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Four Key Concepts to Maximize Incentives

In order to maximize your ROI, start the incentives process early, think holistically, target those incentives that have the greatest effect on NPV, and make sure you understand all the players involved.

Q1 2019
As those in the economic development sector (should) know, no two projects are the same, no two locations are the same, and no two incentive programs are the same. From target incentives to key players involved in the deal — and everything in between — numerous factors determine the success or failure of a project. While there are a multitude of decision points involved in every site selection project, below are four key concepts to help maximize return on investment and project success.

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.

Use Application Cycles or Funding Windows to Your Advantage

Many state and federal incentives now have application cycles or funding windows. These applications may be considered on a monthly, quarterly, semi-annual, or annual basis. By starting early, there is more flexibility within the application cycle, or a state may potentially offer more incentives if funding can be accepted from one cycle versus another. The flexibility from an early start also helps to avoid situations where a project cannot be announced or move forward until incentives receive final approval.

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.

Case Study: How to Own Your Process
Below is an example of steps taken during a project to maximize the return on investment:
  • Used the incentives (and the time gained by starting the incentives process early) to turn low-cost municipal land into a better candidate than developer-owned land, cutting price per acre by 80 percent
  • Held the project in a different tax entity, allowing it to take advantage of lucrative state investment tax credits
  • Realized HR expected the sales staff to be reduced by 50 percent as clients transitioned to online purchasing, which kept the company from committing to an over-estimated employment count
  • Understood operations wanted to spend $10M over the life of the project on backup generators, when the utility would provide a substation on-site, avoiding the need
Target Incentives
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?
This requires an in-depth knowledge of the project’s situation, the offering party’s situation, and the incentive. A common mistake of companies — and commission-based consultants — is ignoring the risks and costs. Receiving $100k in training is great, but if a project requires adding two dedicated staff just for compliance, money may be lost on the deal. Similarly, if a project is one employee short on a 1,000-job project and that triggers a full grant payback anytime in the next decade, ask if there is a way to amend the agreement. If not, that value may be transferred to another more flexible program. These decisions can only be made if there is a complete understanding of the compliance requirements. Identify who will be doing the compliance and make sure the project is in agreement with them on time required/cost of compliance.

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?
Understanding Target Incentives

To understand the available incentives and what to be targeting, there is no substitute for good due diligence. Research and understand what incentives have been given to similar projects; what incentives the state, county, and city can legally provide; what restrictions are associated with lobbying; and options to change the policies or legislation.

For example:
  • Receiving statutory tax credits that cannot be used due to lack of coordination with the tax department
  • Instead of choosing program A — $750k cash over four years — you select program B — $1.5m over 10 years, not considering the nearly six-figure annual compliance bill for program B
  • Accepting a $100k grant instead of having the city build the $100k sewer line that (with additional hidden fees) costs the company over $500k
Projects that create opportunities for economic mobility will stand out among the competition when it comes time to secure incentive approvals. Failure to address economic mobility, or any of the topics above, will allow for the gatekeepers and media to create their own spin, which rarely bodes well for projects, sponsors, or stakeholders.

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.

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