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Weighing Economic Incentives in the Location Decision

The strength of the industrial market gives companies the upper hand when making site selection decisions.

Q1 2016
Hoist Liftruck Manufacturing Inc. secured a multimillion-dollar incentives package to support the high-capacity forklift manufacturer’s relocation
to East Chicago, Indiana.
Hoist Liftruck Manufacturing Inc. secured a multimillion-dollar incentives package to support the high-capacity forklift manufacturer’s relocation to East Chicago, Indiana.
What used to be “icing on the cake” in a corporate site selection project is now often a key ingredient in the cake itself: economic incentives.

Thanks to an increase in the U.S. gross domestic product, the outlook of manufacturers has improved, and many are eager to move forward with real estate improvement plans — whether those include expansion or relocation of existing facilities into new or revitalized real estate. The general consensus is that during the economic downturn, space optimization studies and lean manufacturing processes aimed at managing workflow and increasing efficiencies served a purpose, but the time seems right to alleviate overcrowding and/or transition from obsolete buildings by expanding footprints and relocating into newer, more ef?cient industrial properties.

Despite this optimism, rising operating costs and an intense focus on profit margins mean the dollars required to make these shifts are tighter than ever. Today’s market conditions call for a savvier real estate approach, and it is no longer a secret that a solid incentives package can mean the difference between propelling a deal forward and maintaining the status quo.

The Story Behind the Headlines
The relocation and expansion of manufacturing and distribution facilities are constantly in the news, and companies have come to understand that when headcount and anticipated job creation is signi?cant enough to boost a local or regional economy, they can expect lucrative economic incentives to assist in those efforts. The fact is that without these types of incentives, many plans would be sidelined due to the realities of today’s marketplace.

According to Ridge Development, the industrial development arm of Transwestern Development Co., while construction costs have been relatively stable since the start of the recession, the price of desirable land, such as that along major highways or near airports, has increased. And in many regions, labor costs continue to rise. Furthermore, businesses are now competing with institutional investors for capital and are operating at a disadvantage. Incentives, if structured correctly, can go a long way toward offsetting those variables.

The story behind the headlines is that states are desperately trying to retain their industrial base — and attract companies seeking to obtain valuable real estate deals like those secured by other firms. In Q3 2015, Transwestern’s brokerage and consulting professionals assisted Hoist Liftruck Manufacturing Inc. in identifying a 550,000-square-foot facility for acquisition and simultaneously secured a multimillion-dollar incentives package to support the high-capacity forklift manufacturer’s relocation. A more suitable facility combined with highly favorable economics prompted the company to move only 25 miles from property in Bedford Park, Illinois, to East Chicago, Indiana, where it will shift approximately 300 jobs and is expected to employ 500 people by 2022.
Incentive Program Types
  • Operating / Financing
    • Subsidies
    • Exemptions
    • Utility Discounts
    • Reduced Cost Financing
  • Capital Investment
    • Project Grants
    • Abatements
    • Tax Credits
    • Infrastructure
  • Location Specific
    • New Market Tax Credits
    • Empowerment Zones
    • Enterprise Zones
    • TIFs
  • Human Capital
    • Training
    • Tax Credits
    • Wage Subsidies
    • Recruitment Assistance
Due Diligence Is Key
To reap the greatest rewards, due diligence on potential locations goes hand-in-hand with the creation of stimulus packages during a site selection process. Conducting a comprehensive assessment of human capital requirements and the company’s existing real estate portfolio is a good place to start to determine where the greatest opportunities lie.

Up front, it is important that a company can show the short- and long-term financial impact on an area if it were to join the local economy. How effectively this is done can impact the responses from economic development entities.

Available inventory of industrial facilities in an area also comes into play, so detailed explanation regarding specific industrial requirements is best communicated at the onset of a search. With the national industrial vacancy rate at 6.4 percent at the close of 2015, new industrial property is scarce in many regions, and a willingness to rehabilitate older facilities may be the most cost-effective route to relocation.

Strategic Negotiations
From this point, it often comes down to strategic negotiations with various governmental entities because competition can be fierce. The Council for Community and Economic Research reported that between 1999 and 2015, the number of state business incentives programs grew from 940 to 1,934. Tax credit, grant, loan, and tax exemptions accounted for the majority of incentives. It’s also important for companies and their advisors to take into account upfront dollars as well as savings that could be achieved over the longer term. This could include support in the way of marketing and sales assistance, technology development, or infrastructure improvements.

Using economics of geography to maximize business opportunity by minimizing cost and risk is a sophisticated and financially rewarding way to position for future business success. In the Hoist Liftruck example noted previously, the real estate relocation decision included more than the company’s need for additional physical space. Hoist specifically wanted to lower above-the-line operating costs such as property taxes and workers’ compensation premiums. It also was looking for a state that was producing the skill sets that could make the company successful. The business climate and regulatory environment in a business-friendly state such as Indiana was best positioned to respond to those needs.

During the incentives negotiations process, companies expanding their industrial footprint should not jump at the package with the highest dollar value on paper. There have been many examples of site selection decisions made primarily on this basis that ultimately did not serve the company long term. Instead, economic incentives should be utilized to make a great deal even better. It is crucial that a company making a relocation decision not only look at the economics of the deal to manage the risk but also examine the other intangibles related to the offer. Using economics of geography to maximize business opportunity by minimizing cost and risk is a sophisticated and ?nancially rewarding way to position for future business success.

Is there a limit to how much competition the market can support when it comes to economic incentives for industrial properties? Probably, but we may not reach it for several years. For now, companies can reap the benefits of stiff competition among those entities offering incentives and upgrade their industrial portfolio without hurting their balance sheets. Because when all else is equal between two or more locations, incentives may be the secret ingredient to a lower project cost.
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