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Solving the Economic Incentives Puzzle in Corporate Real Estate

By Soniya Gokhale posted Oct 19, 2016 09:10:33 PM

  

The Site Selection Process & Economic Incentives: What Corporate Occupiers need to know

With the national unemployment rate dropping to 4.7% in April and an estimated 10.5 million jobs added over the last five years, labor markets across the United States are tightening. While this is great news, it also makes the Site Selection Process critical for companies seeking to relocate or expand their corporate operations such as call centers, headquarters, shared service centers, software development, manufacturing plants and distribution centers.  

Companies today are struggling to find the right labor market to attract and retain the best talent in today’s highly competitive market. CoreNet Global member, Site Selection Group, analyzed job creation by State and Industry to identify job creation trends over the last five years to help companies identify states to target during the site selection process.

13 states increased their employment by more than 10% over last 5 years   Growth is always a good thing especially when it comes to creating jobs. Utah added over 180,000 jobs over the last five years— a 14.5% increase. This put the state in first place based on growth.


“Utah continues to win a lot of higher-end professional services projects such as software development, shared services and call centers as well as distribution centers servicing the West Coast. The Interstate-15 corridor between Provo and Ogden has seen significant growth and attracted numerous companies,” explains King White, CEO of Site Selection Group.

Other notable high-growth states include Delaware, Nevada, South Carolina, Idaho, Colorado, Arizona, Florida and North Carolina. The Carolinas continue to attract companies due to their friendly business climate and low cost of doing business, especially in the manufacturing sector.

Here's some questions that End Users and Corporations need to think about when it comes to Economic Incentives:

1. When should companies start thinking about economic incentives?
Is the company renewing a lease, evaluating a new site, consolidating facilities, relocating an office, or making annual routine capital investments? Depending on the trigger, the timeline as to when to start thinking about incentives may differ, but sooner is generally always better than later. A company has the most leverage to negotiate economic incentives early on in the process.

  • Create a systematic process where economic incentives are always part of the annual or semi-annual budget planning. Usually key stakeholders from the business, including C-suite executives, real estate, operations, tax, human resources and governmental affairs, are part of these meetings and thus including economic incentives as a strategic consideration will keep them top of mind to all relevant stakeholders as they make decisions; and
  • On average, 12 months advance consideration of economic incentives will yield the greatest results. This is due to the legitimate competitive site selection process at this stage, as well as the need to capitalize on programs which may require substantial application and approval procedures prior to a commitment being made or announced.

2. Which states are most competitive for incentives?
This answer is heavily influenced by the type of project involved. There are certain states which seem to favor capital intensive projects by granting property tax abatements and/or investment tax credits. Other states may be more focused on job creation and rely on payroll rebates and/or refundable tax credits to attract more jobs. In general, the most competitive states for economic incentives have a diverse set of programs which they can utilize at a state and local level. These programs would include inducements that offset direct and indirect tax components because these items are impactful to different business units within an organization.

3. What are the most common types of economic incentives?
The most common type of economic incentives offered to companies continues to be tax credits. These types of credits are considered “statutory” and are typically granted based on an entity’s job creation and/or capital investment within a state. However, state economic development programs continue to evolve by offering cash grants, payroll rebates and indirect tax abatements (sales tax, property tax). As an example, Texas utilizes very little, if any, true tax credits and rather relies on a multitude of various state and local discretionary economic incentive programs. It is also worth mentioning that most jurisdictions no longer offer upfront cash and rather use a performance-based model which helps to avoid any clawbacks and is more politically popular.

4. Do economic incentives really matter in the site selection process?
Yes. While economic incentives will never make a bad site option a good site, they will help offset any gaps that exist in two competing jurisdictions. States and local communities have varied tax rules, rates, exemptions, etc. and often times economic incentives can help bridge the gap between differences. Such incentives might enable a company to choose a location which has a better labor pool or more economical wages that it would not otherwise be able to select due to large direct and indirect state tax differentials. In addition, companies have a duty to their shareholders to try to procure all available economic incentives in order to generate the best possible return on investment.

5. What range of economic incentives can I expect to receive?
This question is obviously important to ALL companies evaluating sites. Unfortunately, there is no easy generic answer. However, Site Selection Group indicates that most economic incentive packages will range from 5 percent to 15 percent of capital investment and/or $1,000-$5,000 per net new job.

Join CoreNet Ohio Kentucky in Columbus, Ohio on November 1st from 4-6 pm at The Ohio State University's Blackwell Center as we hear from national experts in Site Selection & Economic Incentives.  Columbus2020's Kenny McDonald will moderate what is certain to be a highly informative and engaging discussion about the trends and hot topics in Site Selection.

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