The Complex World of Municipal Incentives

As companies consider where to locate their office headquarters, manufacturing plants, data centers or other support functions, it is also important to determine not only which location provides the most competitive labor talent, minimizes distribution costs and provides the lowest real estate costs, but also where the company has the opportunity to capture the best package of incentives.

While incentives should never be the main driver in site selection, they can make a huge difference in the overall costs for a given project. Incentives typically are tax-oriented, and in some cases, when the investment is substantial, the state selected for a facility can completely change the company's tax position. It is, therefore, imperative that your adviser has both real estate and tax expertise in navigating through each prospective state's tax statutes. Using an adviser with no prior experience can be like maneuvering the Titanic through the ice fields.

Why Incentives?

The concept behind incentives is to offset the extraordinary costs of a new facility project such as infrastructure needs, site work, start-up costs, and the investment required in skills training for new workers. Paradoxically, a business with a new facility has the highest risk with hiring and training workers and the biggest drag on return on assets employed (a Wall Street metric) when real and personal property taxes and sales taxes are at their highest in the project life cycle.

Furthermore, experience shows that incentives absolutely matter when companies evaluate the internal rate of return (“IRR”) for each site. Many sites that lack the necessary accompanying infrastructure or trained workers would not be considered at all if those costs were not offset. In addition, shareholders demand the best return for their investments, with corporate boards scrutinizing large investments and outlays of capital relentlessly.

There are two major kinds of incentives that a company can pursue as part of its decision-making process of where to lease or purchase real estate: “As of Right” Incentives, and “ Discretionary” Incentives.

As of Right Incentives

As of Right Incentives are governed by legislation in each state; however, the qualifications for obtaining these incentives are often not clearly outlined and can be inconsistent with other state statutory language.

For example, many state statutes do not anticipate changes in technologies or business practices. In the early 2000s, Nebraska Governor Mike Johanns sought to draft proposed amendments to Legislative Bill 775 (Legis. B. 775 as amended by Legis. B. 1234; Neb. Rev. Stat. ' 77-4101 through 77-4112, Employment and Investment Growth Act) to allow tax abatements on modern data servers. The legislation at that time was designed to give tax abatements only to the large CPUs that took up entire rooms; however, in the changing computer industry, CPUs were being reconfigured into large server stacks that provided more flexibility to add computing capacity. A company was contemplating an investment of over $500 million in capital, but under the historical Nebraska legislation, none of the investment would have qualified for tax abatement. To Nebraska's credit, the Governor's office looked to the intent of the legislation and then sought to get approval from the Nebraska Attorney General to change the rules and regulations of the statute, which ultimately led to the company's decision to invest in Nebraska.

Currently, one of the largest looming statutory issues in incentive legislation is that many companies are outsourcing various back-office functions such as accounting or information technology (“IT”) tasks. Unfortunately, many state statutes do not allow companies to count outsourced personnel job creation or outsourced average salary calculations. For example, Illinois, Missouri and Texas do not allow outsourced employees to count in job creation for purposes of state incentive programs. Iowa is a state that allows outsourced employees to qualify, but only if they meet the same hurdles as typical, non-outsourced employees. Iowa Code ' 15.329.

Further, there are various metrics that must be met to in order to access statutory incentives. The metrics typically relate to new/retained jobs, average salary, amount of capital being invested by the company, and sometimes selecting a specific location within a redevelopment zone. Average salary is a metric that often is confusing, and leads to a missed incentive target because the requirements are not properly understood. A good illustration of this challenge for a number of states is a state's use of W-2 withholdings to calculate the average salary. If a company is close to meeting the average salary requirements, using W-2 statements to calculate average salary can be problematic. W-2 statements do not include 401K, dependent care withholdings or union dues. Adding these federally exempt wage withholdings back into the average salary calculations can often help a company meet its wage requirements.

Rarely are statutory incentives “easy to get.” An experienced professional can help companies navigate difficult interpretive and compliance requirements in order to meet the criteria to access these incentives.

Discretionary Incentives

Discretionary incentives are determined by each individual jurisdiction and benefits must be negotiated by a professional. They can range from job tax credits or payroll rebate programs; enterprise zone/TIF funding; property tax abatement; sales and use tax exemptions; workforce training programs; free land and/or site work; low-interest financing for improvements to a building, land, etc.; utility subsidies or upgrades and infrastructure improvements; and highway ramps and access.

For example, a food manufacturer recently identified a site that met its logistics requirements, but that did not have the required waste water treatment capacity at the city plant. Estimates for the necessary expansion were between $5 million and $6 million. This was a huge financial penalty for the project and the proposed site. The city and county agreed to fund the waste water treatment expansion through various Discretionary Incentives, and the food company sited its $100 million plant facility and created 500 jobs in that location.

