Similarly, for most businesses and industries, while 2020 brought new challenges, it also exacerbated other challenges that companies have been tackling for many years such as labor shortages, operating costs increases, and a shifting economy. When we couple these challenges with a shortage of industrial real estate product, supply chain disruptions, and a move to a hybrid employment model, to name a few, site selection risks have increased significantly. There are increased financial risks and equally important are the increased timing risks. Today, a strong partnership between government and private enterprise is more important than ever. This partnership can help erode delays and reduce costs. Governments control timing, permitting, public hearing timelines, and even responses on local issues that can either make or break a deal.
While there are differing opinions on the use of incentive programs to attract new investment and employment, the fact remains that these programs, when structured properly, can have a significant value on a project’s upfront and ongoing operating cost structure, mitigate certain project risks, increase the viability of a project’s success, and generate a positive return on investment for the government entity providing the incentive.
Matching Business Needs
We also learned in 2020 the resilience of companies, their ability to adapt to the most difficult situations and evolve in order to keep their businesses afloat and their workforce employed. We have seen this same level of flexibility and adaptation in many states and localities as they have revised their incentive programs to better match the needs of the growing businesses and industries. Unfortunately, however, there are many that have not.
While there are still many unknowns about how office space will be used in the future, the scale of the hybrid workforce, and when the negative effects of the pandemic will end, it is clear that if states and localities intend to use incentive programs to attract investment and jobs, there is a need to evolve the programs to account for the changes discussed. One challenge in this discussion about evolving the incentive programs is the diversity of projects and companies that are active in the market today. The great news for the U.S. economy is that there have been significant projects announced throughout 2020 and 2021, notably in the life sciences, research and development, data center, and manufacturing industries.
Many of the projects in the market today face hurdles in either qualifying for the incentive programs or generating enough tax liability to realize a benefit. Due to the scale, these projects tend to meet the requirements of the incentive programs today from a headcount, average wage, and capital investment perspective, with many of these projects constructing new facilities with the intention of having a large portion of their workforce located in the office. The dilemma is that many of the projects in the market today face hurdles in either qualifying for the incentive programs or generating enough tax liability to realize a benefit. There are challenges for both industrial and office projects.
The operational changes that are impacting incentive eligibility include:
- Increased automation to help mitigate labor shortages;
- Increased construction and fit out costs due to materials shortages; and
- Adoption of a hybrid workforce model.
A challenge that continues to plague the industrial sector is the ongoing labor shortage compared to the soaring number of job openings. Job placement site Indeed estimates there were 9.8 million job openings as of July 16, and the Bureau of Labor Statistics indicates a current unemployment rate of 5.4 percent.
Many companies have increased the use of automation to help mitigate their workforce challenges caused by the labor shortage. While the need for increased automation brings a higher level of capital investment on a per square footage basis and higher electric use, there is a downside on the incentives side. In many states the smaller headcounts will preclude a company from qualifying for certain state incentives. In addition, in these same states, there are no state programs that recognize high capital investment or that provide a usable benefit to offset the hit on the company’s Profit and Loss statement. Automation is not the only aspect triggering higher capital investment, with a lack of existing real estate and the increasing need for build-to-suit facilities, commodities critical to real estate construction, such as steel and lumber, have had a significant impact on construction costs.
Adoption of a Hybrid Workforce Model
As companies continue to understand how office space will be utilized in the future, many companies are evaluating a move to a hybrid workforce model, in many cases, adopting a work-from-anywhere methodology. This structure creates its own set of incentive qualification challenges. In many states, incentives are based upon the employees working from a single location or in a special incentive zone. With a work-from-anywhere model those positions that are not in the office a “majority” of the time will not qualify for the incentive.
With a work-from-anywhere model those positions that are not in the office a “majority” of the time will not qualify for the incentive. Similarly, certain states require a local incentive match in order to qualify for a state incentive. Typically, local incentives are based upon the incremental property taxes generated by new capital investment. If a company is a 100 percent work-from-home or maintains a minimal footprint, it is unlikely that a company would generate enough investment to qualify for the local incentive and, therefore, would not qualify for the state incentive. The other component impacting the level of capital investment being made is the abundance of office space that exists. With many companies requiring less space, there has been a significant increase in sublease space, requiring little to no capital investment.
Not all changes to the incentives landscape are a result of operational changes within business. One of the effects resulting from the increased industrial activity that was occurring pre-2020 and continuing throughout 2020 and 2021 is a lack of wage diversity in many communities. To address this, many communities have created incentive program thresholds requiring wage levels that, for a large portion of active industrial projects, are unachievable.
Flexibility in Incentive Programs Needed
Each type of industry and project has its own merits and value add, whether it is a Fortune 500 company creating 1,000 new jobs or a newly established company with a single facility looking to create 100 new jobs; both projects have their own level of corporate risk and value add to the respective location. A healthy incentive program has enough flexibility to evaluate each project and its inputs on a case-by-case basis, and the ability to view a project’s ROI on more than just number of jobs created and/or average wage.
There are several states and localities that have embraced these changes and designed incentive programs that provide the flexibility to account for nuances such as work-from-anywhere. As we hope to finally arise from the pandemic, states and communities that are progressive and listen to the customer will continue to evolve their incentive programs to account for the changing environment in which business finds itself. The incentive programs of 20 years ago do not work with the ever-changing global economy in which we live. States and communities must be true partners and offer flexible programs to support projects of all shapes and sizes.
Amy Gerber brings over 19 years of industry experience and is an executive managing director in Cushman & Wakefield's Business Incentives Practice. Gerber specializes in state incentive and tax negotiation and implementation. She utilizes her state and local tax background when working with economic development teams to interpret and amend tax statutes that generate significant operating and tax savings for her clients.
Gerber has led and managed numerous multistate incentive negotiation engagements for both office and industrial projects for clients and has also led the efforts to modify state incentive legislation on behalf of her clients.
Gerber came to Cushman & Wakefield from JLL. Prior to joining JLL, she worked at KPMG, LLP with the State and Local Tax Practice/Strategic Relocation and Expansion Services Division. Brad Midgal has over 15 years of experience managing corporate site selection engagements, business incentives projects, and economic development consulting assignments. Brad expertise is in the areas of domestic site selection and location analysis, economic incentives research and acquisition, and demonstrating the economic and fiscal impacts of a wide variety of projects to both corporations and governments. Meghan Gaydos is a senior analyst in Cushman & Wakefield’s Business Incentives Practice with four years of accounting and financial sector experience. Utilizing her accounting and financial experience, Meghan prepares the complex financial and tax analysis evaluating the various cost and tax structures and their implications on a company’s P&L. She leverages her legal background in the analysis of state and local tax policy and tax and incentive legislation.
Prior to joining Cushman & Wakefield, Meghan was a senior associate at EY where she gained public accounting experience in the State and Local Tax/Credits and Incentives group.
Meghan is a member of the Georgia Bar Association and the Atlanta Bar Association.