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Enterprise Zones: Opportunity Requiring Due Diligence

The benefits of investing in an enterprise zone may be substantial, but zone rules, commitments, and potential economic challenges must be clearly understood.

Q4 2016
As political leaders and economic developers seek policy instruments to stimulate economic activity in their communities, enterprise zone programs are a tool deployed by many across the United States. At their core, enterprise zones are initiatives established in a pre-designated area facing economic disparity with unique public incentives opportunities.

In theory, providing public incentives to businesses investing in these zones will provide the necessary support to allow the area to overcome certain economic barriers. However, many economists challenge the true impact of these zones over the long term. This article is not meant to present the economics of these programs, but instead to review the key factors to evaluate when considering an investment in an enterprise zone.

History of Enterprise Zones
Enterprise zones were first developed in Great Britain and implemented by the Conservative Party government of Margaret Thatcher in the early 1980s. The initial concept, credited by many to Peter Hall, an urban planning professor, believed permitting more free enterprise in economically struggling areas through tax benefits and reduced governmental interference would lead to new economic activity. The initial sites were in Newcastle, Liverpool, Belfast, and east London.

Not long after, the ideology behind enterprise zone programs reached the United States. Beginning at the federal level, Representatives Jack Kemp (R-NY) and Robert Garcia (D-NY) introduced legislation to establish enterprise zones throughout the country. The Reagan Administration also supported the concept of zones with tax concessions and relaxed regulations. However, these efforts did not make it outside the capital beltway.

Connecticut was the first state to enact an enterprise zone program in 1981; four years later, at least 40 states established legislation enacting the enterprise zone program idea. A decade on, the Clinton Administration worked with Congress to develop a community and empowerment zone program.

Alternative Measures
Today, enterprise zone programs are still found throughout the United States. However, there are policy leaders identifying alternative measures to improve the programs, as well as replace them altogether. The United Kingdom still utilizes enterprise zones as a key economic development tool, albeit in a different form than introduced in the 1980s, with up to 48 areas to be designated by 2017.

Recent examples of state legislatures choosing to go against the enterprise zone model can be found in California and Florida. The California Assembly and Governor Jerry Brown ended the state’s Enterprise Zone Program in lieu of a new approach with competitive tax credits and a manufacturing sales and use tax exemption. The three new programs — California Competes, the New Employment Credit, and the Manufacturing Sales and Use Tax Exemption — are statewide, as opposed to the Enterprise Zone Program that focused solely on 42 districts.

The Florida legislature simply let their state’s enterprise zone program sunset at the end of 2015. Despite support from business and local organizations, including the Florida League of Cities, the program is no longer available as an economic development tool for communities. As a brief reprieve for investors, legislation passed earlier this year does allow for companies to capture zone benefits if in place ahead of the program’s expiration.

While other public incentive programs are facing budgetary challenges, several states are leveraging enterprise zones further for economic development. While other public incentive programs are facing budgetary challenges, several states are leveraging enterprise zones further for economic development. In Illinois, a state facing significant budget shortfalls directly affecting economic development policy in Springfield, enterprise zones drive significant opportunity for local governments to support investing businesses. In the Land of Lincoln, communities with designated enterprise zones may offer property tax abatements and permit fee waivers, among other support measures.