State Incentive Outlook for Start-Up Companies

For industries that are driving the growth in our economy today, such as data centers and renewable energy sources, there are often no incentives on the books that adequately address their concerns. In illustration, many states do not have incentives that start-up companies can access. Many start-ups have “NOLs,” or net operating losses, and therefore cannot use income tax credits that are a cornerstone of many states' incentive programs. The renewable energy industry requires heavy up-front investments and needs the same assistance as any other manufacturer. States such as Georgia, Indiana and Utah allow income tax credits to be accessed against other tax liabilities such as sales, property, or withholding taxes, or convert the credits to cash. See generally Ga. Code Ann. ' 48-7-40(e); Ind. Code ' 6-3.1-13-18(a); Utah Code Ann. ' 59-7-614.2(2).

Being Successful

Obtaining incentives requires knowledge of the legislation in the various states under consideration and more importantly, the players in the incentives negotiation process; local chambers of commerce, Mayors' offices, county commissioners, state Secretaries of Commerce, Governors' offices, state legislators, state revenue directors, and comptrollers. Having a real estate adviser who knows the right players and can fully analyze all incentive scenarios by site is critical to negotiating an appropriate incentives package and then capturing all the benefits. Applications must be submitted, negotiations completed, approvals/documentation secured and compliance and reporting maintained.

Incentive negotiations are most successful when new high-paying jobs will be created along with heavy investment in the real estate with options for sites in multiple states. With the depressed U.S. and local economies, now is an opportune time to make investments at low interest rates and secure attractive incentives packages.

So leave time to pursue incentives in any sizable real estate deal and hire an experienced professional to ensure your company maximizes incentives and then actually captures the benefits. Maintain a competitive environment. Assure your company's goals are aligned with the key interests of jurisdiction and recipients. Know the key players and the political landscape. Have a well-coordinated internal and external communication plan ' remember this is politics!

Conclusion

Job creation and increasing the tax base and revenue are paramount to jump-starting our economy. These are among the most important issues being discussed after our nation's recent elections. Now is the time for all companies to seek incentives and push for changes in state statutes that can be addressed in upcoming legislative sessions. Newer industries especially need incentive programs that are specific to their needs, but that are no less important to these new businesses in making investments and site selections. Ultimately, it is job creation and investment that will jump-start our economy!

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Elizabeth Cooper, a member of this newsletter's Board of Editors, is the Managing Director of the Brokerage Division of Jones Lang LaSalle. Ann Marie Woessner-Collins is Managing Director of Business and Economic Incentives at the firm.

As companies consider where to locate their office headquarters, manufacturing plants, data centers or other support functions, it is also important to determine not only which location provides the most competitive labor talent, minimizes distribution costs and provides the lowest real estate costs, but also where the company has the opportunity to capture the best package of incentives.

While incentives should never be the main driver in site selection, they can make a huge difference in the overall costs for a given project. Incentives typically are tax-oriented, and in some cases, when the investment is substantial, the state selected for a facility can completely change the company's tax position. It is, therefore, imperative that your adviser has both real estate and tax expertise in navigating through each prospective state's tax statutes. Using an adviser with no prior experience can be like maneuvering the Titanic through the ice fields.

Why Incentives?

The concept behind incentives is to offset the extraordinary costs of a new facility project such as infrastructure needs, site work, start-up costs, and the investment required in skills training for new workers. Paradoxically, a business with a new facility has the highest risk with hiring and training workers and the biggest drag on return on assets employed (a Wall Street metric) when real and personal property taxes and sales taxes are at their highest in the project life cycle.

Furthermore, experience shows that incentives absolutely matter when companies evaluate the internal rate of return (“IRR”) for each site. Many sites that lack the necessary accompanying infrastructure or trained workers would not be considered at all if those costs were not offset. In addition, shareholders demand the best return for their investments, with corporate boards scrutinizing large investments and outlays of capital relentlessly.

There are two major kinds of incentives that a company can pursue as part of its decision-making process of where to lease or purchase real estate: “As of Right” Incentives, and “ Discretionary” Incentives.

As of Right Incentives

As of Right Incentives are governed by legislation in each state; however, the qualifications for obtaining these incentives are often not clearly outlined and can be inconsistent with other state statutory language.

For example, many state statutes do not anticipate changes in technologies or business practices. In the early 2000s, Nebraska Governor Mike Johanns sought to draft proposed amendments to Legislative Bill 775 (Legis. B. 775 as amended by Legis. B. 1234; Neb. Rev. Stat. ' 77-4101 through 77-4112, Employment and Investment Growth Act) to allow tax abatements on modern data servers. The legislation at that time was designed to give tax abatements only to the large CPUs that took up entire rooms; however, in the changing computer industry, CPUs were being reconfigured into large server stacks that provided more flexibility to add computing capacity. A company was contemplating an investment of over $500 million in capital, but under the historical Nebraska legislation, none of the investment would have qualified for tax abatement. To Nebraska's credit, the Governor's office looked to the intent of the legislation and then sought to get approval from the Nebraska Attorney General to change the rules and regulations of the statute, which ultimately led to the company's decision to invest in Nebraska.

