Are incentives for mixed-use developments legitimate?

August 06, 2020 - J. Philip Land

For some time now, questions have hovered over a certain kind of incentive deal. Where most agree that it’s fine to use incentives for manufacturers, distribution centers or corporate headquarters, what about large-scale mixed-use real estate developments? In particular, what if part of the project rents apartments?

In July, the South Carolina Court of Appeals weighed in, providing a welcome opinion that validates the broad consensus in the economic development community.

First, a little about the law surrounding that case might help. Local governments can place property into a multi-county business/industrial park, sometimes called an MCBP or MCIP, subject to detailed legal requirements. When property goes into a MCBP, the local governments levy fees — instead of taxes — against property in the MCBP. Levying fees gives the local governments the flexibility to offer special source revenue credits or SSRCs, which effectively reduce property taxes. The incentive can be quite lucrative, and in exchange, the local governments often require a project to meet criteria that serve a beneficial public or negotiated purpose, such as maintaining investment, affordable housing, paying for a public plaza or parking garage or other infrastructure, or generally encouraging investment into a desperate region, where, without the incentive, the developer’s pro forma just wouldn’t work.

It’s important to note that property cannot go into an MCBP unless it involves a business that is a commercial enterprise. The industry generally agrees that a development consisting of only owner-occupied residential property does not qualify, but what about rentals? That’s the issue the Court of Appeals addressed.

In this case, local governments agreed to place private, for-profit student housing developments in MCBS and provided the property owners with SSRCs in exchange for using the property to support student housing needs. The South Carolina Public Interest Foundation sued, claiming that student dorms (in a for-profit venture) did not meet the definition of “business” under the MCBP Act, and thus could not be included in an MCBP and, as a result, could not receive special source revenue credits. The lower court disagreed, holding that Richland County and the city of Columbia properly included the property in an MCIP. The Public Interest Foundation appealed.

On July 8, 2020, the South Carolina Court of Appeals upheld the lower court order, holding that for-profit student dormitories are commercial enterprises that fall within the definition of “business” for purpose of the MCBP Act.

This case is about more than just dorms. Practically, local governments should have a boost of confidence in offering property tax incentives to mixed-use commercial developments, including those with rental (not owner-occupied) apartments. Developers should be excited. For now (and unless the case is appealed to the South Carolina Supreme Court), there’s no question: The use of MCBPs for commercial mixed-use developments with rental apartments is entirely legitimate.

Originally published on the Upstate Business Journal, July 30, 2020.