Ranked #4 - State and Local Incentives
Michael Huber, Cushman & Wakefield – Location Incentives Group (Apr/May 07)
The findings should not be surprising since corporate decision-makers have become increasingly focused on finding ways to significantly reduce costs and maximize return on investments. Most corporate executives that have experience implementing large investment projects are likely to have pursued state and local support and understand the virtues of such assistance. If they have not pursued incentives for investment projects, they are likely to have potential opportunities presented to them at some point by economic development agencies, consultants, or, frequently, by their peers.

Using one example to demonstrate how incentives have grown in importance as a location factor, Olympus America, on its corporate website, cited "the ability to find the best economic incentives" as one of four key decision factors in recently relocating its corporate headquarters from Long Island, New York, to the Lehigh Valley, Pennsylvania. This is quite telling when you consider the myriad factors that go into making a complex headquarters location decision such as this.

Let's look at the reasons why incentives have become increasingly transparent and how this has affected the site selection process in practice.

Incentives are all around us.
In recent years, companies have become much more proactive about seeking and securing incentives as part of the facilities planning process. This focus is driven at least in part by the desire to reduce the significant costs typically associated with constructing, expanding, or repositioning operations, not to mention the operational and cultural adjustments that often accompany such moves. Clients are asking about incentive opportunities at the earliest stages of the site selection process and remaining engaged during the incentives administration term after a decision is made. Corporate real estate and financial executives are quick to point out that incentives are an important factor in the site selection process.

"When I am presented with a project involving hundreds of jobs or millions in capital, my first two phone calls are to my broker and to [my consultant's] location incentives group to start the ball rolling on both fronts. For both purposes, getting an early start is critical to achieving an optimal outcome," notes a corporate real estate VP at a major healthcare technology company who requested anonymity. "Getting [my consultant] involved early allows him to get us the best information and utilize his inside knowledge of the incentives opportunities to best position our project and maximize results."

The fact that corporate decision-makers are becoming more diligent about pursuing incentives is driven in part by the amount of information that is available about incentive programs and how they are utilized to attract and retain businesses.

How have corporate executives become so knowledgeable about incentives? The answer is that there are a growing number of sources that provide information regarding the types of assistance available and how to go about obtaining them. As mentioned earlier, these sources included state and local economic development professionals, site location consultants, the media, as well as fellow industry executives. Each group has its own objective in disseminating this information. However, at the end of the day, the result is generally the same - incentives are an important part of the site selection process.

• Economic Development Professionals: State and local economic developers are challenged with the goal of creating and retaining employment in their respective regions. In order to do so, they must articulate all of the positive attributes of those areas. It is well-documented in site selection circles that it can be very difficult to make an area with high labor costs or poor accessibility to highways appear more attractive than it really is. However, economic development professionals will use available incentive programs as the "tools" that will help their locations to measure up with other locations in competitive situations. Economic developers are typically very effective in demonstrating the value and flexibility of state and local incentive programs and that their region offers a pro-business climate. Many of the best economic development professionals regularly reach out to corporate end-users and their consultants in order to extol the virtues of their region and, in particular, their incentive programs.

• Site Location Consultants: Consultants can also be very effective in disseminating information about incentive programs to corporate decision-makers. Whether they are working an active project or trying to develop a relationship with a potential client, location consultants will make it clear that there are many opportunities to secure cost savings through both discretionary and as-of-right incentive programs. Perhaps the greatest value that consultants offer is the ability not only to identify incentive opportunities within the site selection process, but also to help end-users understand how to optimize the benefits and implement an incentives program.

• Media Outlets: It is almost impossible to go a few weeks without reading an article in a local newspaper or business journal that a major corporation has decided to relocate its operations from one state to another. In many instances, those articles will have a paragraph alluding to the fact that state and local incentives were awarded to induce the relocation. For large projects, such as the Dell project in North Carolina, major corporate relocation incentives deals will be front-page news because of the size of the public investment being made. These types of major deals put incentives on everyone's radar screen even if most other initiatives are much more modest.

• Peer Groups: Quite often the financial and real estate executives that are responsible for leading corporate site selection efforts will network within the same professional circles. Participating within these professional networks allows executives to discuss their work and share ideas about how to more effectively carry out their responsibilities. Decision-makers are likely to discuss their successes and challenges in implementing relocation and expansion projects, and oftentimes incentives will be a topic of discussion.

Put knowledge to practice.
Having greater access to information about incentive programs and how they have been utilized has led corporate decision-makers to more routinely include state and local incentives as a criteria in the preliminary phases of location studies. Incentives will be considered as to the cost mitigation effects on a specific location's capital and operating expenses, such as labor cost, rents, utilities, construction costs, etc. that often determine whether a location will be able to support a new operation or facility expansion.

Incentives are a decision factor that can be both qualitatively and quantitatively evaluated early in the site selection process to help determine the relative attractiveness of "long-list" candidate communities, and they become extremely critical in the final location decision. For example, location consultants may often formulate an index, such as a rating or grade that reflects the incentives climate or may even generate a high-level pro-forma in order to understand the potential magnitude of incentive benefits in a candidate community.

It has been well-documented that incentives generally play a much more significant role in the site selection process after a "short-list" of potential locations has been determined. Incentives are often categorized as the "tie-breaker" when two or more sites of equal merit and/or cost profiles are being considered for a project. This is typically due to the fact there are often multiple communities remaining in the final stages of the process that rank similarly in key location factors, like labor availability, quality, or cost. Nevertheless, companies seem to have become increasingly influenced by aggressive incentives packages when making location decisions.

"We have found that communities have a far greater appreciation for the economic impacts associated with the value that jobs and investment bring to both the quality of life and bottom line of their local economies, and that appreciation is manifest in increasingly aggressive incentive packages that are tailored to provide significant benefits to the corporate user," said one client. "In our view, it is critical to tap into these programs as a way to offset the significant costs of these projects." For that reason, less attractive sites may become more attractive simply by virtue of an extremely aggressive incentives package, in some cases tipping a decision in their favor. This is definitely still the exception when reviewing location decisions, but this trend is becoming more prevalent over time.

This shift in preference is due to the increased fiduciary responsibility to reduce costs even if it might mean downplaying the importance of more fundamental location criteria. It might also be argued that it is due to the desire to keep up with competitors who have received front-page headlines because of large incentive awards, as well as a variety of other reasons. Based on my experience, it is clear that employing a strategic cost mitigation approach to site selection through the procurement of economic development incentives is critical to the facilities planning process.