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Automotive Site Guide: The Automotive Industry Flies South

John Schuetz, Principal, The RHS Group (Automotive Site Guide 2006)
(page 2 of 2)
Maximize Your Move With Incentives
Automotive firms must find a way to balance the value of incentives being offered by a community with the presence of requisite business conditions. Once the site search has been narrowed down based on the required conditions, it is time for the company to negotiate incentives.

Economic developers use incentives to entice the profitable automotive industry to locate to their regions. They offer two types of incentives: short-term and long-term.

Short-term incentives involve tax credits (e.g., for hiring, pollution control, etc.) and grants. They can include reduced lands costs or even free land; they can offset relocation or building costs and transportation/infrastructure improvements. Empowerment zones, enterprise zones, and renewal zone provide special incentives; and block grants or training and retraining programs are available as well.

The long-term incentives available to auto firms are often doled out over several years and can amount to the greatest financial perks for the company if collected in full. These incentives include tax abatements, sales and use tax exemptions, sharing agreements, tax-increment financing, industrial revenue bonds, and more. Both short- and long-term incentives are not easy to obtain. Companies need to know whom to approach and what to ask for. The negotiation is an arduous process, and results turn out best when handled by a professional.

The majority of companies neglect to collect more than 50 percent of all negotiated incentives. Incentives are negotiated in multiple departments of the company that often don't include each other in the process. They can involve finance, real estate, contract, licensing, legal, and tax departments. As a result, these departments can easily lose track of an incentive that can take several years to collect. Most companies lack the attention and organization that an outside source can offer.

For example, one automotive parts distributor selected a site in Georgia for a major facility without negotiating for personal property tax abatement under a local option Freeport law. It wasn't until it got its inventory tax bill for more than $300,000 that it realized that this was not even an alternative at the chosen site. Moreover, simply moving across the street from its current location put it into an area where the Freeport law could be applied. This simple move saved the company more than $300,000 per year in perpetuity.

In another case, a major distributor of automobiles selected a site for a new $20 million training facility adjacent to its corporate headquarters in Texas. The company's management then discovered that the site it chose was directly across the street from a New Market Tax Credit zone, which could have provided it with a 39 percent federal tax credit on the cost of this new facility had it selected an available parcel of real estate at that location.

Therefore, it is imperative that the incentives negotiator be informed on what a community has offered in the past and what packages are currently available. The negotiator needs this valuable information in order to know what to ask for. This allows the automotive firm to obtain the best possible incentive package.

An incentives negotiator should also provide compliance services. The negotiator should be knowledgeable in what contracts a state requires, the conditions that apply to incentive packages, and how to collect the incentives for the company. Not following through on compliance commitments and requirements is one of the most common errors a company can make. Since some incentives can take upwards of 15 years to collect and are dispersed throughout multiple areas of the organization, collecting incentives can easily slip through the cracks. An incentives management company can monitor and follow-up on the requirements more proficiently than an in-house department to ensure that the company receives all that it is due.

More importantly, the negotiator should be paid for performance. That means that he or she is only compensated when the company actually receives incentives and tax credits. A negotiator that is paid on this basis is more likely to fight for a company's incentive package and make sure that the incentives are collected. Paying the negotiator on a performance basis will allow the auto company to maximize its benefits.


John Schuetz is the Vice President of Location Management Services (LMS), LLC (www.locationmgmt.com), a Mission Viejo, CA-based site selection firm that specializes in negotiating financial incentives and tax credits for Fortune 500 companies. He has been working with the automotive industry for 25 years and can be reached at (949) 472-4482.
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