What’s Killing Your Real Estate Deal in Nashville?

Music City’s booming healthcare, tech, and music industries make it a hot spot for developers. Even so, this popular area is not immune to the challenges felt nationwide in the commercial and multi-family real estate market. Many developers and investors looking to cash in on the city’s explosive growth discover all too late what obstacles may stand in their way. Savvy developers should arm themselves with a clear understanding of the potential pitfalls and tested solutions to keep their deals alive and thriving.

Common roadblocks for Nashville development

Regulatory Landscape 

Between extensive zoning restrictions and permitting delays, development in certain areas of the city can take up to several years to complete. With the increasing demand for mixed-use properties where residential, commercial and retail spaces blend together, rezoning is also a common occurrence in the city. Unfortunately, rezoning requires approval across multiple government agencies that can take months or even years to complete.

The legal and consultation fees can also make this an incredibly expensive process that might be unfeasible for unprepared investors. By the time a property is zoned, surveyed and approved for development, the expected ROI may be significantly diminished.

Infrastructure Limitations

As every Nashvillian knows, the rapid expansion of the city’s population has put a toll on the local infrastructure and public transportation. The city has been ranked the worst in the country for commuters because of the city’s severe traffic congestion issues. Many residents have been fleeing the busy area for calmer, cheaper suburbs for years. This can affect accessibility to new developments and impact their attractiveness to potential tenants or buyers. 

Despite the city’s initiatives to build new infrastructure and devise commuting alternatives like “Choose How You Move,” traffic congestion and insufficient public transportation remains a pervasive issue for locals. Potential developers should research the areas of interest before determining where to invest their money.

Economic Constraints

In recent years, Tennessee’s excise and franchise taxes have impacted many companies conducting business in the state. Instead of a personal income tax, Tennessee enforces an excise tax and franchise tax on local businesses. The excise tax requires all C and S corporations, limited partnerships, limited liability companies, and businesses to pay 6.5% of their Tennessee taxable income, while the franchise tax takes 0.25% of an entity’s net worth. 

Inflation has also contributed to the ballooning price of development in Nashville. Tennessee has the highest rate of inflation across the country at 3.8%, second only to Florida at 3.9%. According to recent reporting by Redfin, a digital real estate company, Nashville households need to make $124,000 annually to afford the average home in the region, while the combined median household income in Nashville is $71,767. This mismatch in values and incomes will have a lasting impact on the population within Nashville city limits. Trickle-down impacts are felt across the commercial real estate market. Investors seeking to make a fast return may find themselves stumped by the increased operating and supply costs as a result.

Important lifelines for Nashville developers

While these obstacles may seem daunting, Nashville remains a welcoming and inclusive city with bountiful investment opportunities. Developers and investors can adopt some strategies to navigate these challenges to maximize ROI and reduce the delays and costs of commercial real estate in the city.

Research the area

Each neighborhood in Nashville provides different opportunities depending on the type of commercial or multi-family residential real estate you’re seeking to establish. Location matters, and researching the area you’re interested in will help prepare you for whatever unique challenges may appear.

Pursue tax incentives

Reviewing state and local tax incentives and credits is well-worth your time. Nashville offers local programs to offset development costs, such as the Property Investment Incentive for construction or rehabilitation of commercial property valued at less than $1 million. At the state level, Tennessee provides Tax Increment Financing (TIF) and the Payment in Lieu of Tax (PILOT) Reporting incentive, which allows businesses to rent from a government-owned property and pay an alternative amount, such as the costs of development or additional jobs in lieu of a typical property tax. Brownfield tax incentives, for example, are often offered at local, state, and federal levels for companies able and willing to transform properties into livable spaces. 

Seek professional guidance  

Many of the legal and tax repercussions that often hinder development projects can be prevented with proper consideration and planning up front. A trustworthy advisor can help identify quality deal flows, help drive accurate revenue projection and P&L forecasting and evaluate incentives at every level that may increase your savings without killing your ROI.

Next steps

At the end of the day, Nashville is a vibrant community that presents many opportunities as well as risks for developers and investors in the real estate market. As Dolly Parton says, “if you want the rainbow, you gotta put up with the rain.” Companies should carefully evaluate the challenges of any investment opportunity and consult professional advice to make a viable investment strategy that minimizes tax obligations and maximizes ROI. 

Optimize your tax strategy with Aprio’s business tax advisors. From securing valuable tax credits to navigating complex regulations, our holistic approach helps businesses grow. Let us help you minimize tax liabilities and create opportunities for reinvestment. Schedule a consultation today and achieve what’s next at Aprio.com.

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