HUBzones are “Historically Under-utilized Business” zones located within qualified census tracts; qualified non-metropolitan counties; lands within the external boundaries of an Indian reservation; qualified base closure area; or redesignated areas. The HUBZone program was created in 1998 by the HUBZone Empowerment Act. Its primary goal was/is to incentize businesses to operate and create jobs in historically, economically downtrodden communities/areas by requiring federal agencies to set aside more than 3% of their budget in the form of prime contracts for HUBZone certified small businesses. HUBZone certified companies benefit from preferential treatment in the form of set-aside contracts and 10% price evaluation preference in full and open contract competitions.
The Small Business Administration (SBA) administers the program and establishes the requirements for businesses to qualify as HUBZone certified. First, a company must qualify as a small business under SBA guidelines as based on size requirements established by the North American Industry Classification System (NAICS). Second, the business must be at least 51% owned and controlled by a U.S. citizen(s), a Community Development Corporation, agricultural cooperative, Indian tribe, or Alaska Native Corporation. Third, the company’s principal office must be located in a HUBZone. “Principal office” is defined by as location in which the greatest number of employees work. Because this excludes contract sites maintaining HUBZone certification can be especially challenging in the DC metro area. Finally, 35% of the company’s employees/total workforce must reside in a HUBZone. Under the current rules, businesses must re-certify their HUBZone status every three years; however, there is no limit to the number of times a company can re-certify as long as they continue to qualify under program’s existing requirements.
The SBA has a HUBZone map on its websites that allows one to search a specific address to see if it is located within a certified HUBZone:
Despite the billions in federal contracts available to HUBZone certified companies, the program, like the areas it attempts to aid, has been historically underutilized. This is because the rules and requirements have made compliance difficult to achieve and maintain, and sudden changes can cause a company to no longer be in compliance; rendering it ineligible for the program. The two biggest compliance challenges are the requirements for the company’s principal office to be located within a HUBZone and for 35% of its employees to reside in a HUBZone. An issue that is further compounded by the continuous and unpredictable movement of HUBZone areas and boundaries.
The SBA has proposed three changes to the HUBZone program requirements to address these issues:
- Freezing HUBZone maps until the 2020 census after which maps will be updated every 5 years. The new regulation would also provide companies with up to 3 years to move to a new HUBZone if their principal office and/or employee’s residence loses its designation as a result of changes to the HUBZone map. That’s a total of 8 years to relocate to a new HUBZone, which is more than enough time considering most commercial lease terms are 5-10 years.
- Changes to rule requiring 35% of employees to reside in a HUBZone. Current regulations require an employee to live in a qualified HUBZone for at least 180 days or be a currently registered voter in that area and be hired by the company before that employee will count towards the HUBZone/Non-HUBZone employee mix. Under the proposed change, after such period, the employee will always count as a HUBZone employee as long as they remain employed by the HUBZone certified company, even if that employees moves to a non-HUBZone area or their residence loses its HUBZone designation.
- Changes to the eligibility requirements for contract awards. Currently companies must be HUBZone certified at both the time they bid on a contract and at the time the contract is awarded. The proposed rule change would only require companies to certify or recertify their HUBZone status once a year (by its annual recertification date) thus eliminating the need to prove compliance at either the date of bid and/or time of award.
So, what does this mean in the context of real estate investment? For one, because the purpose of the HUBZone program is to revitalize economically depressed areas, they increase the likelihood for increased rents and property appreciation. Secondly, landlords with properties within a HUBZone can use this status as a marketing tool to attract prospective tenants. The allure of billions in federal funds could be the deciding factor in a competitive market and the financial stability/prosperity from multi-year government contracts reduces the landlord’s risk of tenant defaults. With changes to the rules that have caused the HUBZone program to be historically under-utilized, itself, property owners and residents of HUBZone areas should begin to see the fruits of the program’s intended purpose.