by Ronald R. Pollina, Ph.D.
Pollina Corporate Real Estate, Inc. / ITRA Global – Chicago
Abridged by Jason T. Stagman, CCIM (Entire article available upon request)
Now more than ever, economics are forcing companies to look very hard at finding the best and most economically competitive locations from which to work. The relocation process is complex, with numerous variables to consider. For medium-size and large companies, state and local incentives are an important aspect of the relocation process. Incentives have developed into a highly competitive method of luring corporations into relocating their operations. Taken alone, incentives are a poor reason to relocate; however, when evaluated in the context of a full location analysis, incentives can be the pivotal factor in the final selection decision.
State and local financial incentives can vary greatly from state-to-state and community-to-community. Much depends on the governor and state legislature for state incentives, and a mayor’s, city council’s and county board’s attitudes toward job attraction. A professional incentive negotiator can help save a considerable amount of time by identifying those that are willing to follow through on their pro-business rhetoric. This is why the range in incentives can run from $0 – $150,000 or more per employee.
Quantity and quality of jobs is important to the equation. For example, 200 high paid research and development jobs will garner more benefit per job than 200 lower paid assembly jobs. Additionally, Fortune 500 companies tend to receive more benefit per job than unknown companies – regardless of creditworthiness. For some politicians, it is all about the press conference. The bigger the name and the more jobs they secure, the more favorable press they will receive.
There are basically two categories of state and local incentives: Statutory – which are approved by state and local governmental bodies and made available to eligible companies, and Negotiated – which are limited solely by the needs and imagination of the relocating company, its negotiators, and ability of political leaders to accept and approve them.
Some examples of state and local incentives are: property tax abatement, corporate tax reductions, subsidized job training, waived development fees, low interest loans, and cash grants. In some cases Federal funds are available as well.
When companies prefer to remain in their current state, but still need assistance in relocation, other states must be examined in order to create a credible, competitive bidding environment in which to negotiate and extract the most favorable incentives achievable.
Program applications, or fine print on criteria for eligibility, can be so overwhelming that companies quit the process early in frustration or find that they do not qualify for programs. Before committing to a specific location, all details of programs offered (particularly statutory incentives) must be examined in detail.
In addition to the traditional statutory incentives offered, such as job training programs and low-interest loans, other negotiated incentives can include but not be limited to the following: (1) refurbishment of existing manufacturing or office buildings; (2) buildings purchased by state or local governments and leased back to the corporation at a nominal rent; (3) abated or reduced property taxes; (4) outright cash grants; (5) fast track permitting and construction; and/or (8) forgiveness of low-interest loans based on employment growth.
Increasingly, incentive programs are tied to short- and long-term achievements of the corporation, and they can be reduced or rescinded. In some states, statutory incentives can be simply rescinded by future legislatures – sometimes depending on changes in public opinion. Like many government programs, some statutory incentives, when examined carefully, can be difficult to understand, qualify for, and use.
The location decision-making process is a balancing act. Many variables must be considered including labor, transportation, quality of life, and incentives, and each must be weighed as it relates to the company’s specific needs and goals. A location/incentive consultant’s objective in the early stage of the decision process is to guide the company in examining the multitude of factors that can impact a company and to categorize them as to their importance in meeting the company’s short- and long-range requirements. Financial incentives are just one of many variables that must be considered.
One of the major advantages of using a recognized location/incentive consultant is that during preliminary discussions with state and local economic development groups, the consultant is taken seriously and can begin incentive negotiations while keeping the client’s name confidential. This confidentiality can be withheld and maintained up to the final phase – when the field has been narrowed to a few states and local jurisdictions. Confidentiality is essential since there is no need to arouse the concerns of employees, stockholders or the community – especially if the final decision is to not relocate. Experienced location and incentive negotiators are aware of those states and communities that are competitive and truly pursuing jobs, as well as those that are not.
Incentive negotiations require an understanding and set of skills that are different from traditional business or real estate negotiations. In business, motivation is typically easy to understand, but in politics, motivation can be as complex as the personalities of a city council or state legislature or their constituencies. This complexity does not mean that a great deal cannot be accomplished and in a timely manner, provided that political leaders remain motivated, negotiations are handled professionally, and that a great deal of attention is paid to detail and documentation. Incentives must always be viewed with proper regard to all factors that can influence a company’s short- and long-range success.