Currently, one of the largest looming statutory issues in incentive legislation is that many companies are outsourcing various back-office functions such as accounting or information technology (“IT”) tasks. Unfortunately, many state statutes do not allow companies to count outsourced personnel job creation or outsourced average salary calculations. For example, Illinois, Missouri and Texas do not allow outsourced employees to count in job creation for purposes of state incentive programs. Iowa is a state that allows outsourced employees to qualify, but only if they meet the same hurdles as typical, non-outsourced employees. Iowa Code ' 15.329.

Further, there are various metrics that must be met to in order to access statutory incentives. The metrics typically relate to new/retained jobs, average salary, amount of capital being invested by the company, and sometimes selecting a specific location within a redevelopment zone. Average salary is a metric that often is confusing, and leads to a missed incentive target because the requirements are not properly understood. A good illustration of this challenge for a number of states is a state's use of W-2 withholdings to calculate the average salary. If a company is close to meeting the average salary requirements, using W-2 statements to calculate average salary can be problematic. W-2 statements do not include 401K, dependent care withholdings or union dues. Adding these federally exempt wage withholdings back into the average salary calculations can often help a company meet its wage requirements.

Rarely are statutory incentives “easy to get.” An experienced professional can help companies navigate difficult interpretive and compliance requirements in order to meet the criteria to access these incentives.

Discretionary Incentives

Discretionary incentives are determined by each individual jurisdiction and benefits must be negotiated by a professional. They can range from job tax credits or payroll rebate programs; enterprise zone/TIF funding; property tax abatement; sales and use tax exemptions; workforce training programs; free land and/or site work; low-interest financing for improvements to a building, land, etc.; utility subsidies or upgrades and infrastructure improvements; and highway ramps and access.

For example, a food manufacturer recently identified a site that met its logistics requirements, but that did not have the required waste water treatment capacity at the city plant. Estimates for the necessary expansion were between $5 million and $6 million. This was a huge financial penalty for the project and the proposed site. The city and county agreed to fund the waste water treatment expansion through various Discretionary Incentives, and the food company sited its $100 million plant facility and created 500 jobs in that location.

State Incentive Outlook for Start-Up Companies

For industries that are driving the growth in our economy today, such as data centers and renewable energy sources, there are often no incentives on the books that adequately address their concerns. In illustration, many states do not have incentives that start-up companies can access. Many start-ups have “NOLs,” or net operating losses, and therefore cannot use income tax credits that are a cornerstone of many states' incentive programs. The renewable energy industry requires heavy up-front investments and needs the same assistance as any other manufacturer. States such as Georgia, Indiana and Utah allow income tax credits to be accessed against other tax liabilities such as sales, property, or withholding taxes, or convert the credits to cash. See generally Ga. Code Ann. ' 48-7-40(e); Ind. Code ' 6-3.1-13-18(a); Utah Code Ann. ' 59-7-614.2(2).

Being Successful

Obtaining incentives requires knowledge of the legislation in the various states under consideration and more importantly, the players in the incentives negotiation process; local chambers of commerce, Mayors' offices, county commissioners, state Secretaries of Commerce, Governors' offices, state legislators, state revenue directors, and comptrollers. Having a real estate adviser who knows the right players and can fully analyze all incentive scenarios by site is critical to negotiating an appropriate incentives package and then capturing all the benefits. Applications must be submitted, negotiations completed, approvals/documentation secured and compliance and reporting maintained.

Incentive negotiations are most successful when new high-paying jobs will be created along with heavy investment in the real estate with options for sites in multiple states. With the depressed U.S. and local economies, now is an opportune time to make investments at low interest rates and secure attractive incentives packages.

So leave time to pursue incentives in any sizable real estate deal and hire an experienced professional to ensure your company maximizes incentives and then actually captures the benefits. Maintain a competitive environment. Assure your company's goals are aligned with the key interests of jurisdiction and recipients. Know the key players and the political landscape. Have a well-coordinated internal and external communication plan ' remember this is politics!

Conclusion

Job creation and increasing the tax base and revenue are paramount to jump-starting our economy. These are among the most important issues being discussed after our nation's recent elections. Now is the time for all companies to seek incentives and push for changes in state statutes that can be addressed in upcoming legislative sessions. Newer industries especially need incentive programs that are specific to their needs, but that are no less important to these new businesses in making investments and site selections. Ultimately, it is job creation and investment that will jump-start our economy!

[IMGCAP(1)]

Elizabeth Cooper, a member of this newsletter's Board of Editors, is the Managing Director of the Brokerage Division of Jones Lang LaSalle. Ann Marie Woessner-Collins is Managing Director of Business and Economic Incentives at the firm.