Nashville has been growing at a rate of nearly 100 residents per day since 2011, according to U.S. Census Bureau estimates. Emerging Trends in Real Estate® 2019, copublished by ULI and PwC, ranks Nashville as the number-five U.S. market for overall real estate prospects.
For those still looking for deals in Nashville, the following are six important things to know about capital markets and the local lending environment. We hope you will be visiting the city as part of this year’s ULI Spring Meeting.
No State Income Tax, but ...
Tennessee is one of the few states that does not impose a state income tax, but that’s not the whole story. The state has franchise and excise taxes that may come as a surprise to business owners, especially those with real estate assets.
Entities doing business in Tennessee that provide owners with limited liability protection, including limited liability companies and limited partnerships, must pay 6.5 percent of net earnings under the excise tax. The franchise tax levies 25 cents per $100 of value on the greater of either a taxpayer’s net worth or the depreciated book value of Tennessee property. Several exemptions are available for these taxes, and investors must calculate the effect of these taxes when looking at a project in Tennessee.
Incentives May Be Available
Tennessee is aggressive on the incentives front, offering tax breaks and direct subsidies 105 percent higher than the national average and fourth in the nation as a percentage of the export-based economy, according to one study.
Two property tax incentives are available to local governments: payment in lieu of taxes (PILOT) and tax increment financing (TIF), the popular program that encourages investment in economically disadvantaged areas. The TIF incentive allows a developer to use real and personal property taxes payable on a project site to offset development costs, typically through a TIF loan. The PILOT incentive usually is calculated as a percentage of the standard tax rate. Developers say TIF has been a big boost to the development that has transformed downtown Nashville over the past decade.
These standard institutional incentives are enhanced by Nashville’s commitment to expansion. Exhibit A is the November announcement by Amazon that it will build its Center of Excellence in Nashville, creating 5,000 jobs with an average salary of $150,000. The incentives, all tied to job creation, reportedly include a $65 million state grant to Amazon for capital expenditures, an additional $21.7 million in job tax credits to offset franchise and excise taxes, and $15 million from the local government.
The Amazon deal was the latest in several high-profile corporate relocations to Nashville in recent years. The others were the corporate headquarters for Bridgestone Americas, which will create 1,700 jobs, and investment firm AllianceBernstein, which is bringing more than 1,000 jobs paying $150,000 to $200,000 when it relocates from Manhattan.
Bridgestone Americas reportedly received state and local incentives of about $100 million, with about half in the form of local property tax abatements using PILOT. AllianceBernstein reportedly received $17 million in state grants for construction and building improvements and $3.6 million from the local government. One hour before the state announced the Amazon deal in November, it said Ernst & Young would locate its new EY Edge Center to the city, bringing 600 jobs in accounting and technology. No incentives have been announced for Ernst & Young.
As in other parts of the country, there has been some pushback on incentives, and the TIF program is now on hold in Nashville through June while a study group assesses how it should be structured going forward. However, it appears that Nashville and the state are willing to consider incentives to companies that promise jobs.
Opportunity Zones Live Up to Their Name
Federal Opportunity Zones (OZs) constitute one of the big development opportunities in Nashville, and developers are aggressively pursuing OZ projects in Nashville. A surprising number of these areas are within walking distance of the city’s premier developments, including the Gulch area where Amazon will locate its Center of Excellence, East Nashville, and the Nations and Wedgewood-Houston neighborhoods.
Housing Shines as an Opportunity
Opportunities exist in every development category in Nashville—office, industrial, mixed use, hospitality, and others. But one sector sure to demand more construction over the next few years is single-family and multifamily housing. Even before the Amazon announcement, Nashville and the surrounding middle Tennessee counties were attracting nearly 100 new residents each day. Many are young workers who want to live close to the city’s increasingly vibrant core. The 2019 Emerging Trends report ranks Nashville first on its list of homebuilding prospects.
Unaddressed Challenges
Residents like to think that Nashville has a hip vibe, but the city is not without challenges. Traffic congestion is nothing compared with that in larger markets, but it is not getting better. In May 2018, Nashville voters rejected by a two-to-one margin a proposed one-cent increase in the local sales tax that would have raised $5.2 billion for an ambitious mass transit system. If Nashville wants to hold on to its reputation for a high quality of life, it will have to do more than widen the roads.
Don’t Expect to Steal a Deal
Nashville’s undervalued parcels are long gone. That said, the city is gaining popularity as a destination for logistics and technology companies, adding to its traditional strength in health care. Many out-of-town developers bring their own financing and other services, but Nashville banks are competitive and have the resources to support most deals. Their familiarity with the development landscape often results in smoother transactions and easier connections in the community. Opportunities will continue to come up for investors who have the sophistication to get deals done in a competitive environment.
MICHAEL A. STEWART is an attorney at Bass, Berry & Sims in Nashville, advising developers and investors on commercial real estate projects throughout Tennessee and across the country. He can be reached at [email protected].
