Impact Study: Even in an Economic Downturn, There are Safe, Profitable Opportunities for Real Estate Developers
by William O. Higgins and Christian L. RogersDevelopers often take economic risks to work within the communities that need help the most. Recognizing that, both state and federal government have tried to make it easier for investors and developers to take on projects that enhance a community’s quality of life and strengthen its economic base through tax breaks. However, many developers miss what can be lucrative opportunities because they are simply too busy to stay on top of complex and ever changing tax incentives.
How then, does one avoid missing these government-created windows of opportunity? First, find out what advantages exist within current tax incentives, and then work with competent legal counsel to take full advantage of these opportunities.
In a previous Ellis Lawhorne Impact Study, we looked at a specific project to renovate an historic upstate textile mill into loft apartments. (See Impact Study: Tax Credit Equity Financing for Income Producing Real Estate Development.) In that transaction, the developer utilized three types of tax credits: federal and state historic rehabilitation credits and state textile mill rehabilitation credits.
There are other tax incentives that we’d like to bring to your attention as well, which also offer extremely favorable terms for developers. These incentives can help fund certain types of real estate development including:
- Low-income residential housing
- Commercial development in less affluent markets
- Redevelopment of abandoned shopping centers
The Low Income Housing Tax Credit Program gives the South Carolina State Housing Finance and Development Authority a portion of nearly $5 billion in tax credits for the acquisition, rehabilitation, or new construction of rental housing targeted to lower-income households.
What it does for developers:
- Developers can utilize these credits to get much needed equity capital from tax credit investors.
- With more equity capital in the project, debt financing is easier to obtain.
- It helps make costly low-income housing projects profitable for developers.
What it does for communities:
- Encourages development of low-income housing projects in communities when market rate projects are otherwise more attractive to developers and investors.
- Enables placement of low-income housing in more affluent communities.
- Revitalizes communities and provides quality housing to individuals who are otherwise unable to afford such housing.
The New Markets Tax Credit Program offers support to businesses, developers, banks, and others that invest in low-income census tracks. This program has often been used by financial institutions to make loans for development in less affluent communities.
What it does for developers:
- Provides highly attractive debt financing for commercial real estate investments in less affluent communities.
- Helps bridge the gap between costs and income production associated with ventures that would otherwise be unprofitable.
What it does for communities:
- Encourages business development in less affluent communities, spurring revitalization.
- Creates a higher quality of life for residents.
The Retail Facilities Revitalization Credit in South Carolina offers an incentive to redevelop abandoned shopping centers that have often become eyesores in their communities.
What it does for developers:
- Allows developers to raise substantial amounts of equity from tax credit investors to help fund their project.
- Makes eligible projects more profitable for developers.
What it does for communities:
- Encourages redevelopment of run-down, abandoned shopping centers into attractive structures that attract new businesses into communities that are often in economic decline.
- Attracts other economic development and revitalizes communities that need it the most.
Another tax incentive that may merit consideration by commercial real estate owners and developers in the future is the Energy Credit. The Energy Credit offers developers and businesses incentives to utilize certain alternative energy sources such as solar, fuel cells, and geothermal power. While the cost of these alternative energy sources has been prohibitive in the past, even with tax incentives, rising energy costs and environmental concerns are making such energy sources more and more attractive.
What it does for developers:
- Offsets upfront costs of equipment that provides energy from alternative sources.
- Saves on utility expenses to increase cash flows.
- Allows developer to market building as environmentally friendly.
What it does for communities:
- Complies with environmentally friendly community policies.
- Encourages other environmentally friendly development in the community.
- Creates positive social “energy” among residents seeking sustainable place to live and work.
South Carolina offers opportunities suited for many of the development tax credits given by the federal government. Coupled with state incentives, developers can end up with a powerful tax incentive package.
These incentives are complex and some are subject to change. We invite you to call Ellis Lawhorne to discuss the possibilities of your project qualifying for these or other tax breaks.
