Enterprise zones and opportunity zones are essential concepts for your development team to understand as you look for up-and-coming markets to break ground in. Federal and local governments designate geographic regions, often impacted by economic distress or blight, and offer businesses, developers, and investors tax breaks, regulatory exemptions, and other financial incentives to build there. By selecting a market designated as an enterprise or opportunity zone, your team can save money in the short term by keeping costs down and expediting the development process, and see long-term financial benefits as property values in the region increase.
Here’s everything you need to know about enterprise and opportunity zones, and how your development team can benefit from these initiatives:
What Is an Enterprise Zone?
Enterprise zones are geographic regions where the government offers special tax breaks, regulatory exemptions, or other financial incentives to encourage private economic development and spur job creation. Enterprise zones are often created in areas in need of revitalization or experiencing economic distress.
Individual states have been using enterprise zones since the 1970s to stimulate business in underserved or struggling communities. However, the federal government’s official program, known as Empowerment Zones, Enterprise Communities, and Renewal Communities, was created in 1994. While most states have their own enterprise zone programs, many are funded through the federal program.
Investment & Tax Benefits
Businesses that operate in enterprise zones may be eligible for a variety of tax credits or benefits. Here are several examples of tax credits or financial incentives available to entrepreneurs in enterprise zones:
Hiring Tax Credits: Hiring tax credits are often among the most lucrative available, offering employers to take credits for each qualified employee, based on wages over a certain period. Job creation credits may also be available, offering credits against taxes for each new job created within the zone.
Property Tax Abatement: Property tax abatements are among the incentives most relevant from a development standpoint, reducing or eliminating property taxes over a certain time period to encourage development and improvement of properties. Abatements are often offered as discretionary subsidies, granted by state and local governments to companies on a case-by-case basis. In enterprise zones specifically, property tax abatements are often offered as entitlement subsidies, where owners pay no or reduced taxes for an agreed-upon period.
Net Interest Deduction for Lenders. Lenders who make commercial loans to businesses located solely in enterprise zones may be exempt from state income tax on the net income interest earned on a loan, potentially resulting in lower interest rates for borrowers. Developers have struggled with high interest rates and stalled capital deployment amid the economic uncertainty of the past couple of years, and enterprise zone incentives may result in easier access to capital
Tax Increment Financing (TIF). Tax increment financing is used to finance redevelopment projects or other investments in anticipation of future tax revenue resulting from new development. Local governments designate a district or an area in need of redevelopment and determine a base value for properties. Then, TIF bonds are issued to finance the project and are repaid using future property tax increments generated by the increased future property tax increases.
What is an Enterprise Zone in Real Estate?
Enterprise zones have several key benefits for developers looking to build new properties or commit to adaptive reuse projects. By committing to investing and developing in an enterprise zone, your team will help create jobs, boost economic growth, and revitalize communities in need. You will also find additional upside in the form of tax incentives, a streamlined regulatory process, and financing perks.
Tax incentives are the main benefit of developing in an enterprise zone. Your projects may be eligible for property tax abatements, the reductions and exemptions on property tax for owners, Income tax credits and sales tax exemptions may also prove beneficial, offering credits against state or local income taxes and exemptions on sales tax on construction materials or tools needed for your project. Your team may also be able to expedite the regulatory process, as projects in enterprise zones are often eligible for faster permitting processes and zoning regulations may be less strict to encourage development in the region.
While perks for investors may also make the lending environment more promising, you may also be eligible for low-interest loans. Favorable financing options are often offered by banks or other private lenders to support development projects within an enterprise zone. All incentives offered in an enterprise zone are regional, and due diligence on state and local policies will be essential for taking advantage of such opportunities. Understanding the public and private benefits enterprise zones in individual states offer to developers can help your team select the next market to pursue.
What Is an Opportunity Zone in Real Estate Development?
Opportunity zones are designated areas designed to allow people to invest in distressed areas in the United States. In certain areas, new investments in opportunity zones are eligible for preferential tax treatment. Opportunity zones were created under the Tax Cuts and Jobs Act of 2017, and most projects created through the program thus far have been market-rate multifamily housing. There are currently 8,764 opportunity zones in the United States. You can identify opportunity zones using databases from the Internal Revenue Service or through the U.S. Department of Housing and Urban Development.
Investment and Tax Benefits
The federal program currently provides three separate tax incentives for investing capital gains in opportunity zones:
- Temporary deferral of taxes on previously earned capital gains. By placing existing assets with accumulated capital gains into opportunity funds, those capital gains will not be taxed until 2026 or when the asset is disposed of
- Exclusion of taxable income on new gains. Investors will pay no taxes on investments held for at least 10 years with capital gains produced through Opportunity Funds
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- Basis step-up of previously earned capital gains invested in Opportunity Funds. Capital gains invested in Opportunity Funds for at least 5 years will see the investor’s basis on the original investment increase by 10%
Tax incentives offered in opportunity zones can be used for commercial or industrial real estate projects, as well as other housing, infrastructure, or business development.
Opportunity Zones’ Impact on CRE Development
The tax incentives offered to investors in opportunity zones may facilitate capital deployment and make getting projects off the ground easier for your development team.. Investors who may have been reluctant to invest in economically distressed areas, or who have been spooked by the current interest-rate environment, may be more inclined to fund projects in opportunity zones due to the substantial tax incentives. Opting to build in an opportunity zone can be one strategy for your team to overcome stalled capital markets.
Your development team may also be able to take advantage of public-private partnerships as governments and private businesses come together to help revitalize an economically distressed area. Local governments may also offer additional incentives to developers working in Opportunity Zones, such as an expedited permitting process, grants, or other abatements. Building in an opportunity zone also gives your firm the chance to help improve local infrastructure and create jobs, bolstering your reputation as a positive and socially responsible force in relevant communities.
Investors and developers must meet the strict regulatory requirements of the opportunity zone program to benefit from financial incentives. However, opportunity zone eligibility requirements are not as robust as those of other federal programs, such as the Low-Income Housing Tax Credit (LIHTC) initiative. If your team wants to ensure success on a project with regulatory requirements, technology can play a key role in streamlining the compliance process and mitigating risk.
Leveraging Technology to Facilitate Enterprise Zone Projects
Technology can play a key role in helping your firm execute projects in enterprise or opportunity zones, ensuring your projects using government funding are compliant and come in on time and on budget. Modern real estate development software can act as your command center over a complex development process, helping you manage your entire real estate portfolio and keep your team organized. You can automate and standardize important reports and dashboards to make sure you’re always informed of project performance;
Northspyre’s is the only CRE platform with a tailored solution for complex capital management, mitigating risk and enabling a seamless end-to-end development lifecycle on projects with complicated source structures and requirements. The platform allows you to enable consistency and improve profit margins on projects with complex capital stacks with complete visibility, predictive intelligence, and actionable insights that keep teams agile and in control through each stage of development. Leveraging Northspyre for your projects with complex capital stacks empowers you to decrease risk, win more deals, and yield predictable outcomes as well as higher returns.
Download our ebook A Real Estate Developer’s Guide to Low-Income Housing Tax Credits to learn more about making the most of government funding opportunities.
