Ensure Your Project Is Competitive by Starting Early
Traditionally, the competitive nature of a project has been the first requirement in the legislation, policy, guidance, rulings, and applications of nearly every incentive program; yet somehow, it is often overlooked. In reviewing the myriad of text that surrounds most negotiated incentives currently available, the language generally states that the project “must be competitive” and does not say that the project “must have been competitive at one time but not necessarily now.” The latter is an exaggeration but does occur.
This stems from a fundamental flaw in the incentives process for many companies: they start the process too late. Incentives can take dozens of forms, solving hundreds of potential development and operational issues associated with a site or location. As such, incentives should be reviewed, at least preliminary, at the onset of a site search. Opportunity Zones, free-trade zones, Freeport exemptions, or special tax implications — when considered with the labor, tax, and logistics factors — may narrow a national or international search to a specific region.
By incorporating incentives earlier in the process, the incentives team can work with the state or local economic developer for cost-effective locations and collaboration opportunities. This early start helps avoid the situation of frantically trying to negotiate incentives on a site on which a contract is days away from being signed on by the real estate team. If the location is flexible, an early start may also come with offers for a reduced-cost building or site. The land may have development issues, but if there is time (due to the early start) and the community has the incentives, the desired result could still be achieved with a higher project return on investment.
Own Your Process
It is common to review an incentives package that was provided to a company and correctly assume which department negotiated it. If there are large statutory credits with little tax liability and no negotiated incentives, it is likely a tax team was not involved, or the company started too late. A finance-led project tends to target the cash grants but miss the infrastructure benefits. In short, departments tend to focus on incentives that matter to them, instead of thinking holistically.
Whoever runs the incentives process (including consultants) must have access to data and decision-makers in each department, including real estate, finance, tax, human resources, and operations. More importantly, they must use this information. This allows the incentives leader to maximize the incentives for the project or company, not just their respective vertical.
Collaboration between different internal verticals helps to determine where incentives can be used to benefit the project. For instance, the real estate team may want to exclude any site without utilities; however, if the operations team has ample leeway before production, there may be time for the community to install utilities (at their expense). As the price of pad-ready sites has dramatically risen recently, this strategy could materially reduce the project cost, keeping the finance team happy.
Economic development entities must be able to justify any given incentive package to their financial backers, whether they be private donors or taxpayers. A large cash grant could raise a red flag, but a benefit that stays within the community, even if the company leaves, is easier to rationalize. This is the fundamental reason for infrastructure and training grants. It is common for companies negotiating in-house to attain a modest amount of upfront cash, while overlooking infrastructure costs (roads, water, sewer, fees, utilities, etc.) that are 10 to 20 times the cost of their cash grant.
Focus on incentives that will have the greatest effect on the project’s net present value (NPV). This can be broken down into timing and value. While upfront grants have the least NPV discount due to timing, infrastructure and training support usually occurs early in the project lifecycle and may represent significantly higher value. In other words, infrastructure and training may not bring that early cash infusion into the project, but could end up having a greater NPV impact. Either way, both are usually better than a 20-year tax credit.
With target incentives, always ask the following questions:
- Is this incentive beneficial?
- Can we use all of it?
- When will we use it?
- What are the costs?
- Is there something else we would rather have?
- And, the one that is so often missed, what happens if we come up short on our projections?
Understand the Players
As the potential location list shortens, there should be more communication with the economic development officials. As early as possible, identify sponsors, advocates, gatekeepers, and decision-makers.
Sponsors: Sponsors will help navigate the incentive process and present the project to the decision-maker(s). Ask, what sponsor has the knowledge, zeal, availability, and respect to attain results for the project? The sponsor will most likely need to explain why incentives should be approved for the project. Provide this information early in the process by thoroughly answering the following questions, and use compelling case studies to help communicate your story:
- Are there additional suppliers or growth that will occur because of this project?
- Are you an industry leader or using first-of-its-kind technology?
- Do you provide great benefits and training opportunities for your employees?
- Are there positions that provide transferable skills, or positions where employees can work their way up the ladder?
- What community support do you traditionally provide?
Advocates: It is common that due to project metrics, unforeseen circumstances, or just plain politics that an advocate will be needed for the project. Identify individuals that can move the project over hurdles and through gatekeepers, while giving the sponsor the support they need.
Gatekeepers: Gatekeepers can be city managers, council members, and members of the legislature, among many others. It is important to identify them early and know (a) whether they are a true gatekeeper and can affect the project, and (b) if provided the right solution, they can turn from a gatekeeper to an advocate. Few things are more powerful than having a traditional gatekeeper as the project’s advocate.
Decision-Makers: Identify and understand who the decision-makers are for the incentives involved; it may not be obvious. If city council asks for the city manager’s recommendation and has previously followed it 100 percent of the time, then the decision-maker is the city manager, not council. Understand the decision-makers’ needs, predict their questions, position your project correctly, and provide solutions.