Companies’ site selection plans have been adversely affected by the global recession. Reduced customer demand and cash flow, limited borrowing capacity and other factors have complicated and delayed projects. However, the “green shoots” of economic recovery and growth are becoming visible, and companies are once again focusing on expansion and the implementation of strategic growth plans.
Economic circumstances have also caused state and local governments and their allies to place renewed focus on their economic development efforts. To borrow a phrase, job creation is job one. That renewed focus is in large measure focused on particular industries. In the Carolinas, those industries include energy, healthcare, defense and aerospace, biotechnology and other industries driven by technological innovation.
Tight company budgets have made state and local incentives even more important to capital intensive projects. Area Development Magazine, in its most recent Annual Corporate Survey of Site Selection Factors, noted that incentives have moved higher up the list of factors companies consider in making site selection decisions.
Those tight company budgets and an increased emphasis on incentives to support new projects or to retain existing facilities are often met by reduced government budgets and a re-evaluation by many communities of their traditional approaches to granting incentives. Further fueling this re-evaluation is the recent failure of some incentives-driven projects. For example, the recent announcement that Dell will close its manufacturing facility in Forsyth County, North Carolina after reportedly receiving one of the state’s largest incentive packages, prompted a lot of public discussion about the value of incentives to the state and the local community (Dell has reportedly agreed to re-pay a portion of the state and local incentives). Some states are also taking a more aggressive approach by implementing compliance programs. For example, the State of Ohio General Assembly recently passed a law enabling the state’s Attorney General to implement a compliance program to ensure that recipients of state grant awards are living up to their end of the bargain.
Consequently, while communities know that creating jobs and increasing the tax base is critical to their economic recovery, government leaders are under increased scrutiny and are evaluating potential projects very carefully in light of the changing times. They are looking at new ways to balance the incentives they pay against the increased employment, tax revenue and other benefits their communities receive.
A Strategic Approach
These changing circumstances make it critical for a company to understand the “high-stakes” game of incentives. A company that develops and implements a good strategic plan for its site selection project will level the playing field and position itself to obtain the maximum available public assistance for its project. We recommend that a company consider the following when conducting a site selection project:
1. Plan Ahead. Prepare well in advance your strategy to negotiate and obtain incentives. In addition to considering government sources of incentives, consider non-governmental sources of support like non-profits and utilities that support economic development projects. Also, evaluate early on potential pitfalls to achieving, using and retaining those incentives. Understand and plan for addressing reimbursement requirements if your project is delayed or cancelled. Plan for the unexpected.
2. Consider Future Expansions. Leverage your current project to secure incentives for potential future expansions. Many communities are willing to include in a current incentives package a mechanism for rewarding future expansions. A company will have more leverage before it agrees to select the site for the current project.
3. Present Realistic Projects. Pay close attention to defining best and worst case scenarios for the project’s projected job creation and capital investment. The importance of how job and investment goals are presented to a community cannot be over-emphasized. The “initial” estimate of job creation and capital investment creates a community expectation that drives the incentives proposal. Starting with a best case scenario might lead to an attractive initial incentives proposal, but a subsequent revelation that the initial estimates were way too high can hurt your company’s credibility and its long-term relationship with the community. Remember, you need to create a community partnership on which you can rely for future assistance.
4. Evaluate Potential Changes in Legal Impediments. Our experience is that state and local governments are willing to consider and implement changes in the law that will allow a large project to proceed in their jurisdiction. Recent examples include the South Carolina legislature’s authorization to increase the state’s bonding capacity for the Boeing project and the North Carolina legislature’s passage of a bill to grant special corporate income tax incentives for the Apple project.
5. Read the Fine Print. Incentive proposals generally combine discretionary and non-discretionary incentives like cash grants, tax credits, exemptions, rebates, and land donations. In many cases, these proposals come with stringent performance requirements that encourage accelerated capital investment expenditures and job creation. These proposals normally do not disclose the intricacies of which project expenditures are eligible for the offered incentives or the conditions under which the company may lose incentives if it does not achieve the projected investment or job creation goals. Many of the rules governing incentives are based on governmental practice, agency guidelines and tax rules that are not immediately clear to a company. All of this information is critical to reaching an informed judgment about whether the proposed incentives meet the company’s needs.
6. Compare Apples to Apples. When you engage in a multi-jurisdictional site selection project across communities or countries, you must compare differing incentives. Our economic development lawyers have deep experience in evaluating differing incentives and presenting them to companies in a way that promotes an apples-to-apples comparison. A company really needs that kind of comparison to make an informed decision.
Parker Poe’s experienced team of business, regulatory and economic development lawyers is ready to help companies evaluate the best and most realistic strategies to obtain the maximum available incentives for current and future projects. We believe the key to making this an efficient and successful process is to prepare well and level the playing field. For more information about site selection, incentives and our economic development team, please contact one of the following Parker Poe lawyers:
George Pretty III