Incentives: What Auto Suppliers Should Look for when Expanding or Choosing a New Site
David B. Munson, Program Development Associate, Center for Automotive Research (Fall 2012)
(page 2 of 2)
No matter what type of incentive is offered, the first question you should always ask is, "What is the approval process and how does the timing work in respect to our commitment to the project and commencement of investment and job creation?" Some states and communities only require written notification before committing to the project to preserve eligibility for subsequent consideration of statutory incentives; others require prior full approval by a public or quasi-public board. Discretionary incentives require prior approval (in some form) before a company makes an irrevocable commitment or issues a public announcement.
Expect investigation into "business integrity and financial viability" for statutory incentives, and a much deeper look into the company and its owners and officers when discretionary incentives are on the table. Some states expedite the incentives process by issuing letters of intent in 7-10 days describing specific offers, contingent on (1) a satisfactory report from their due diligence process; and (2) commitments by the company to specific "net" new job creation, maintenance of baseline employment plus new jobs over a period of years, and capital investment as detailed in the project plan and incentives agreement.
Many incentives, especially discretionary, high-value and/or those providing benefits over several years (like a 10-year tax abatement), have "clawbacks" or other sanctions that penalize companies that fail to meet their employment and investment commitments. As many incentives are now performance-based, clawbacks may be less of an issue in the future. Most projects receive property tax abatements and these, in particular, may have "repayment" requirements. In some places that means that a company that falls below its commitments in (say) year five of a 10-year tax abatement will have to repay the tax savings for the current or immediate past year; in other areas the repayment might stretch all the way back to day one. Some terms and conditions may be negotiable up front.
Some states allow "layering" of their high-value incentives; they will offer multiple programs that may have individual limits, but can be combined to produce a higher total value. If limited to one state-level incentive, pick the most valuable offer that is also the best overall fit for your project. There are incentives that look good on paper or in a news release, but may have little or no value to your specific project.
They are offered in good faith because they fit many projects - and maybe they will fit your company in the future. For example, if you are offered millions of dollars of credits against a state tax that is only imposed on products made and sold in that state, and 90 percent of your sales are outside, then the credit has little value to you at this time.
Whether to use a site selection or incentive procurement consultant is a topic for another article; there are qualified consultants to handle any project from the largest to the smallest and local to global. If a company makes location decisions frequently, it may develop some in-house expertise. But the learning curve and time commitment each new location demands may make it wise to find a consultant who specializes in auto supplier projects. Consultants work exclusively for you.
Without exception, the one agency you must know is the local economic development office. Expect annual meetings and periodic check-ins via phone and email. Join the organization, if possible. Build a relationship. Most economic developers are problem-solvers. Challenge them to help you grow and they will almost always amaze you. They will also connect you to everyone else you need to know to put a successful project together in their region and state. Local economic offices work for the community, but many are partially supported by business members. That makes them a "dual agency" of sorts - but they do not work exclusively for you. You are their customer and you can expect them to treat you as well as you treat your customers.
Economic developers and government officials at all levels understand that facilitating incentives should result in a good business deal for each party. Undertaken on a straightforward basis, it is a fair exchange.