Do you ever wonder why it is very difficult to attract investors for redevelopment projects, recruit a specific type of business to your hometown or drum up interest for adaptive reuse of existing buildings?
The answer may be simple. These projects may have a higher risk for failure or experiencing unforeseen challenges. This creates uncertainty which in turn discourages investment.
To reduce an investor’s financial risk for these types of projects, municipal officials are beginning to offer performance-based incentives. The incentives reduce the upfront development and operating costs by rebating a portion of tax or fee revenue generated by the development activity or business startup. Income tax, property tax and fee credits are the most common vehicles used to grant this kind of incentive.
Credits increase an investor’s equity and improve cash flow. This can often be the positive difference between the revenue generated and expenses paid by the business. Strategic use of incentives can make the difference between a marginal venture and a profitable one.
Such performance-based incentives require projects meet certain eligibility thresholds determined by local officials. The thresholds address identified public purposes. Common thresholds include adherence to historic preservation standards, minimum investment levels and minimum number of jobs created.
"Municipal officials that use performance-based incentives understand that without these incentives to lower an investor’s risk, the potential for new investment may be limited," explained Eric Budds, the Association’s deputy executive director.
Not only do these incentives reward investors willing to take a risk, they also benefit the municipality by generating new revenue and economic activity which would not otherwise occur.
A municipality has minimal risk or financial exposure for offering these incentives because the credit (or rebate) occurs after the investor has paid the taxes and fees being rebated and the project has achieved the predetermined thresholds. If the investment fails to meet the required threshold, the municipality does not owe the investor the rebate.
South Carolina is fortunate to have access to highly effective state and federal incentive programs. Some allow the investor to choose between income or local property tax credits if the city agrees to offer this option. In certain circumstances, these incentives can be combined (or stacked) to maximize the benefit to the investor.
Municipalities may also design local incentives if there is a clear public purpose to do so. The scope or extent of a local incentive program and the amount of money rebated are policy decisions left to the city council.
Considerations often include the public need for the investment and the level of risk assumed by the investor. The length of the incentive program is also a local decision. In some instances, incentives can be closed to new ventures once incentivized projects have attracted sufficient private-sector investment. In other cases, especially where significant challenges exist, the incentive program may be a long-term program.
The adage "nothing ventured, nothing gained" aptly describes economic development in redevelopment areas. Doing nothing to promote development will likely mean no investment occurs. Strategically using performance-based incentives significantly increases the odds of attracting investments.
The Association’s website has information for local officials about available economic development tools. "The site provides a series of articles summarizing available incentives and key provisions of each program," said Budds. Other resources include sample South Carolina incentive ordinances and a white paper on economic development incentives with a description of the public purpose test that must be applied when considering local incentives to ensure they are legal.