The Art of the Deal
Company executives must not only know how incentives will affect
their business plan; they must also know how to negotiate for incentives
and manage their fulfillment.
By Jenny Massey, Senior Project Manager, Bingham Economic Development
Advisors (BEDA) (Nov 07)
Most corporate executives are aware of economic development incentives.
There are almost daily announcements in the news. Earlier this year,
for example, Honda Motor Company announced that it would be building
a new assembly plant near Greensburg, Indiana. Honda will be investing
$550 million and create approximately 2,000 jobs; Indiana was able to
lure the company amidst fierce competition with $141.5 million in tax
credits, tax abatements, and training money. These incentives meant a
huge difference in project startup and employee training costs and will
provide tax savings for many years beyond the initial project undertaking.
Incentives offered to Honda equal roughly 26 percent of its capital investment
or $70,750 per new job. Executives should know, however, that incentives
are not just available for enormous developments like this; they can
have similar impacts for much smaller projects.
After reading about large project announcements and their associated
incentives, an executive of a smaller firm might wonder how to obtain
incentives and whether or not his/her firm will qualify for them. Fortunately,
incentives are available to most companies that are making a capital
investment, creating new jobs, or relocating operations.
Leveling the Playing Field
Of course, there has been some controversy with regard to the
offering of incentives by state and local governments. The question has
been posed as to the purpose and effectiveness of offering incentives;
the quick answer is that incentives make good business sense. Many states
and local communities offer incentives in order to attract capital investment
and create new jobs. They must be competitive in order to win projects,
and incentives can help level an uneven playing field.
For example, Company X wants to relocate to a new site and it has two
viable options in different communities. Community A has a rural undeveloped
site and an unskilled work force. Community B has an established industrial
park site but much higher taxes. Incentives can offset each disadvantage
mentioned above: undeveloped land with infrastructure and development
programs; an unskilled work force with training programs; higher taxes
with tax credit and abatement programs. Aggressive states and communities
will offer incentives to offset their disadvantages, enabling them to
better compete for projects.
Many times incentives are tiebreakers that narrow several good sites
to a final project site. Incentives, however, cannot turn an ill-fitted
site for a project into a good one. They can only help narrow the decision
between good site option possibilities.
Three Questions
There are three questions that an executive should ask
when considering the incentives for a new project:
1. How can I be sure that the company is getting the best incentive
deal?
There is no direct or easy answer to this question; however, an executive
should be mindful of several factors.
First, is it a competitive situation? The most lucrative situation for
incentives is if there are two or more site locations being considered.
Communities are less motivated to offer incentives if there is no competition.
Second, have the company's goals, needs, and desires been clearly declared
to state and local community representatives? Each project is unique;
the more the state and local representatives know and understand, the
better they will be able to tailor-assist with the project.
Third, consider that there are really three parts to managing a new
project: real estate, operations, and incentives. Experts are handling
the first two parts. If the executive has any questions about incentives,
perhaps an expert should be consulted in this area as well.
Remember, the company gets one chance to get it right. States treat
incentives as business negotiation tools. If a company does not ask for
incentives or is not well-informed of the incentive possibilities, it
will most likely not maximize its situation. Here is a real-life example:
Company X stated that its project would include a $100 million capital
investment and create over 400 new jobs. It was a competitive situation,
and yet the company did not really understand how to compare and evaluate
the incentive packages. The state where it wanted to relocate had offered
the company nonrefundable tax credits, training, and other refundable
tax credits. The corporate executive decided to seek the advice of an
incentives expert.
After some discussion, it became apparent that the nonrefundable tax
credits (though they are a good incentive) would have little meaning
for the company, as it had predicted no state corporate income tax liability
for the first four years of operation. It also became clear that the
training and other refundable tax credits that had been committed to
the project were significantly less than those received by other similarly
sized projects. The incentives expert was able to help the company work
with the state to restructure the incentives package so that it added
more value to the project, and Company X was able to locate to the preferred
state.
2. How can I be sure that the company realizes the benefits
of the incentives negotiated?
An executive should be considerate of the time it takes to manage incentives.
Many companies negotiate for incentives and use them to help guide where
their project locates but, unfortunately, many companies do not actually
receive the benefit of those incentives. The reasons are many and varied.
Understand that negotiation is not a guarantee of incentives applications
still have to be submitted according to the rules and must meet all of
the requirements set forth by the state or local authority.
