The Food Retail Expansion to Support Health (FRESH) Program was implemented in 2009 as a zoning program through the Department of City Planning (DCP) and a tax incentive program through the New York City Economic Development Corporation (NYCEDC) to address the disparity of access to quality food in large swaths of the city. These underserved areas were experiencing higher instances of diet-related disease. In an attempt to remedy this, the city incentivized the renovation or construction and operation of quality grocery stores in the areas.
Speaking from our own experience, clients are most interested in the zoning benefits conferred by DCP that are achievable in the FRESH Zones: a 1:1 square foot bonus for eligible grocery store square footage between 6,000 and 20,000 square feet. There are two other benefits in addition to the added ZFA: reduced parking and grounds to increase the height of the building to fit the additional ZFA.
These zoning bonuses are found clustered in four areas of the city: Harlem, the Bronx, Eastern Queens (Jamaica, Hollis, St. Albans, and Baisley Park), and northeast Brooklyn. The zoning bonuses are not applicable in all of the areas that are eligible for the FRESH tax incentives. Many sites lie outside these zones and outside the focus of many buyers.
The lesser known financial incentives conferred by the NYCEDC include:
1) Sales tax is completely waived for eligible expenses incurred by the purchase of materials to construct, renovate, or equip quality grocer facilities.
2) A one-time deferral of mortgage recording tax relating to the project’s financing, from 2.85 percent to 0.3 percent: a nearly 90 percent discount
3) Stabilization of building taxes based on pre-improvement assessed value for 25 years. A phase-out of the benefit begins in year 21 and continues through year 25 at 20 percent each year. In year 26, building taxes increase to the full amount.
Not only do the financial incentives decrease the upfront cost, but the significantly reduced tax burden can make a grocery store financially viable in place of more valuable ground floor retail. The NYCEDC tax incentives only require a minimum investment of $1 million and 5,000 square feet dedicated to food retail. The qualifying supermarket tenant does not have to be on the ground floor; a creative stacking plan that combines the ground floor lobby portion with a second floor area will allow a developer to take advantage of a high-traffic retail corridor while obtaining FRESH program bonuses as well.
There is now a unique opportunity to stack the benefits of various programs in order to create value in a tight market. One possible combination for a developer looking to hold a property long term is combining the tax benefits of NYCEDC’s FRESH Program with the tax benefits of the new Opportunity Zone Program.
The Opportunity Zone Program benefits long term ownership and the areas in which both FRESH and Opportunity Zones are found are rental markets, they go hand in hand to synergize with one another. A project built using capital raised from an Opportunity Fund can take advantage of the FRESH Program to achieve tax benefits on both sides. If the asset is held for at least 10 years, there would be no capital gains tax burden on the profit after disposition.
While no program currently has the power to magically turn a bad deal into a good deal, there is clear value to the FRESH Program.
There are just over 4,600 commercial zoned sites with lots between 6,000 and 20,000 square feet that lie in both FRESH Zones and Opportunity Zones. The cheaper cost of capital through Opportunity Funds as well as the deferred and reduced capital gains tax coupled with the substantial tax breaks that can be obtained from the FRESH Program points towards lower startup costs. NOI is higher due to greater density and stabilized taxes over the next 25 years meaning a higher sellout at the end of the hold period.
According to our analysis of data from the New York City Industrial Development Agency (IDA), the count of FRESH Program sites has been trending upwards while the timeframe between the IDA closing date and grocer operations commencement is trending downwards. The FRESH Program is seeing renewed interest after a lull from 2014 to 2016. Interest is now on par once again with 2013, the difference being that the timeframe between closing on the tax incentive agreement to grocer operation is considerably less.
The NYCEDC’S FRESH program has incented nearly 700,000 square feet of new or renovated space in FRESH zones and has preserved or created nearly 1,600 jobs. All parties benefit: developers, the neighborhood, and the city as a whole.
Lev Kimyagarov is a founding partner of Goldenwood Property Advisors.