Navigating the Incentive Landscape to Increase ROI on CapEx

Shelly Carmichael

 

Each year more than $50 billion dollars are invested into businesses by economic development agencies across the U.S. in the form of discretionary incentives. Supplementary to statutory tax credits, these incentives are offered to attract and retain a company, its jobs and investment in a specific area. They can offset upfront capital expenditures and long-term operational costs by as much as 20 percent or more.

These incentives come in the form of cash or cash-like benefits and have a positive impact on EBITDA. Some of the more common examples include: site preparation grants, land/property donations, utility rate reductions, permit fee waivers, cash grants, infrastructure upgrades, railway extensions and property tax abatements.  Many others are available that are project specific and not publicized on economic development websites.

While economic development agencies and many municipalities actively recruit businesses, the majority of companies are not aware incentives exist or mistakenly believe they don’t qualify. Those that have received incentives most often don’t maximize them due to reasons like lack of awareness of unpublicized programs that are not routinely offered, not understanding how to strategically package and present projects, and negotiating the bottom line too early in the process.

Qualifying Business Activities

A company is very likely to qualify for incentives if they will be investing $7+ million and adding 25+ jobs over a three to five-year period.  Qualifying investments include relocations, greenfield projects, expansions, facility recapitalizations, new equipment purchases and machinery upgrades. Investments and jobs are mutually exclusive. Incentives can be negotiated for investment without jobs and for jobs without investment. However, in general if a company is only adding jobs, a minimum of 100 new jobs is typically needed for discretionary incentive negotiation depending on locations, wages and industry.

Qualifying Industries

The world of discretionary incentives is industry agnostic. All can qualify given the desirability of the industry and positive impact on a community’s economic development goals. Some of the most sought-after industries include automotive, information technology, electronics, plastics, energy, metals, pharmaceutical, aviation, and food and beverage. Retail establishments are not ideal for discretionary incentives except for new or improved headquarters, call centers and distribution centers. This is because location decisions are predominantly driven by market demand versus availability of incentives.

The Best Time to Seek Incentives

To have the leverage needed to maximize incentives, negotiations must occur before investments have been made or new jobs have been added.  This is because incentives are designed to be the final deciding factor on a company’s choice to invest in an area. This is commonly referred to as a “but for” scenario; “but for” these incentives, a company may have made a different investment decision.

While most negotiations can be completed in ninety days, the best time to seek incentives is during early budgeting for a project.  Having as much time as possible between starting negotiations and any committed activity such as a site groundbreaking or a public announcement is critical to maximizing the benefits.

Performance Metrics

100% of U.S. states offer discretionary incentives. The navigation process and value of benefits is unique for every county and state depending on agency budgets, development goals, efficiencies, resources and management.

All of them are performance based. This means incentives are not received until a business keeps their capital investment and new job commitments. There are two types of performance, pro rata and full performance. Packages can include one or a combination of both and understanding them is very important. For example, a program that pledges to pay a company $500,000 pro rata based on a commitment for 200 new jobs, and 100 jobs are added, the payment would be $250,000.  A full performance agreement would not pay any money until all jobs were added. Often times, if incentives are front loaded, mechanisms such as letters of credit or deeds of trust for lien positioning may be utilized.

Proof of Performance

Proof of performance reporting is critical to monetizing incentive programs. It requires long term consistency because incentive benefits and associated reporting can last a decade or more.  It is required on a predetermined and agreed upon timeline and format during negotiations. If reporting deadlines are missed a company can forfeit a portion of or all benefits. These situations are not uncommon due to limited bandwidth, employee turnover, vacations and lack of interdepartmental collaboration.

Having a highly experienced, dedicated resource for incentive and compliance strategies, strong collaboration between internal departments, efficient data collection systems, bandwidth and a solid accounting team are keys to successfully navigating the incentives landscape for the long run.

Fortunately for growing companies who don’t have the time or resources to ensure they are not missing out on opportunities, there are external incentive experts that can offer the keys to kingdom.

 

 

 

 

 

 

 

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