Incentive applications can be lengthy and daunting, and the continual
monitoring can be cumbersome. Management of the incentives sometimes
requires monthly and/or yearly reporting for the length of their term,
which can be up to 20 years. Records are almost always required to be
kept for years beyond the term of incentives. Incentive programs are
not created equal or by one economic development body; therefore, they
have different requirements, deadlines, and monitoring responsibilities.
Another reason that incentives are left unclaimed is that there is a
natural flux of people in and out of a company, which results in some
instability for incentive maintenance. Also of note, the middle manager
who will administer the incentives will have his/her core job to do plus
this incentive management. Even though the executive may see the benefits
of the incentives for the company, the middle manager will most likely
not see any benefit from his/her efforts — only
an increased workload. Also, keep in mind that it is not in the state
or local authority's best interest to make sure that all of the necessary
paperwork is filed by the associated deadlines. In fact, from their point
of view, it is better companies do not pursue the collection of incentives.
In order to be sure to take full advantage of incentives awarded, a
company needs a dedicated and confident person on staff to take personal
responsibility for incentives management. Factor in that there will be
three to four people at the state level that will be working with that
person to manage the incentives, as well as three to four people at the
local level. As a final deliberation, recognize the actual time and cost
of understanding and administering the incentive programs versus the
cost of consulting and/or hiring an expert. Experts work with hundreds
of projects a year and may be able to manage the incentive process for
a fraction of the time and cost a company may incur while attempting
to manage incentives on its own.
3. What happens if projections are too high and the company
misses the goals set? Too low and surpasses the goals set?
An executive should realize how important it is to forecast the most
accurate project numbers possible. It is understandably a difficult task
to undertake; however, most states like to see five-year projections
of capital investment and new jobs.
When mapping out forecasts, keep the incentive programs in mind. Know
what the penalties are and what the company will ultimately be judged
against. For example, consider tax credit Program D. Program D requires
accurate prediction of job creation for the next five years. While capital
investment predictions must be made, the Program D monitoring requirements
rely exclusively on new job creation; therefore, capital investment should
not be of too much concern for this program. With Program D, if the new
job projections are too high and the company falls short of the goals
originally set, the program regulations dictate that the company will
receive a prorated incentive amount based on actual job creation numbers.
On the contrary, consider tax abatement Program. The Program Q application
requires five-year capital investment and job-creation predictions. Program
Q rules state that the company must achieve two-year employment and investment
goals within a two-year time period. If the company is delinquent in
goals by the end of the first year, missing the mark is not taken too
seriously as long as by the end of the second year the company has caught
up to original two-year predictions. If the company has not achieved
its two-year goals, Program's regulations defer to a previously signed
clawback agreement. This means that a portion of the incentives granted
will have to be paid back to the governing body. Alternatively, when
considering projections that were too low i.e., the company exceeds original
numbers there is usually no recourse. The company will only receive incentives
on the original numbers predicted for the project.
It is important to understand that incentives are funded with government
dollars; as such, there are countless rules governing the incentives,
legal documents and agreements that must be signed, as well as extensive
documentation and reporting requirements. All of this leads to the issue
of accountability. States and local communities want companies to be
serious about their projects and will support those projects only if
it makes good business sense for them to do so. The trend is such that
if a company falls short of goals, states and communities are asking
for money to be returned.
To conclude, an executive should be confident with the project numbers,
both capital investment and new jobs estimated for the next five years.
If a capital investment is being made or new jobs are being created,
an executive should not be afraid to ask for incentives based on those
projections. Offered incentives should be clearly stated in writing,
with actual assigned amounts from the governing body.
An executive should know about the incentives to the point where he/she
can understand how they will impact the company business plan. He/she
should feel comfortable about assigning incentive management to one person
who will be responsible and accountable. Finally, consider that incentives
experts may be able to negotiate more appropriate and meaningful incentive
packages, as well as ease the burden of incentives fulfillment if the
company does not have the time or personnel to be responsible for incentives
management.
Jenny Massey is the senior project manager for Bingham Economic Development
Advisors (BEDA) headquartered in Indianapolis, Indiana. BEDA provides
comprehensive economic development services for businesses and communities
nationwide.
To see more articles, click on the titles below:
Rural Economic Development Grants Available
USDA Announces Rural Economic Developmental Grants
Federal Grants Provide Money For Energy Efficiency Improvements
Economic Gardening - How Does Your Community Grow?
The Art Of The Deal
|
Helpful Links
Job Listings 
Real Estate 
Local
Local Healthcare
