Area Development
In recent months, megadeals are the talk of the economic development community and catching headlines: Foxconn investing $10 billion to locate in Wisconsin; Toyota/Mazda looking to build a $1.6 billion manufacturing facility; and, most recently, Amazon soliciting proposals for HQ2, which is expected to have a total capital outlay of $5 billion.

In the wake of these news stories, those of us working in site selection, economic development, and corporate real estate have undoubtedly had several dinner table and cocktail party conversations about government incentives and their impact on corporate investment decisions: The answers to these questions are the same whether we are discussing multibillion-dollar megadeal investments, a $5 million facility expansion, or anything in between. Though entertaining dinner table and cocktail-party topics, the stakes are high for corporate real estate executives to understand how to answer these questions and effectively use government incentives to tip the scales in the capital approval process.

{{RELATEDLINKS}} The “But For” Requirement
There are an estimated 10,000 government incentives programs in existence across the country and wildly more when considering international programs. With that many incentive programs, there is no one answer to any of the questions surrounding corporate investments. However, of these tens of thousands of incentive programs, there is one commonality among them all: a requirement that program administrators determine the incentive is materially impacting a company’s investment decision. Stated simply, the administrator must determine that “but for” this incentive the company would not proceed with the investment. This may be called many things: the “but for” requirement, the incentive-impact effect, the material inducement resolution.

Regardless of what the statutes and bylaws call this important requirement, an effective partnership with a government entity hinges on a company’s ability to satisfy it. We’ve all seen companies approach the “but for” incorrectly, e.g., requesting incentives because their neighbor or competitor received some, infeasibility suggests a move across state lines, or a company representative making reference to certain political connections. The possibilities for how to address the requirement the wrong way are perhaps endless.

Addressing the requirement the right way comes down to one simple thing: clear and accurate communication regarding a company’s investment decision and capital approvals process. For our small or mid-sized clients, this investment decision may be made with a trusted advisor over a cup of coffee. For our larger corporate clients, the decision often requires formal approval from a capital investment committee or board of directors. Whether it’s a coffee shop or boardroom decision, clear communication of the factors influencing a company’s investment decision are imperative for achieving governmental, community, and taxpayer support for an incentives award.

{{SIDEIMAGE1}} Capital Approval Justifications
While the capital approval processes vary from client to client, all involve the consideration of important alternatives when making decisions, including alternative locations, project scope, or to do nothing at all. Typically, numerous other considerations create such complexity in the capital approval process that corporate executives are challenged to step back and pinpoint the impact that incentives play in the investment decision. To create some clarity on this issue, let’s further explore some of the common impacts that we see incentives have on our clients’ capital approval processes.