Tax Credits for Economic & Community Development

Commercial real estate developers with an interest in economic and community development can tap into multiple sources of support. Federal, state and local governments offer tax credits, grants, and subsidies that aim to stimulate economic growth, often in overlooked communities. At the same time, these programs help real estate developers fund important projects, often by lowering their tax burden.

What’s the Difference Between Commercial Development and Economic Development

Commercial and economic development are two sides to the same coin. In theory, the former helps the latter. Commercial development refers to any project built on private land, for profit, that is not heavy industrial or residential. Hospitals, shopping malls, and office buildings all fall into this category.

Economic development centers on projects designed to improve both the wellbeing and economic growth of a city or a neighborhood. Mixed-use developments in urban areas—which integrate retail, residential and cultural uses—usually promote economic development. When a corporation expands offices into a new city, creating hundreds of new jobs, commercial and economic development blend together to create complementary benefits.

Tax credits, subsidies, and grants exist to support a range of developments, from housing to technology to small business. Here are a few resources to consider when planning a new project.

New Markets Tax Credit Program

The United States Department of the Treasury’s Community Development Financial Institutions Fund (CDFI) explains how the New Markets Tax Credit (NMTC) Program uses tax credits to motivate private investment in underserved communities.

Under the program, investors receive a tax credit against their federal income tax in exchange for equity investments in Community Development Entities (CDEs). CDEs are financial intermediaries that fund businesses in low-income communities.

The tax credit is worth 39 percent of the original Qualified Equity Investment (QEI) made in the CDE, which is claimed over a seven-year period—a notable savings for investors. The program also helps boost economic development where it’s most needed.

Examples of developments that have blossomed under the NMTC program include Firelake Arena, a 52,000 square-foot entertainment venue in Shawnee, Oklahoma, as well as the Cade Museum for Creativity and Invention, which now has the space to provide STEAM (science, technology, engineering, arts, mathematics) education to low-income students in Gainesville, Florida.

Investors and CDEs have different financing structures available under the NMTC Program. Consult with a lawyer experienced in the program to see if it suits your business.

Opportunity Zones

Another federal “opportunity” dedicated to economic development lies in Opportunity Zones. Businesses willing to invest in low-income Opportunity Zones can receive tax incentives for doing so.

Currently, investors can defer taxes on capital gains until 2026. Capital gains must be reinvested in an Opportunity Fund within 180 days to maintain compliance. An unlimited amount of capital gains can be reinvested in an Opportunity Fund.

The benefits are two-fold: Investors avoid capital gains taxes and economically stressed areas have resources to grow. Although all property types can benefit from Opportunity Zones, property types available depending on location.

The IRS publishes a comprehensive list of Opportunity Zones. Interested investors should do their homework to find a knowledgeable fund manager who can help select appropriate properties, as well as Opportunities Funds with the lowest fees.

Capital Magnet Fund

Real estate developers interested in affordable housing can apply for a grant through the U.S. Department of Treasury’s Capital Magnet Fund. The program awards grants to finance affordable housing and community revitalization efforts that benefit low-income individuals and neighborhoods.

Recipients—primarily nonprofit developers and CDFIs—can use grant funds to create loan loss reserves, loan funds, equity funds, risk-sharing loans, and loan guarantees. At least 70 percent of the grant money must be allocated for affordable housing. Recipients can use the remaining 30 percent to finance development linked to affordable housing.

The Capital Magnet Fund’s benefits multiply. When grant recipients invest in affordable housing, the community benefits. As the community benefits, it attracts private investors, which supports economic development even more.

Low-Income Housing Tax Credits

Another incentive geared toward affordable housing, the Low Income Housing Tax Credit (LIHTC), helps fund the acquisition, rehabilitation, or new construction of rental housing for lower-income households. Enacted in 1986 and modified several times, the U.S. Department of Housing and Urban Development estimates the program has helped create more than three million homes between 1987 and 2017.

How it works: The federal government awards tax credits to state and territorial governments. State agencies then award credits to private affordable housing developers. Developers often sell credits to private investors to secure funding. Once the project is complete and renters move in, investors can claim the credit over a 10-year period.

The rules around computing and allocating the credit get complicated, which is one of the downsides to participating in the program. Critics also argue that state finance authorities tend to approve projects in economically limited areas. However, with the advent of Opportunity Zones, this may change.

State-Based Tax Subsidies and Credits

State tax incentives play a key role in economic development activities. States use incentives as part of their proposals to attract new businesses. States may use these incentives to boost growth in a specific region or to build business in certain industries.

While supporters claim the new jobs and increased economic activity outweigh the cost of the tax breaks, detractors say they are an inefficient use of resources. Nonetheless, almost every state offers multiple types of tax subsidies and credits.

For example, to encourage agriculture, Nebraska offers a credit to landlords that rent to new farmers. Several states offer incentives to high-technology facilities and data centers.

Incentives can snowball when major corporations are involved. For example, the Commonwealth of Massachusetts and the City of Boston offered General Electric a “mega deal” that included $25 million in property tax incentives, $1 million in employee training, and additional investments in infrastructure and transit upgrades.

Because it’s debatable whether states receive a good return on their investments, the government is calling for improved reporting. Even so, states will likely continue to offer incentives to companies that offer economic growth potential.

Commercial real estate developers have many resources at their disposal, especially if they’re willing to invest in lower-income communities. Research opportunities at the federal, state and local levels to find ways to save.