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TENNESSEE: An Introduction to Real Estate

Contributors:
Kaitlyn Cornett
Marshall Cox
Andy Jones
Burch, Porter & Johnson PLLC Logo
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Tennessee: Real Estate 

Tennessee is not only ground zero for America’s music, boasting Memphis as the birthplace of rock and soul and home of the blues, and Nashville as the world’s country music capital, it is also home to a bustling and welcoming market for business growth and real estate investment and development. Tennessee has enjoyed extraordinary commercial and industrial development in recent years and is ranked as the number two state for doing business by Area Development Magazine. Tennessee business owners experience low overall costs of doing business, a favorable state regulatory and tax environment, and abundantly available real estate. Affordable property values and state and local-funded development incentives have contributed to the rise in development, as has Tennessee’s favorable workforce: Many young professionals call Tennessee home, with Nashville and Memphis frequently ranked among the most attractive places in the U.S. for millennials to live.

ECONOMIC DEVELOPMENT INCENTIVES AND PROGRAMS 

Tennessee and its municipalities enjoy wide latitude to approve commercial developments through public development incentives and collaborative agreements with developers. This environment has helped grow the trend of large mixed-use projects often utilizing historic, new markets and other tax credits, including complex redevelopment projects in the state’s urban cores. More generally, Tennessee has enjoyed a construction boom statewide and has become a leader in site readiness initiatives through the Select Tennessee Certified Sites Program. Potential commercial investors can access an interactive database to find sites throughout the state that are development-ready and low risk. The rigorous criteria for site certification include a minimum of 20 developable acres, on-site utilities access, completed boundary surveys and topographical maps, trucking-quality road access, proper zoning, and a recent Phase 1 Environmental Site Assessment.

Further contributing to growth trends are Tennessee’s location in the Southeast United States and proven logistical assets. The state’s natural geographic advantage and high-quality infrastructure ensure robust access to global markets by allowing streamlined connections to suppliers and end users. Situated on the Mississippi River, Memphis is the world headquarters of shipping juggernaut FedEx and the number one cargo airport in the world. Tennessee has immediate access to eight interstate highways, six Class 1 railroads and more than 1,000 miles of navigable waterways. Rounding out these distinctions, the state led the nation in 2015–2020 job growth and has the nation’s highest employment concentration in the distribution and logistics industry.

Tennessee state and municipal laws allow local governmental authorities and Industrial Development Boards to enact Tax Increment Financing (“TIF”), Payment in Lieu of Taxes (“PILOT”) and similar development programs. TIFs spur economic development by providing revenue derived from the increase in property taxes to satisfy indebtedness incurred for public infrastructure and other related improvements to the property. PILOTs utilize a public ownership structure for a designated number of years during which taxes are reduced in return for capital investment and job creation. Tennessee’s major metropolitan areas have enacted various versions of these incentives resulting in noteworthy projects as varied as the redevelopment of Shelby Farms Park in Memphis, among the country’s largest urban parks, Nashville’s AT&T Building office tower and the Ryman Auditorium, best known as the iconic original Grand Ole Opry house and “Mother Church of Country Music”.

Other federal, state and local incentive programs and various public-private partnerships have similarly driven impactful projects throughout the state, such as the recently announced $1.9 billion expansion of the campus of St. Jude Children’s Research Hospital in downtown Memphis, and the successful revitalization of a nearby former Sears distribution center as the vertical urban village that is Crosstown Concourse. Having secured over $250 million from over thirty diverse funding sources to retrofit the long-abandoned fourteen story, 1.5 million square foot space, Crosstown is the largest historical adaptive reuse, Platinum LEED-certified building in the world.

While Tennessee has enjoyed strong growth trends in relatively every sector throughout the state, many of these and other headline-grabbing projects in Memphis, Nashville, Knoxville, Chattanooga and beyond, represent more than physical square footage increases by connecting people and communities in new and innovative ways. They use green spaces along rivers, repurposed railways and other unique locations to create bike lanes, pedestrian pathways and other gathering and performance arts spaces for greater community connection and engagement.

TAXATION IMPACTS 

Tennessee imposes neither an individual income tax nor a corporate income tax, although some businesses are subject to a state franchise and excise tax, as discussed below.

Effective January 1, 2021, Tennessee repealed the Hall Tax, which had imposed a tax on individuals and partnerships receiving interest income from bonds, notes and stock dividends. The Hall Tax repeal results in no state tax liability on the distribution of profits to shareholders of Tennessee C- and S-Corporations. This decrease in taxation makes the S-Corporation an attractive entity form, as Tennessee S-Corporations now receive identical state income tax treatment as LLCs, in addition to existing benefits such as lower federal income tax rates on dividends and the ability to pay dividends without incurring self-employment tax on the dividend income.

Tennessee imposes an aggregate 6.75% franchise and excise tax on the privilege of doing business in Tennessee. The franchise tax is based on the greater of taxable year-end net worth or the book value of real or tangible personal property owned or used in Tennessee. The excise tax is based on net income for the taxable year. General partnerships, sole proprietorships and nonprofits are not subject to the state franchise and excise tax, and county and municipal governments lack jurisdiction to levy any additional franchise and excise taxes on a business.

The income of out-of-state companies doing business in Tennessee is allocated to Tennessee for franchise and excise tax purposes based on the market-based sourcing method, requiring out-of-state companies to source receipts from sales, other than sales of tangible personal property, to Tennessee based on the location of the market. Sales of tangible personal property are sourced to Tennessee if the property is delivered or shipped to a purchaser in Tennessee. When apportioning the income of an out-of-state company to Tennessee, the state uses a weighted three-factor formula based on property, payroll and sales; however, the income of out-of-state financial institutions and some manufacturers may be apportioned to Tennessee by using a single-factor formula that is based only on sales.

There are seventeen types of entities that may apply for exemption from Tennessee’s franchise and excise tax, including certain venture capital funds, family-owned non-corporate entities, and non-corporate obligated member entities. A non-corporate obligated member entity (“OME”) is a limited liability company, limited liability partnership, or limited partnership whose members are fully liable for the debts, obligations and liabilities of the entity. OMEs are a popular business entity choice for Tennessee real estate companies due to their low effective tax rate.

Also exempt from Tennessee’s franchise and excise tax are Tennessee historic property preservation or rehabilitation entities organized to preserve or rehabilitate historic properties listed on the National Register of Historic Places. Such entities are ideal candidates for the 20% federal income tax credit via the Federal Historic Tax Credit Program, a development incentive that has produced over $1 billion in investments in Tennessee’s historic buildings.