The Role of Tax Incentives in Attracting Commercial Real Estate Investments
Tax incentives have long played a key role in driving commercial real estate (CRE) investment, particularly in economically disadvantaged areas in need of a boost. By offering financial incentives in terms of tax credits, deductions, and exemptions, governments at all levels encourage developers to undertake ventures that, in any other scenario, cannot make financial sense.
Dov Hertz, a long-time real estate developer, attests to the worth of such incentives. “Tax incentives are a game-changer in commercial real estate,” Hertz explains. “They don’t merely enable developers to save dollars—they make long-term financial development a reality in communities in desperate need of it.”
With increased interest rates and rising development costs, incentives through taxes have become more critical than ever in attracting investors to CRE ventures.
What Type of Tax Incentives Drives CRE Investment?
A range of incentives through taxes spurs commercial real estate development, each designed for a specific investment purpose.
- Opportunity Zone Incentives
Opportunity Zones (OZs) have been adopted through the 2017 Tax Cuts and Jobs Act in an effort to drive investment in economically disadvantaged communities. Capital gain taxes can be delayed through a re-investment in Qualified Opportunity Funds (QOFs), and, in case investors hold an investment for at least 10 years, they can exclude capital gain taxes for any gain in value in the investment.
“OZs have re-shaped development in underserved communities,” Hertz continues. “Projects that, in any other scenario, have been considered too high a risk, are actually attracting considerable capital, courtesy of long-term incentives through taxes.”
Such incentives have spurred significant development in urban and rural communities, generating jobs and improving infrastructure.
- Historic Tax Credits (HTC)
For developers working in rehabilitation work for older buildings, Historic Tax Credit provides a 20% federal credit for qualified rehabilitation expenses. Most states have additional HTC programs, boosting the redevelopment of older buildings’ viability.
Reducing renovation expenses, HTCs encourage developers to preserve architectural heritage and reuse buildings for new purposes.
- New Markets Tax Credit (NMTC)
The NMTC program provides investors with financing for development in low-income communities with a tax credit. Most beneficial for mixed-use and community development ventures providing critical services such as medical care, retail, and schools, it is ideal for such ventures with a high social impact and financial impact too.
“New Markets Tax Credits are a strong tool for connecting real estate investment with community necessity,” Dov Hertz describes. “They promote projects with both social and financial impact, and therefore, have strong appeal for developers interested in seeing a return but not necessarily a financial one alone.”
- Tax Increment Financing (TIF)
A tool in which a city can utilize future taxes generated in a development to fund its initial expenses, TIF is a strong tool for financing infrastructure improvements such as streets, utility, and public spaces for a large development.
With the lowered initial burden for developers, TIF enables ambitious development.
Why Tax Incentives Matter More Than Ever
High interest rates and inflation environments make tax incentives a key tool for financial viability for developments in such an environment. Developers actively seek locations with a tax benefit to counteract increased lending costs and inflationary factors.
“Without incentives, many developments won’t break ground,” Hertz describes. “They give developers a financial buffer to undertake big-ticket investments, particularly in uncertain times.”
Moreover, these incentives not only attract private capital but also create jobs, stimulate economies locally, and build infrastructure, and thus, are a win for both communities and developers.
Conclusion
Tax incentives represent one of the most effective tools for commercial real estate investment, most specifically, in high-risk and underserved communities. Through Opportunity Zones, Historic Tax Credits, or Tax Increment Financing, these incentives drive development and make development economically viable.
For Dov Hertz, “Smart developers understand that tax incentives aren’t simply about short-term gain. They’re about creating long-term value—for investors, for cities, and for the communities they serve.”
Utilizing these financial tools, developers can gain access to new opportunities, mitigate risk, and make meaningful urban development a reality in years to come.