The Often-Overlooked ROI Booster (Incentives)

Posted by Jeremy BraschFeb 27, 20180 Comments

One of the most important factors to consider when investing in real estate is the Return on Investment (ROI). Projected ROI is crucial today as investors are evaluating whether to continue investing in real estate (a bull market at present) versus traditional mediums, such as the stock market route. There are a lot of costs that can negatively impact the ROI of a project including property taxes, construction costs, infrastructure needs, and utilities. But there is an often-overlooked ROI booster that can reduce the burden of these costs: the creation of a public-private partnership through incentives.

Incentives are a financial tool used by the government to create jobs and add tax revenues in target jurisdictions. A project needs to provide a significant economic impact to qualify, but when those qualifications are met, incentives can provide a reduction in property taxes, utility rates, or offset development costs.

One such public-private partnership was formed in Cramerton, North Carolina with the Villages at Cramerton Mills. The developer was facing a total development cost of more than $110 million to develop the mixed-use community that included residential neighborhoods with green homes, retail space, office space, light manufacturing, and university-level institutional space. To enhance the viability of the project and accelerate the development, a partnership was formed between the town, county, and the developer. In this case, the town and county participated by agreeing to reimburse 60% of the infrastructure costs tied directly to the commercial portions of the development (mostly new roads that had to be installed), which amounted to reimbursement of more than $5.5 million.

This public-private partnership created numerous benefits for the town and county. When the partnership was approved, the project was scheduled to be completed in 2020. The development was projected to create a combined $19.5 million in real property tax revenues for the town and county by 2030, additional tax revenues from more than $20 million in personal property tied to the light manufacturing component, increased sales and use tax revenues, create more than 300 permanent full-time jobs and more than 500 temporary construction jobs. For the developer, a 60% refund in commercial roadway costs inspires confidence in investors, attracts additional investors, and provides a significant, tangible boost to the project's ROI.

Another example of a public-private partnership was formed between Douglas County, Georgia, and the developers of the 95-acre Foxhall Conference Center and Resort Hotel. In this case, Douglas County along with the Douglas County Development Authority approved a 30-year reduction in property taxes for the developers.   

From the county's perspective, a partnership in a project like this can help create permanent, full-time jobs, attract business conferences and social events, and generate significant hotel tax revenues. On the private side of the partnership, the developer and investors minimize risks as the ongoing operational costs are reduced. Any time you can cross off a big ongoing expense from your pro forma, such as property taxes, it is going to provide a nice boost to the projected ROI.  

Does every real estate development project qualify for a public-private partnership? No, there must be a significant economic impact through job creation and tax revenues before a partnership will even be considered. However, when the government participates, these partnerships can provide numerous benefits on the public side. And on the private side? Well, a boost in ROI makes every investor smile.