28 Apr Developer Incentives – A Necessary Tool
In this weekend’s newsletter one of our highlighted articles is: District Detroit Project Wins Nearly $615M in Tax Incentives From State Board. I thought it important to highlight some of the benefits of these types of incentives. In recent years, there has been a lot of discussion and debate around the use of public funding and tax incentives to support commercial real estate development. Some have argued that developers are already wealthy and don’t need these incentives, while others have questioned the effectiveness of these programs. However, we believe that developer incentives are necessary in the context of commercial real estate, and here’s why.
Firstly, it’s important to recognize that commercial real estate development is a complex and costly process. It requires significant upfront investment and carries substantial risk. Developers must navigate a wide range of challenges, including securing financing, obtaining permits, navigating zoning regulations, and dealing with unexpected issues that arise during construction. All these challenges can significantly impact a developer’s bottom line.
Secondly, while it’s true that many developers are wealthy individuals or corporations, this doesn’t necessarily mean that they have unlimited access to capital. The reality is that many developers operate on tight margins and rely heavily on debt financing to fund their projects. This means that any increase in the cost of capital, such as higher interest rates, can have a significant impact on their ability to complete projects.
Finally, it’s important to recognize the broader benefits of commercial real estate development. Well-designed and well-placed commercial developments can create jobs, increase property values, and provide new amenities and services to the community. These benefits can be especially significant in areas that have been historically underserved or neglected.
Given these factors, it’s clear that developer incentives are necessary in the context of commercial real estate development. Programs like Opportunity Zones, TIF, Brownfield, and NEZ can help to lower the cost of capital and increase the overall return on investment for developers. This, in turn, can make projects more financially feasible and increase the likelihood that they will be completed.
Critics of developer incentives often argue that they are too costly or that they primarily benefit wealthy developers at the expense of taxpayers. However, we believe that these concerns can be addressed by ensuring that these programs are well-designed and effectively administered. This could include implementing rigorous oversight and reporting requirements, ensuring that incentives are only provided for projects that have a significant community benefit, and requiring developers to provide detailed information on the financial impact of these programs.
In conclusion, developer incentives are a necessary tool for supporting commercial real estate development. Despite the perception of real estate developer’s net worth’s and relative needs for creative finance within the context of commercial real estate development, the reality is that these incentives can help to lower the cost of capital which intrinsically increases the likelihood that projects will be completed. Furthermore, these incentives can create significant benefits for communities by creating jobs, increasing property values, and providing new amenities and services well beyond the immediate surrounding area. Lest not forget that the larger economic picture our state, developers, businesses, are all in a competition on a global scale, these projects create advantages that go well beyond the visual impact to create a greater Michigan to call home.
Thank you for reading.
Kees Janeway – Managing Partner, ICONIC Real Estate