Biotech Incentives Help Create Winning Locations
Thomas J. Stringer, Esq., Managing Director & Practice Leader, Site Selection and Business Incentives Group, BDO USA (Biotech Location Guide 2007)

Biotechnology has been and remains one of the most sought-after industries in economic development. The huge opportunities, dynamic growth, and high talent pool skill sets generated by the industry make biotech companies very attractive candidate companies in the eyes of state and local economic development officials. Therefore, it's no surprise that biotech companies consistently rank at the top of most economic development departments' target wish lists for new projects.

So what are biotech companies looking for in a location? Traditionally in this industry, brainpower was the key driver in biotech site selection decisions. Locations that offered the right mix of universities, incubators, and highly skilled labor were the only possible locations that biotechs would or could consider for their relocation needs. To this day, this seminal requirement has not changed.

However, globalization has created ever-growing clusters of talent-rich locations throughout the United States and around the world. Simply put, the portability of talent means that biotechnology firms are no longer bound to a location merely because of geography. Such newfound geographic flexibility is allowing biotech companies to seek out new locations that have the optimal blend of skills sets in addition to other important site selection factors such as quality of life, cost-effectiveness, and business incentives.

As site selection and incentives practitioners, we would be the first to say that business incentives alone can never turn a bad location decision into a good one. However, effective and relevant business incentives can and do make a good location great. Further, they can secure a company for the long haul by allowing a firm to achieve a measure of cost certainty. This advantage comes at a time when biotechnology firms are increasingly being pressed by their equity partners (both public and private) to show fiscal accountability and profitability. Where they locate is increasingly seen as a decision that has profou

Let's detail some of the interesting incentives that biotech firms are increasingly availing themselves of:

Infrastructure Grants
Massachusetts historically has had a very strong biotech community on the basis of its world-class research universities and the work force that has subsequently developed around them. However, the Bay State has always been seen as a place where it's very costly to do business. Thus, in order to obtain continued access to those workers and their intellectual capital, biotech firms are increasingly working with economic development officials and consultants to find ways of mitigating the costs through a host of old and new incentive programs.

Several programs in particular have become very useful to the growth and retention of both small and large biotech projects. Regional infrastructure grants, which are large-scale awards of up to $2 million, are designed to assist in revitalizing the infrastructure of a community to enhance its ability to meet high-tech company needs. The economic development incentive program is designed to attract and retain businesses in specific Economic Target Areas (ETAs) by means of a 5 percent Economic Opportunity Area (EOA) investment tax credit. Eligible firms include a business that is expanding its existing operations, relocating its operations, or building new facilities and creating permanent new jobs within an ETA.

Municipal Tax Incentives
Businesses in ETAs are also entitled to municipal tax incentives, including special tax assessments and tax increment financing, which is a 5- to 20-year property tax exemption based on the increased value of the project property due to new construction or significant improvements. Recently, through special legislation, the EOA tax credit was allowed to be transferred or monetized for large-scale bio pharma investments, thus making this a very attractive tool for new investments in the Bay State.

Another program specifically developed for biotechnology companies, regardless of proximity to an ETA, is the Job Creation Incentive Payment. This program offers biotechnology companies that create 10 or more eligible jobs in Massachusetts during a single calendar year an incentive payment equal to 50 percent of the eligible jobs' salaries multiplied by the applicable Massachusetts income tax rate of the newly hired persons.

Income Tax Credits
North Carolina is fast becoming a desired location for biotechnology and other high-tech pursuits, and it has strong track record of providing incentives. The success of the Research Triangle Park and the state's many national universities are fueling growth of the skilled labor needed in the field at a substantial cost discount compared to many Northeast and West Coast locations.

To maintain this momentum, and fight off potential job loss to other aggressive Southeast states, North Carolina has renewed and created several strong programs. The William S. Lee Income Tax Credits have recently been renewed and their compliance requirements vastly streamlined to encourage greater participation. The Job Development Investment Grant is a discretionary incentive providing annual grants to new and expanding business measured against a percentage of withholding taxes paid by new employees. Further, the state's discretionary grant fund - the One North Carolina Fund - allows the governor to distribute cash grants on an as-needed basis to win strategically important projects that are also looking at another state or country.

The Research Triangle Park also has very aggressive property tax and infrastructure incentives. Essentially a high powered regional economic development entity, the RTP has the ability to leverage North Carolina's usual state incentives as well as to create customized property tax solutions, assist in providing equity financing for high-tech businesses, and to utilize taxable and tax-exempt industrial revenue bonds to finance land, building, and equipment purchases.


