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The Problem Breaking the World of Real Estate Incentives

There is an unseen force directing when and where companies move and buildings get built: government incentives. This force can make or break many real estate projects, yet there is no single source of truth about which governmental authorities are even offering incentives. Technology has done little to bring transparency to the incentives market. Technology hardly helps when what developers and dealmakers need to see isn’t online. A clear picture of incentives remains elusive, leaving billions on the table while making the impact of the $100 billion in incentives handed out every year hard to understand. 

Real estate incentives include property tax abatement, zoning bonuses, rebates, grants, exemptions, and a whole lot more. Added these together can create a nearly endless number of permutations and combinations of incentives available to real estate projects. Fueling real estate, whether residential, commercial, or industrial, is one of the best ways government has to spur economic activity. That’s why every level of government is trying to do it. The big problem is local, state, and federal programs have created a layered, complex system that’s impossible to understand. That problem isn’t new, several platforms like CoStar, Reonomy, Property Shark, and others have built powerful tools to help users and clients sort through the variety of incentives. That approach is at odds with much of the traditional world of real estate and public service. Technology, no matter how powerful, is struggling to revolutionize the real estate industry because the problems the industry faces aren’t as simple as most in the tech world think they are. Technology is trying to solve the clouded information around government incentives, where both hyper-local expertise and scale are needed. 

“The reality is that so many folks in PropTech aren’t real estate people, they’re people from the outside who think or hope or imagine they can revolutionize our industry, which is the largest in America, in one swoop,” Atif Qadir, CEO of Redist said. “There’s an approach to that which feels reductive, a bit simplistic.” 

Qadir is a former architect turned developer who served time as an appointed government official in Hoboken, New Jersey, giving him a unique perspective from both the private and public side of development. He saw firsthand how muddled incentives were during his own attempts to underwrite deals.

Powerful tech tools are bound by the info they’re able to receive. Platforms like CoStar, Reonomy, and PropertyShark struggle to control input. They have limited control over what data gets put on their platforms, relying largely on user-generated data or automated scraping techniques, collecting known data sets and adding them to the database at scale. Scraping, often known as harvesting, relies on information that’s available online, either listed on a website or in a publicly available file to download. Scraping is a valuable technique, but it lacks nuance. 

Non-traditional data sets are what hold the most value when it comes to hyper-local intelligence about government incentives. In small and medium-sized towns, not everything gets listed online or put into a pdf, sometimes the info isn’t even in an electronic form. Often the best way to get local zoning, incentive, and permitting information is to show up at the municipal planning office and talk to someone face-to-face. That may sound obvious to many, but in today’s digital age, showing up in person to collect information is hardly even considered. 

“It’s not intentional, it’s just a sign of an industry in dire need of innovation,” Qadir explained. “I spoke to an economic development coordinator in Connecticut, his info wasn’t anywhere online, I had to drive to collect it. I mentioned to him that the new generation might not be too keen on driving to pick this up. He said, ‘Really?’ I think there’s a generational change we’re on the cusp of.” 

Incentives will only become more important over the next three decades. Ambitious climate goals have local, state, and federal authorities priming the pump to unleash a new wave of incentives aimed at energy efficiency and electrification. In several states, they’ve already started. Government agencies are not just dangling carrots, they are swinging sticks. In a few short years, NYC will start levying fines against buildings that aren’t taking carbon emissions and energy efficiency seriously. Similar frameworks are being worked up across the country. Transitioning existing building stock into a more sustainable energy future will require owners and managers to leverage all the incentives for upgrades that they can. 

Local governments don’t make it easy. The fragmented, slow nature of municipal governments has held them back from adopting much of the technology we use in the business world. A lack of standardization means it’s hard to know what to expect, some small towns have excellent record clerks with a fully digitized setup, while working with other larger cities feels like screaming into the void. Qadir jokes with clients that tracking down economic development officials, planning departments, and the full cast of local characters with relevant knowledge can feel like herding feral cats. It is a painstaking task for even the most experienced shepherds. 

Businesses with enough pull have found a way to flip the script and be courted themselves, rather than doing the courting. Amazon infamously ran a year-long bake-off between the largest cities in America to narrow down potential sites for a second headquarters. The company was able to reap millions, perhaps billions, in incentives without having to do much of the work themselves. The company pitted governments against each other to try to lure this high-pay, high-visibility job center to territories. 

Figuring out what your city or state was offering to Amazon is a close kept secret, even the best journalists haven’t got to the bottom of. We may never know how many millions in taxpayer dollars the world’s largest company was offered up on a silver platter. Smaller businesses aren’t as fortunate as Amazon. The companies that really need the incentives are too often left in the dark as to what’s really on the table. Taxpayers are too. Amazon dominated headlines as local leaders bashed what many viewed as corporate cronyism, eventually causing Amazon to pull out of its “HQ2” plans in NYC. The backlash to unaccountable incentives the majority of the public doesn’t understand is real. 

We know that American taxpayers are giving $100 billion to corporations in the form of incentives every year, according to estimates from Redist. We don’t know much else. What are they getting for it? What are they promising? How are we measuring the incentives’ impact? Not all agencies report totals and agencies don’t coordinate with each other. There are several types of incentives that are unlimited. The $100 billion estimates are the best guess. The renowned think tank Brookings has been trying to crack the case for years, doing great work analyzing case studies, but a clear nationwide picture remains elusive. It simply is not calculable at this time. That’s a big problem. 

“The metrics that economic development organizations (EDOs) produce may be precise … but precision isn’t the same as accuracy. And most EDOs rarely, if ever, invest in measurement efforts that would enable them to accurately evaluate performance,” Brookings wrote. 

EDOs fail to account for selection bias, there’s no control group. They claim credit for positive outcomes, disregard negatives outcomes, and make no distinction between a job that was created by a program and one that would’ve been created anyway. EDOs regularly claim credit when new jobs are announced but never materialize. What little analysis is done focuses on gross outcomes rather than return on investment. 

We’ve created a system that isn’t working properly. Developers and deal makers that need the information can’t find it, municipal departments that want the information shared aren’t sharing it, and accountability is nowhere to be found. We’re left wondering what the point is and how things got so twisted. Using public taxpayer dollars to finance private economic activity that delivers a public social good is a uniquely American concept, especially considering how ubiquitous the practice has become. Is that a sound concept? It’s impossible to say. Without more data, better data, and some form of accountability, we’re tossing millions of coins into a well, wishing for more economic activity. 

Owners and developers will continue to read the tea leaves while EDOs take credit for the sun rising. Poor practices threaten to create a political backlash that could threaten the whole system. Unaccountable incentives forking over public funds to mega-corporations big enough to overcome the mind-numbing obstacles of understanding fragmented incentives aren’t pro-business. Both parties getting a measurable return on investment, calculated with better data sharing practices and research tools, will lead to better outcomes that justify the continued practice. If that’s not possible, incentives shouldn’t be either.

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