Finding Free Money with Tax Credits and Abatements

Today, we’re going to talk about tax credits and abatements. But before we do, let’s talk about why they’re an increasingly important part of any potential development deal.

We’ll start with cost. We all know that development deals are getting more expensive. From rising construction costs and higher interest rates to cooling markets and legislative uncertainty, it’s getting harder for deals to pencil out. That uncertainty and heartburn isn’t dissipating any time soon. But the interesting thing about market pressures is that those same pains are often felt by state and local governments, albeit in a different way, and they usually result in opportunities for real estate developers. Here’s why.

Local governments depend on private investment by businesses and developers to increase their overall tax base. And when times are tough in business and real estate, those same local governments feel the pinch, too. What I have seen (and experienced first-hand as an elected official) is that local stimulus is often needed to keep the tax coffers full. Especially if you’re not a proponent of simply raising tax rates. Jurisdictions usually rely on a couple of different levers to stimulate the investments they need to generate much-needed revenue. And because most of a local government’s tax revenue comes from real estate taxes, they often begin dishing out those opportunities in the direction of developers first.

So, what are those levers? Quite often they come in the form of tax credits and abatements. And over the last 20 years, these programs have become widespread. Unfortunately, they are also fraught with misunderstanding, fine print, and nuances that can lead to confusion, misapplication, and even missed opportunities.

Now, what do these programs look like? Well, most developers are familiar with the major tax credit food groups: Revitalization and remediation.

Revitalization. These credits are established by state and local jurisdictions to incentivize redevelopment in areas that are underserved, underinvested, or blighted.

Remediation. These programs are primarily focused on incentivizing a developer to build on an environmentally contaminated site, cleaning it up in the process, in exchange for tax credits.

At Cavalry, we have achieved tens of millions of dollars in tax credits in both buckets for our clients, with most of that being found money that our clients were unaware existed in the first place. However, getting it done is not straightforward. Because while it’s easy to search online to see what tax credits may be available, it’s something altogether different to make sure a development qualifies and receives those credits.

That’s because many tax credits listed online can be laden with pitfalls. For example, Enterprise Zone Tax Credits, which fall into the revitalization bucket, often have limits and expirations. Those programs require dedicated funding and commitments that if not carefully monitored could result in you underwriting significant tax savings and an accepted application to later find out that the program was decommissioned or expired. One very prominent firm in the mid-Atlantic stepped on such a land mine, advising their client that such a tax credit program existed. The project was approved, constructed, and delivered based upon the assumption the developer would be receiving that substantial tax credit, only to find out the program had expired several years prior to the start of the project. That poor bit of advice and the firm’s fundamental misunderstanding cost their client more than $10 million in losses and resulted in a lawsuit between the client and the firm. In short, it pays to do your due diligence when it comes to these programs, which is where the Cavalry team shines.

On a more positive note, as local governments continue to find creative ways to stimulate investment, there are often tax credits available that are not listed publicly. I like to call these “off-the-menu” tax credits. Jurisdictions have the flexibility to serve as deal makers and quite often the local economic development offices have some additional tools to drive investment. You simply need to know where to look and what to look for.

For example: PILOTs, TIFs, empowerment zones, technology/innovation overlay districts, commercial rehabilitation property tax abatements, income tax credit for local hires, sales and use tax exemption on business property, personal property tax accelerated depreciation schedules, partial real estate tax exemption for affordable housing, bonus density, and many more. As you can see, the credits are there, but the list is mind-numbingly long. Having a trusted advisor who meticulously tracks these programs and understands how to qualify is important. Equally important is running sensitivity analyses to carefully quantify the potential savings.

Here’s the bottom line: Free money is out there. State and local jurisdictions can be generous. You just need to know where to look and how to measure it. Your best bet to get it done right? Call in the Cavalry, of course.