The Money Issue: Negotiating for Incentives
Employing a standardized process when negotiating for incentives will optimize the results and allow a company to compare various offers on a consistent basis.
As detailed in, “The Role of Taxes,” taxes and associated reductions are critical components in site location decisions. Significant reductions to taxes are often obtained via negotiated incentives, which have been a hot topic for the past several years with flashy headlines and purported large awards. An observer would think companies make location decisions based on the biggest incentive offered. In reality, an offer’s quantitative dollar value is just one aspect of a properly negotiated incentive.
Negotiating for financial incentives might seem mysterious, but employing a standardized process optimizes results and allows a company to compare various offers on a consistent basis. A strategic negotiation process is comprised of the following key components: request for proposal, feasibility analysis, negotiation, and approval.
Request for Proposal
An incentive Request for Proposal (RFP) is submitted to each shortlisted site to determine what incentives will be offered. Crafting the RFP is an important step. The RFP details project parameters, timing, and a request for assistance. An RFP should also include both quantitative and qualitative benefits to the community; just as the company is seeking a good community partner, communities are seeking good corporate citizens.
When developing the RFP, the company should evaluate its job, wage, and investment statements carefully. Initial statements are often the benchmark for negotiation, and future downgrade adjustments may result in corresponding incentive reductions. Each incentive program will have its own requirements — some negotiable and some not. Incentive requirements should be considered when determining job, wage, and investment levels to represent in the RFP.
Once RFP responses are received, it is time for a comparative analysis to determine feasibility of incentives. A comparative analysis includes incentive values and qualitative factors to determine true “value” of incentives offered.
When evaluating incentives, total dollars are important, but the biggest incentive dollar amount is often not the best solution as incentives are the mitigation or reduction of costs, and incentives values are often higher where the costs are higher. Incentives are not all created equal. Qualitative factors such as incentive payout term, form of incentive, required commitments, and recapture are key considerations in the feasibility analysis.
For example, $100 of an upfront cash grant does not have the same value as $100 of property tax benefit over five years. Some incentives may be unusable all together. A nonrefundable income tax credit is of no value to a company running net operating losses. However, if the same tax credit is usable against withholding taxes, it has value. Incentives must be evaluated based on each company and project’s facts and circumstances.
The negotiated incentive package should be a win-win for the company and community. Negotiation
After evaluation of offers, the company should have a clear picture of incentive value and feasibility at each site. Developing an appropriate negotiation strategy is paramount to success. Determining optimal, acceptable, and unacceptable outcomes can help a company develop a negotiation strategy. What are the negotiation priorities? What is the justification for a requested increase? What evidence can be supplied to bolster the argument? What items are deal killers vs. extra bells and whistles?
Overall dollar value is the most obvious item to negotiate. However, just as qualitative factors must be analyzed in the feasibility stage, they should also be considered for negotiation. For example, if the incentive is “all or nothing” based on achieving a job commitment, it may be more valuable to negotiate a 20 percent commitment buffer rather than increasing the total dollar amount.
As part of negotiation, it may be prudent to supply supplementary information to justify requests. Appropriate evidence will depend upon the negotiation strategy implemented and request. Typical evidence may include a gap analysis, a cost differential comparing shortlisted sites, a specific extraordinary cost required at the site or as part of the project, or additional information regarding participation as a corporate citizen, community involvement, and outreach.
Overall, the goal of the negotiated incentive package should be a win-win for the company and community. An incentive agreement can be the first step in an ongoing productive partnership between business and government.
The process does not end with negotiation. Each incentive has its own required application and approval documentation and procedures. Since incentives are a use of public funds, requirements must be strictly followed. The order of approval and agreement depends on the municipality. Sometimes the agreement must be finalized before approval and sometimes the reverse. Often the approval must occur in a public meeting.
Once the parties agree upon the value, form, and terms of the incentives, the incentive will be memorialized in an incentive agreement, typically executed by both parties. The agreement delineates company commitments and requirements, incentives benefits, default and cure provisions, and compliance and administrative reporting requirements.
Administration of the reporting requirements is as important as any other step in the process. Fulfilling administrative requirements ensures monetization of negotiated benefits.
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