The Art of the Deal
Company executives must not only know how incentives will affect their business plan; they must also know how to negotiate for incentives and manage their fulfillment.
Jenny R. Massey, Senior Project Manager, Bingham Economic Development Advisors (Nov 07)
(page 2 of 2)
3. What happens if projections are too high and the company misses the goals set? Too low and surpasses the goals set?
executive should realize how important it is to forecast the most
accurate project numbers possible. It is understandably a difficult
task to undertake; however, most states like to see five-year
projections of capital investment and new jobs.
When mapping out
forecasts, keep the incentive programs in mind. Know what the penalties
are and what the company will ultimately be judged against. For
example, consider tax credit "Program D." Program D requires accurate
prediction of job creation for the next five years. While capital
investment predictions must be made, the Program D monitoring
requirements rely exclusively on new job creation; therefore, capital
investment should not be of too much concern for this program. With
Program D, if the new job projections are too high and the company
falls short of the goals originally set, the program regulations
dictate that the company will receive a prorated incentive amount based
on actual job creation numbers.
On the contrary, consider tax
abatement "Program Q." The Program Q application requires five-year
capital investment and job-creation predictions. Program Q rules state
that the company must achieve two-year employment and investment goals
within a two-year time period. If the company is delinquent in goals by
the end of the first year, missing the mark is not taken too seriously
as long as by the end of the second year the company has caught up to
original two-year predictions. If the company has not achieved its
two-year goals, Program Q's regulations defer to a previously signed
clawback agreement. This means that a portion of the incentives granted
will have to be paid back to the governing body. Alternatively, when
considering projections that were too low - i.e., the company exceeds
original numbers - there is usually no recourse. The company will only
receive incentives on the original numbers predicted for the project.
is important to understand that incentives are funded with government
dollars; as such, there are countless rules governing the incentives,
legal documents and agreements that must be signed, as well as
extensive documentation and reporting requirements. All of this leads
to the issue of accountability. States and local communities want
companies to be serious about their projects and will support those
projects only if it makes good business sense for them to do so. The
trend is such that if a company falls short of goals, states and
communities are asking for money to be returned.
To conclude, an
executive should be confident with the project numbers, both capital
investment and new jobs estimated for the next five years. If a capital
investment is being made or new jobs are being created, an executive
should not be afraid to ask for incentives based on those projections.
Offered incentives should be clearly stated in writing, with actual
assigned amounts from the governing body.
An executive should
know about the incentives to the point where he/she can understand how
they will impact the company business plan. He/she should feel
comfortable about assigning incentive management to one person who will
be responsible and accountable. Finally, consider that incentives
experts may be able to negotiate more appropriate and meaningful
incentive packages, as well as ease the burden of incentives
fulfillment if the company does not have the time or personnel to be
responsible for incentives management.
Massey is the senior project manager for Bingham Economic Development
Advisors (BEDA) headquartered in Indianapolis, Indiana. BEDA provides
comprehensive economic development services for businesses and