development of government programs and policies intended to spur economic activity and job creation. This included economic incentives to spur urban and industrial development through historic preservation tax credits and industrial reinvestment tax deductions. In some instances, the incentives approach served a dual purpose of creating jobs and achieving a policy objective; tax abatements for affordable housing and solar energy incentives are two such programs. However, state and local efforts to bridge the recession and spur economic activity were not limited to financial incentives, but also included regulatory reform to streamline permitting processes to “shovel-ready” development projects.
While not perfect, the economic approaches to overcome the economic downturn required a little give and take from all parties: public sector, private sector and interest groups. However, as the country emerged from the recession and the unemployment rate dropped from 9.6 percent in August 2009 to 4.9 percent today, the working relationship between these parties has been tested as many state and local governments shift their attention to mandates and fees over incentives in order to achieve objectives and generate additional revenue. Commercial real estate and the private sector are often the target of these mandates and fees without consideration of the cost or economic impact. Because of this, it is important for the commercial real estate industry to remind policymakers of the economic effect of their actions and the potential for unintended consequences that may discourage economic growth. This is evident at the local level where many cities are considering energy efficiency requirements, including unfunded mandates for commercial real estate owners to benchmark their properties for energy usage. Rather than provide an economic incentive, these unfunded mandates place the burden on the property owner to collect the data from tenants and then report the data for benchmarking purposes, that is often publically disclosed, without any financial support from local governments.
The same could be said of local efforts to raise impact fees on commercial real estate to generate funds for local projects and initiatives. The commercial real estate industry must remind policymakers of the potential for an excessive fee structure to serve as a deterrent in the development and revitalization of downtown and industrial corridors. This was evident during the 1990s when local officials in San Diego placed a high linkage fee on commercial development for affordable housing that ultimately discouraged job creation and downtown redevelopment until it was reduced.
The economic crisis of the last decade created an opportunity for the public and private sectors to work together in developing economic strategies and reform government programs in order to encourage economic growth and job creation. However, as the economy improved, state and local governments, in particular, appear to be trending back towards more government mandates, regulations and fees, in place of incentives, in order to achieve an outcome or fund a government program. Because of this, NAIOP and its chapters must continue to participate in the development of public policy and programs to ensure balanced and sound approaches are implemented that do not focus solely on commercial real estate, and which also do not hinder economic growth and development.
Toby Burke is the Senior Director of State and Local Affairs for NAIOP.