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Why Do Many Incentives Awarded Remain Unused?

There’s often a mismatch between incentives provided and those an organization — which also needs to be aware of any “strings attached” — can actually use.

Q4 2018
According to a Brookings Institute report (March 2018), between $45 billion and $90 billion of various federal, state, and local incentives are offered each year for the purpose of creating jobs and enticing capital investment related to economic development. At the same time, industry experts would say only half are used by the recipients — mostly corporations. So, one might ask, “Why wouldn’t the organizations originally seeking these incentives actually use them?”

After serving as “matchmaker” between organizations and communities for over 40 years, we asked ourselves the same question and took a hard look in the rearview mirror to see what answers we could find. What we uncovered were multifaceted answers whereby the economic development agencies (public-sector grantors) and the recipients (private-sector grantees) are both the cause.

Private-Sector Grantees
An organization is awarded incentives for expanding or locating its business but doesn’t really understand the overall process or all the contingencies attached to the incentives. The “strings” that are attached may have the organization ultimately reject the incentive once the terms are understood. Often, the organization does not assign a single point person to marshal the incentives to the end, as some may be tax-related while others are human-resource–related — therefore ending up in different departments. This leads to misinterpretation and confusion.

Once the incentives are taken through the application process and finally get to the administration process, the amount of paperwork and back and forth may be deemed onerous and not worth the value received. Also, because many of the incentives are spread over multiple years, out living the initial project, they get “lost” within the organization.

LES J. CRANMER has advised over 300 clients representing 80 million square feet — including over 50 organizations with distant relocation efforts. Formerly an architectural firm partner, a partner of Fantus Consulting, and national director of Deloitte & Touche LLP, Cranmer is recognized nationally for his experience and expertise relating to corporate relocation, financial incentives, and real estate. His professional expertise covers virtually all corporate facility types including headquarters, back office operations, customer services, shared services support, R&D, data centers, manufacturing, distribution, and other special-purpose real estate holdings.
Lastly, there can be future changes in the business causing the organization to not meet its initial commitments. While there may be clawbacks in the case of grants, tax credits may never be captured.

Public-Sector Grantors
Economic development organizations are marketing and sales groups whose functions are bringing in investment and employment, at which most are very good. Unfortunately, they tend not to be operational implementers. Once the organizations receive the commitment of the incentives for their commitment of jobs and capital, they begin interacting with the various revenue and other governmental departments whose job it is to dot the “i”s and cross the “t”s. They also — with the help of attorneys — make sure the implementation is in compliance with all the relevant statues. At times, this causes misunderstandings of what the organization thought was being promised and that which can be implemented.

During the process of attracting the investment, the economic developer may not truly understand the organization’s issues or needs. This can cause them to incorrectly target incentives and award incentives that are useless to the organization. This occurs many times with recruiting and training programs.

ART M. WEGFAHRT brings to Savills Studley more than 40 years of experience in consulting services associated with corporate real estate and facilities. His professional expertise covers virtually all facility types including headquarters, back office, customer service, R&D, data centers, manufacturing, distribution, and other special-purpose real estate holdings. His career highlights have included consulting at Interspace Inc. (an architectural and facility consulting firm), and senior management with PHH Fantus Consulting and its successor, Deloitte & Touche/Fantus Consulting. Wegfahrt has been responsible for advising more than 300 organizations on issues related to facilities configuration and location, representing over 50 million square feet with a real estate asset value of $10 billion.
Finally, governmental processes can become frustrating to organizations — especially small, growing entities that are focused on their business and not filings. What they believed initially was something that could be a help to them becomes more of a burden.

A Successful Partnership
It should be asked, “Why are the incentives granted in the first place?” Most experienced professionals in the location consulting field would tell you that the incentives are necessary to fix deficiencies in a location to make it more attractive to an organization. This may be training to fix a “skills gap.” It can be roadwork to accommodate traffic or utility extensions to make a site functional for the organization’s use. More often than not, incentives end up being tax-oriented — which benefits the recipient by helping lower the ongoing annual costs.

It is important that all incentives are clarified from the beginning and the organization has a thorough understanding of all the “bells and whistles” as well as “strings” attached. Often, while trying to encourage business to commit and grow at their location, public-sector employees lose the notion of courteous “selling” and instead become the “incentive police,” which can create an adversarial relationship. Public- and private-sector groups need to work as partners and not adversaries.

After reviewing the outcomes of location engagements over a lengthy period of time, as a general rule, we have found that the incentives accepted and actually used the most are those associated with property tax. Included are PILOT programs, abatements, and tax incremental financing programs. Most of these programs are very direct, in terms of rules, less cumbersome to understand, and are usually administered at the local government level, which tends to be free of thicker regulatory bureaucracy.

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