Tax Incentives For Real Estate Owners And Lessees

Friday, April 1, 2005 - 01:00

Editor: Ken, here in New York City and also in the surrounding areas, there are a number of tax incentives and other programs designed to encourage real estate investment. These programs make it important for investors/owners to look beyond the first level of numbers when considering their real estate transaction strategies. Can you provide a little insight into these programs?

Weissenberg: Well, when making real estate decisions, the deciding factors may not be a result of direct negotiations between the parties of the transaction, i.e. buyer and seller.Sometimes the key to a transaction can be found in government-provided incentives designed to attract business or capital to a particular location.A variety of programs exist on the federal, state and local level that can provide significant financial assistance and incentives. These programs range from low interest financing, tax credits, real estate tax abatements, employment credits, and even reductions in energy costs.These programs may radically improve the bottom line of the corporate real estate end user.

Editor: What are some of the tax incentives available to owners or lessees of real estate?

Weissenberg: Among the federal programs is the Rehabilitation Tax Credit , which provides a federal tax credit of up to 20% of the cost of rehabilitating a certified historic structure and a credit of 10% of the cost of rehabilitating other qualified property that was placed in service prior to 1936.This credit can be passed through to a lessee of the property. Another interesting federal program is the New Markets Tax Credit , available for certain investments in low-income community businesses.This credit, which is available over a seven-year period, can amount to a total credit of 39% of the amount of the investment.

Editor: Are there specific programs available for taxpayers at the state or local level?

Weissenberg: States have the ability to assist business with the issuance of special purpose bonds.These bonds are treated as issued by the state so that the interest on the bonds is exempt from both federal and state taxation (but is a preference for the federal Alternative Minimum Tax).The proceeds of the bond are used by the state to fund a specific project, i.e. the construction of a factory for a private company.

Each particular state also has its own programs and incentive to attract and retain business.New York, for example, has an Empire Zone Incentive Program which rewards businesses in certain designated economically depressed areas with wage credits, credits for real property taxes, and tax reduction credits as well as a 10 year exemption from sales tax on goods and services (including utilities). New York State also has financing incentive programs that offer businesses direct loans and grants, interest rate subsidies, and a linked deposit program that provides businesses with affordable capital based on bank loans at reduced interest rates. These bank loans are subsidized by "linked" state deposits.New York even has a low cost energy program for qualifying businesses.A variety of New York State programs can be found on the New York State website, www.nyloves biz.com.

On top of the New York State programs, New York City has a host of additional tax and financial incentives to offer businesses located within the city's borders. One such program is the Industrial and Commercial Incentive Program (ICIP) . The ICIP provides real estate tax exemptions for rehabilitated or newly constructed commercial or industrial buildings.The benefits can last for up to 25 years depending on the location.In order for a property to be eligible for the ICIP exemption, capital improvements to the property must exceed 10% of the buildings assessed value for commercial properties.

New York City also has expanded tax benefits and other incentives specific to certain areas within the city.The Commercial Expansion Program (CEP) provides a laundry list of potential benefits to help businesses relocate and expand in these zones.The incentives include a revitalized Relocation and Employment Assistance Program (REAP) which provides tax credits of $3,000 per job per year for 12 years for jobs relocated or added within 5 years of the relocation; and Energy Cost Saving Program (ECSP) which can reduce energy costs by up to 45% for qualified commercial or industrial businesses that have relocated or invested in properties within the expansion zones including tenants of properties qualifying for the ICIP .Additional information is available at www.nyc.gov/ html/sbs/nycbiz.

Editor: Are there any special benefits still available in Lower Manhattan?

Weissenberg: The New York Liberty Zone still has several significant federal, state and city tax benefits for businesses investing within the zone.The New York Liberty Bonds are a new category of low interest tax-exempt private activity bonds available for commercial and residential development in New York City.In addition, first-year bonus depreciation of 30% is available until December 31, 2006 for qualifying property placed in service within the New York Liberty Zone.Qualifying leasehold improvements while not eligible for the bonus depreciation are eligible for five-year amortization; outside the zone, the amortization period is 15 years.

Editor: Are other incentives available?

Weissenberg: There are many other programs and incentives available which are not mentioned above.I strongly urge any business contemplating a relocation to fully investigate the incentives available to them.