Selling Losses and Credits
New Jersey has long been the home of big pharma in the United States and has a global reputation for its pharmaceutical industry work force as well as easy access to the capital markets of New York. New Jersey is also often the site of many initial foreign direct investments in various industries into the United States.

New Jersey makes cash grants available through the Business Employment Incentive Program to expanding or relocating businesses that create new jobs in the state. Companies must create at least 10 new jobs if they are high-tech/biotechnology companies and 25 new jobs if they are in other nontechnology business categories. The maximum award is 80 percent of new state personal income taxes generated as a result of new employees hired.

An innovative incentive gaining steam in New Jersey - and attracting attention elsewhere - is the Technology Business Tax Certificate Transfer Program. This benefit allows unprofitable biotechnology companies to raise cash by selling New Jersey tax losses and R&D credits to other New Jersey businesses for at least 75 percent of their value. The program is open to expanding companies with less than 225 employees that have at least 75 percent of their work force in New Jersey. Money raised may be used for most business expenses.

Increasingly, other states are looking at this program and developing similar models. Unlike the usual array of tax credits offered as incentives by most states, saleable credits will be of interest to biotech companies regardless of how small or unprofitable they may be. The reasons for this are simple; at some point a company will be able to actually obtain value for them. They may generate cash proceeds during the start-up phase or eventually be used to reduce tax liability during the tax compliance process when the company eventually turns profitable. Simply put, these credits are not hollow incentives like so many income tax credits that have no relevance for growing biotech companies with little or no tax liability.

Other Financing Options
Pennsylvania also offers salable tax credits to businesses with research and development expenditures. Companies can receive tax credits up to 10 percent of their R&D activities, not to exceed $15 million. Companies without a tax liability may sell these tax credits for cash or carry them over for up to 15 years. More traditional Pennsylvania incentives that are increasing in popularity are advanced job training reimbursement programs for existing or newly hired employees and the Opportunity Grant Program, which offers discretionary funding for significant projects in targeted industries.

The Texas Enterprise Fund is by far the most powerful tool in the state's arsenal for attracting and retaining key projects. The fund allows the state to respond quickly and aggressively to opportunities and has been dubbed a "deal closer" due to its flexibility and depth in creative financing opportunities. The fund can be used for a variety of economic development projects, including infrastructure development, community development, and job-training programs. Funds are primarily used to attract new business to the state or assist with the substantial expansion of an existing business as part of a competitive recruitment situation.

Free Land and Leases
In recent years Florida has become one of the most aggressive states in courting biotechnology. Long known for its tourism, aerospace, and services industries, Florida has made several dramatic strategic bets to attract high-caliber and high-impact biotech companies and research institutes. The belief is that these catalysts will, in turn, create multiple spin-off effects for the local and regional economies - thus generating a significant and generational return on the incentives investment.

In several cases key projects were awarded incentives in the hundreds of millions of dollars, including discretionary cash grants from both the state and local counties. Additionally, local counties have moved toward acquiring land and building facilities free-of-charge for these projects. In some cases, local municipalities have even gone so far as to coordinate the use of leased office space for startup ventures. These benefits are in addition to the many traditional Florida incentive programs such as Enterprise Zones and job-creation grants.


A Win-Win Situation
Increasingly, as the global marketplace forces innovative companies - biotech and other new ventures alike - to become financially accountable for profits and losses, these high-tech firms will continue to increase their use of cost-reduction tools like business incentives to maximize their bottom lines. Biotech firms have clearly arrived and are no longer just "the next big thing." Like the dot-coms before them, they are learning that old-fashioned notions like profits and losses are just as important as the latest and greatest idea.

And, state and local governments are responding quickly to the needs of biotech companies by adopting flexible incentive programs that are performance-based and can be monetized as a source of liquidity when the companies are in a net operating loss position. State and Local governments have also been looking at creative organizational structures, such as partnerships, to allow for the collaboration of joint ventures without being adversely taxed. By partnering with biotech firms in creative ways to obtain cost certainty, successful economic development organizations find themselves poised for success in winning new biotech business and dramatically improving the bottom lines of their resident biotech corporate citizens.

gic bets to attract high-caliber and high-impact biotech companies and research institutes. The belief is that these catalysts will, in turn, create multiple spin-off effects for the local and regional economies - thus generating a significant and generational return on the incentives investment.

In several cases key projects were awarded incentives in the hundreds of millions of dollars, including discretionary cash grants from both the state and local counties. Additionally, local counties have moved toward acquiring land and building facilities free-of-charge for these projects. In some cases, local municipalities have even gone so far as to coordinate the use of leased office space for startup ventures. These benefits are in addition to the many traditional Florida incentive programs such as Enterprise Zones and job-creation grants.


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