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Public-Private Partnerships Incentivize Industrial Development

Communities that embrace creative solutions and collaborative approaches are well-positioned to thrive and attract jobs and investment from the private sector.

Q1 2024
Public-private partnerships (P3s) are vital to a community’s growth. Collaboration between the public and private sectors fosters development projects that result in creating or retaining jobs as well as adding to the tax base of a community.

Land development isn’t the only benefit to these partnerships, most communities have dedicated staff within their economic development or community development departments who serve as liaisons to help the private sector navigate the complexities of regulations and procedures. This role involves fostering relationships, streamlining processes, and championing projects that align with the community’s development needs. At the core, economic development professionals are charged with attracting new businesses, working to grow existing businesses, and supporting workforce development initiatives. They advocate for and support initiatives that contribute to the community’s economic well-being.

Speculative Development to Attract Industry
While P3 incentives for speculative industrial development are less of an interest to primary markets where there is already robust population growth and significant organic investment, often secondary and tertiary markets are willing to invest in P3s to support these types of projects. Over the past few years, the Maxis Advisors team has seen increased interest from government and utility partners to support speculative development projects in their respective markets.

Speculative development, in this context, refers to the construction of industrial properties without a pre-committed tenant. Communities in these markets will set goals for development that allow them to take a strategic approach to proactively support and address the demand for new industrial space that aligns with their economic objectives. For example, an automotive OEM locates in a jurisdiction and the communities around the manufacturing facility know that suppliers to the OEM are going to set up operations in the region. These surrounding communities might engage with the private sector to establish a P3 that supports building speculative development, in hopes to appear more attractive and address speed-to-market demands from suppliers.

Key reasons for the heightened interest in speculative development support include:
  • Job growth: Communities aim to attract or expand specific industries that can contribute to job creation. By developing new industrial spaces speculatively, they create an environment conducive to attracting businesses and, subsequently, fostering job growth.
  • Diversification: Introducing new industrial product helps diversify the economic landscape of a community. By accommodating a variety of industries, communities can mitigate risks associated with relying heavily on specific sectors.
  • Increased tax base: The development of new industrial properties contributes to the local tax base. As businesses occupy these spaces, they generate property taxes and other local revenues, providing the community with additional funds for public services and infrastructure.
  • Speed to market: Speculative development can make a community more attractive to businesses seeking suitable locations for relocation or expansion. It positions the community as proactive and responsive to the evolving needs of the market.
Most communities have dedicated staff who serve as liaisons to help the private sector navigate the complexities of regulations and procedures. Secondary markets are typically within 30 to 45 minutes of major cities that boast large populations, universities, airports, and numerous amenities. In addition to major market proximity, these smaller communities have clear access to highways and interstates. For a developer, expanding their search from a core metropolitan area could increase site availability and reduce land costs for industrial development. Companies considering relocating or expanding their business into a secondary market could also benefit from lower real estate and labor costs.

The increasing attractiveness of secondary markets for developers and end-users gives local governments an opportunity to creatively support development projects. This discretionary support is often tailored on a case-by-case basis and may involve local government agencies, state authorities, and utility partners. Each community structures its support mechanisms differently.

Assessing Opportunities for Collaboration
Timing is crucial when exploring potential support from the public sector, and the due diligence phase of a project is an ideal time to assess opportunities for collaboration. This phase occurs when the development team conducts an in-depth analysis of various factors, including available land, construction costs, return on investment, market demand, and existing availability. During this process, the team identifies potential hurdles that may impact the project’s success. The due diligence period is a strategic window for initiating discussions with the public sector and economic development professionals.

In some communities, the local government can support development through a reimbursement of taxes paid once a building is delivered and on the tax roll. Tax increment financing (TIF) is another tool used by government to assist developers with infrastructure upgrades associated with a project. At the state level, departments such as the Department of Transportation could potentially support a project if infrastructure upgrades are aligned with projected plans for upgrades in the area. Each state will have a different structure for how they support projects. Infrastructure support from a state could be available through a fund with an earmarked amount of dollars that is tied to target industry sectors and job growth. These type of economic development grants could require coordination with the local government to apply for specific public infrastructure improvements that will support private development. Funding from the local and state government for a development project is typically tied to projected job growth and new investment.

The due diligence phase of a project is an ideal time to assess opportunities for collaboration. Local utility partners could also be a resource when developing new product. Depending on the utility provider and the market it serves, there could be opportunities to receive funds for site development and energy-efficient building upgrades. Site infrastructure programs could potentially support water and sewer extensions, environmental studies, and road improvements needed at the site. Energy efficiency programs could include industrial building upgrades such as rebates for lighting and equipment, HVAC equipment, and industrial equipment.

Just like states, each community is different and will have different drivers and priorities when planning for growth. Navigating the bureaucratic processes of local government and aligning with the priorities of elected officials can indeed be challenging for private-sector developers and end-users. However, fostering collaboration between the public and private sectors is essential to create a win-win scenario for the community and developers/end users. Recognizing the strengths and capabilities of each sector is key to achieving successful and expedited project outcomes. Communities that evaluate their economic toolbox to ensure it aligns with their goals and future plans are better equipped to support the private sector and drive growth.

A business-friendly community with staff that is responsive, proactive, and open to collaboration is a true differentiator. The level of customer service the private sector experiences will influence a developer’s and company’s decision to invest in a community. This is especially crucial in a risk-averse industry such as commercial real estate where developers seek confidence and assurance when making substantial investments.

A business-friendly community with staff that is responsive, proactive, and open to collaboration is a true differentiator. Economic development professionals in secondary markets can set themselves apart by taking a leadership role in facilitating discussions with internal departments and elected officials about development opportunities. Bringing together key representatives from different departments early in the development process allows for the identification of challenges and the exploration of potential solutions before they become significant obstacles.

A Valuable Approach
In today’s capital market environment securing support from local government is more crucial than ever to make development deals financially viable. Various challenges — including the rising costs of construction and materials, high interest rates, and more stringent lending practices from banks — have made it difficult for new industrial development projects to succeed. Additionally, the perception that “all the good sites are gone” and “if it hasn’t been developed yet, there’s a reason” often arises, but the reality is that many undeveloped sites face significant barriers to development.

Public-private partnerships (P3s) emerge as a valuable approach in overcoming these challenges. P3s provide a framework for addressing obstacles and creating thriving communities that attract the investments and jobs essential for sustained growth. Secondary and tertiary communities that embrace creative solutions and collaborative approaches are well-positioned to thrive and attract the jobs and investment desired by stakeholders in the community.

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