Empowerment Zones And Commercial Development
 
May 17, 2004
 
James Mayer - Chicago

Retailers are continually searching for a market segment that has yet to be explored. While our nation’s inner cities provide a plentiful source of potential clientele that are in dire need of adequate facilities, many retailers are reluctant to locate businesses in areas that suffer from high crime rates, lower incomes and the many other problems facing urban areas. In turn, residents of these communities find themselves with very few shopping alternatives, and they either settle for what is available locally or travel to outlying areas that provide the desired goods.

In an effort to help alleviate this problem and the many others plaguing our nation’s cities, a number of years ago the government initiated a new program - the Empowerment Zone/Enterprise Community Initiative (EZ/EC Initiative). The EZ/EC Initiative is designed to target, in part, the redevelopment and economic revitalization of our nation’s inner cities. Cities throughout the nation competed for the award of an Empowerment Zone, and ultimately six cities (Atlanta, Baltimore, Chicago, Detroit, New York and Philadelphia/Camden) were awarded Empowerment Zone designations. Many other cities were awarded with “Supplemental Empowerment Zones,” “Enhanced Enterprise Communities,” and “Enterprise Communities,” each designation offering successively fewer benefits than those available with Empowerment Zones.

An Empowerment Zone is an area or areas within a city which offer special benefits for businesses already located in or perhaps contemplating locating within such zones, including increased tax incentives, preferential treatment for federal programs, a path with fewer regulatory obstructions, and grant monies amounting to $100 million for each zone. In turn, the communities within the zone benefit from the infusion of grant monies, increased employment opportunities, improved community infrastructure (including housing developments, retail establishments, and community service facilities), and greater alternatives with regard to goods and service providers. At the same time, the private retailer would reap both tangible and intangible rewards from the business generated at their new locations.

Many businesses are still unaware of the benefits available to commercial enterprises located within Empowerment Zones. Qualifying businesses operating in Empowerment Zones are eligible for three different types of federal tax incentives. The first, an employer wage credit, creates an incentive for businesses to hire employees residing within the Empowerment Zone. Initially, this income tax credit provided such employers with an income tax credit amounting to up to 20 percent of each qualifying employee’s first $15,000 in qualified wages. Currently, this translates to a tax credit of as much as $750 per qualifying employee, as the percentage dropped to 5 percent in 2004, and will be phased out completely in 2005. In addition, employers can benefit from a wage credit of up to $2,100 per employee for hires of individuals classified as “high-risk youths” who reside in Empowerment Zones or Enterprise Communities.

A second tax incentive, available to Enterprise Zone businesses, increased by as much as $20,000 the amount of depreciation deduction already available under Section 179 of the federal tax laws for certain depreciable tangible property. As a third incentive, the legislation created a new type of tax-exempt private activity bond, referred to as “qualified enterprise zone facility bonds.” This is an alternate form of low interest bond for Empowerment Zone businesses, which has fewer financing restrictions than typical tax exempt bonds. Businesses can use this new form of bond as a relatively inexpensive way to help finance certain aspects of their development, such as costs associated with the acquisition of certain real and personal property.

In addition to these tax incentive programs, the Empowerment Zone legislation provides several “direct” federal government business development programs. These programs include the award of up to $100 million in funds for each urban Empowerment Zone, loan guarantees, preference for funding under existing federal programs for areas designated as an Empowerment Zone, and waivers of federal regulatory hurdles in order to streamline the process for zone communities.

In order to assist local companies expand and create job opportunities for local residents, in many of the cities with designated zones, state and local programs are also available for businesses interested in locating within specified areas, referred to as Enterprise Zones, which often overlap the designated Empowerment Zones. Available incentives offered by the municipalities and the state include sales tax exemptions, property tax reductions, real estate transfer tax exemptions, investment tax credits, state job creation credits, machinery and equipment sale tax exemptions and low interest loans. When these state and local incentives are combined with the Empowerment zone benefits, cities can offer very attractive packages to businesses interested in locating within the Empowerment Zones.

However, businesses should be aware that locating within an Empowerment Zone does not necessarily mean that they will receive federal grant monies. The $100 million promised to each Empowerment Zone will be spread over a number of years, and the competition is already fierce, particularly among nonprofit community groups. At the same time, however, the tax incentives and many state and local incentives are available now!

Some Empowerment Zones have already shown good results. The Harlem portion of New York City’s Empowerment Zone had commitments from many nationally recognized retailers, e.g., Blockbuster Video and Pathmark, and several retail malls have been constructed. Detroit’s zone has realized financial commitments of nearly $500 million from the city’s automobile manufacturers in conjunction with the establishment of business ventures that are expected to last well into the future.

What does all of this mean for the retailer or shopping mall developer? The Empowerment Zones provide extensive opportunities for businesses willing to take the first step. Tremendous potential exists in the form of vast markets bursting with consumers who are eager to spend their money on goods sold locally by quality retailers. Zone communities are rich in underutilized retail space, plentiful labor markets and numerous community outreach opportunities. The opportunities for development are firmly in place.

With all of this potential, however, retailers will surely be wary of the problems that have traditionally accompanied such areas. At the same time, the only way this program can be successful is if retailers establish a presence in the Empowerment Zones. This pinpoints the central focus of the EZ/EC Initiative, and that is that handouts will not solve the problems that have traditionally plagued these communities. The purpose of this program is to help communities help themselves. The hope is that the combination of seed capital, increased business ventures, private capital commitments and a renewed community focus will help create a winning situation for all concerned.

If you are interested in pursuing this program, and would like to find out whether a particular location is eligible for some or all of the benefits described above, you should contact your local government, the Department of Housing and Urban Development, or you can contact Holland & Knight and we will send you a list of eligible communities.

For more information, e-mail Mark J. Nora at mark.nora@hklaw.com or James T. Mayer at james.mayer@hklaw.com, or call toll free, 1-888-688-8500.