What To Know When Investing?
Going forward, enterprise zones can provide vast benefits for businesses through tax concessions and relaxed regulation, along with supplemental support dependent on the location. However, businesses need to conduct a thorough evaluation of these potential benefits when making location decisions to understand all of the dynamics facing the project. The key factors to identify and understand include the specific rules of the zone, the benefits, the commitments, and the potential economic challenges.
  • Rules of the Road: Through legislation, and subsequent rulemaking processes, state and local governments have developed their enterprise zone programs to best meet the unique elements of their communities. For any business seeking to invest in a zone, the company must understand the specific statutory and regulatory rules in place.
  • The Benefits: When it comes to the benefits provided to investors in these zones, there are major variations across the country. Many of the enterprise zones have a key focus on the delivery of tax benefits to stimulate investment. How the tax relief is applied varies depending on the state. Several states focus on state corporate income tax liability, while others leverage sales and use tax exemptions/refunds, as well as property tax abatements. It is vital to understand how these tax concessions benefit the company being in the particular zone, and if the relief is of true value.
    In addition to tax relief, state and local governments provide further support for businesses investing in enterprise zones. This supplemental aid may come in a number of different forms, including cash grants, subsidized unemployment insurance, waived permitting fees, training funds, and technical assistance.
  • The Commitments: Along with the varying levels and forms of support available in enterprise zones, state and local governments also have vastly different project commitments to capture incentives. Investing in an enterprise zone often does not automatically trigger incentive support. Typically, the key eligibility drivers include industry, size of capital investment, job creation, employee wages, and employee residency.
Enterprise zone programs frequently target specific types of industries for investment. Dependent on the site and the goals of the community, eligibility may be limited to certain industries, such as manufacturing, warehousing and distribution, and office facilities. Before making an investment in a zone, it is critical to identify the target industries to ensure the project is eligible.

Incentives in enterprise zones are also frequently tied to the level of capital investment for a project. For example, to capture the Texas Enterprise Program Sales Tax Refund, the maximum value of the incentive is limited on the capital investment level. With an eligible investment of less than $400,000, a project may receive no more than $25,000 in total refund. Incrementally, the refund level increases as does the level of eligible investment. Ultimately, an investment over $250 million may capture up to $3.75 million in total refund.

Enterprise zones can provide vast benefits for businesses through tax concessions and relaxed regulation, along with supplemental support dependent on the location. Many enterprise zone incentives are also directly associated with job creation, along with employee wages. In the Commonwealth of Virginia, the state’s enterprise zone program offers an Enterprise Zone Job Creation Grant. For the creation of new jobs within an enterprise zone, a company may capture a cash grant up to $800 per job per year for five years. Capped at a maximum of 350 jobs, the ultimate value is dependent upon wage levels versus the federal minimum wage rate.

Additional requirements may be in place that are critical to identify and understand when evaluating an enterprise zone program, including residency requirements. In driving economic activity to a certain area, state regulations may require a level of employees to be residents of an enterprise zone. In Texas, if a business is located in a zone, at least 25 percent of new employees must meet economically disadvantaged or enterprise zone residency requirements. If not in a zone, the threshold increases to 35 percent.

  • The Challenges: Enterprise zones are designated for a reason, which is characteristically a heightened level of economic disparity. With that under consideration, these areas are frequently faced with economic barriers, including labor availability, transportation access, social challenges, and environmental issues, among others.
Areas designated as enterprise zones can present many opportunities for investing businesses, but the availability of required skills is often a challenge. As is critical in any site decision, the company must ensure a skilled and affordable workforce exists. With the challenges presented in an enterprise zone, a company needs to undergo the due diligence to make certain the labor force is available.

Many communities targeted for these support mechanisms are also often facing difficult social challenges, such as high crime rates. Depending on the project, it is important to understand the local dynamics of an enterprise zone. Additionally, transportation access to move goods and services, as well as for commuting employees, is vital to evaluate ahead of an enterprise zone investment.

Finally, many enterprise zones are aimed at vacant industrial properties. Business leaders should fully certify that each site within an enterprise zone does not face environmental challenges ahead of development.

In Sum
With several decades in existence, enterprise zone programs have evolved greatly from their inception in the United Kingdom. Today, while not supported by all, enterprise zones are continuing to be utilized as a policy instrument to stimulate economic activity across the United States. Before investing in an enterprise zone, there are a number of key factors to evaluate, including the specific rules of the zone, the benefits, the commitments, and the potential economic challenges. The benefits can be substantial, but the requirements and challenges must be understood.

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