Real estate developers and owners provide the commercial and residential space for individuals to live, work and play. State and local governments can play an important role in supporting this through incentives and other measures that ensure development projects financially “pencil” and are economically sustainable over the long term.
Tax Increment Financing (TIF) districts are one such incentive that can boost economic development and economic growth within certain established areas of a community. According to the Illinois Department of Commerce and Economic Opportunity, state law allows local governments to establish TIF districts that dedicate a sales tax or additional property tax increase to finance costs associated with development and redevelopment projects that generate economic activity and job creation within certain areas. Qualified projects for TIF benefits include:
- Redevelopment of substandard or vacant properties
- Financing public infrastructure improvements
- Environmental cleanup
- Improving downtown business viability, including historic preservation
- Providing infrastructure to develop sites for new industrial or commercial use
The NAIOP Chicago chapter recognizes the imports of TIFs in the state and has released a report highlighting its benefits as an effective tool in spurring economic development and job creation. The report also notes that TIFs have strengthened the tax base in economically challenged areas within northern Illinois.
State and local governments may utilize other available tools in spurring and contributing to the long-term viability of a completed development project. These tools include tax credits and abatements for certain activities, such as historic preservation, affordable housing and recycling. In fall 2020, Fairfax County, Virginia, established a new Economic Incentives Program that includes “multiple financial and regulatory incentives” in certain areas of the county. The county’s incentives program involves partial tax abatements of the real estate taxes and annual adjustments to the assessed value of the tax-exempt portion of the property.
Some may have concerns with incentives and abatements because they are subject to political influences and may ultimately expire. However, there are other ways for state and local governments to indirectly influence and spur economic growth and development. A winter 2019-2020 NAIOP article highlighted the role of liquor license policies in boosting real estate development and attracting patrons to strip malls and other properties. Once there, they may visit and shop at other establishments. NAIOP New Jersey CEO Michael McGuiness noted that “restaurants have proven to be desirable anchors for redevelopment projects, magnet for other businesses and an amenity for a population that is out more.”
Establishments serving alcoholic beverages are traditional places that bring people together for dinner, celebrations and sporting events. However, New Jersey, along with Wisconsin, are states with Prohibition-era restrictions that limit the number of liquor licenses based on population rather than demand. These limitations impede development and revitalization projects from achieving their full economic potential and may discourage projects in cities seeking to attract private businesses and jobs.
The development of real estate can be complicated, unpredictable and inconsistent depending on the state or local jurisdiction. NAIOP’s The Center for Education has produced an online course concerning the essentials involved in the development process, that includes securing the appropriate permits and entitlements, such as zoning and occupancy, from governing entities. The local permitting process plays a critical role and can be challenging for developers. NAIOP’s Research Foundation has provided a local approval index that compares permitting processes in various jurisdictions that can assist developers and owners in understanding and making informed decisions and so that local governments can benchmark processes among neighboring cities and states.
Commercial real estate development comes with other challenges as well. Besides obtaining permits and entitlements, commercial developers and owners must negotiate agreements with several non-government entities in order to move a project forward. These non-government entities include financial institutions, labor unions, contractors and material suppliers. These agreements come with a cost that may impede and ultimately prevent a project from being economical viable absent a state or local incentive and other available program on the back end of a completed development project.
Developers and owners assume the risk that a commercial real estate project will be economically and financially sustainable, and state and local governments can help lower the risks and challenges by strengthening programs and processes that promote commercial development and economic growth.
Toby Burke is the Senior Director of State and Local Affairs for NAIOP.