Determining The Sweet Spot For Pursuing Economic Incentives
by Kelley Rendziperis, on Feb 21, 2018 11:26:18 AM
What is the sweet spot? Prospective clients frequently ask what is the optimal amount of capital investment and job creation to procure economic incentives. In this article, Site Selection Group will attempt to answer this question, which simply stated is – it depends.
The sweet spot for obtaining economic incentives is heavily dependent on project type and jurisdiction. Everyone recognizes that projects the size of FoxConn or Amazon HQ2 will yield significant benefits, but what about the “normal” project? One must remember that the premise behind offering economic incentives is to encourage specific investments and to bridge any cost differentials which exist between two competing sites. Thus, the level of economic incentives offered to a project often will be directly correlated to a state’s and/or community’s desire to attract a specific industry, assuming they have the incentives toolkit necessary to compete.
Generally, an average economic incentive award will yield a return on investment of approximately 5 to 15%. Approximately 90% of reported economic incentive packages are less than $5 million, a large portion of which are less than $2 million, as reported on a quarterly and annual basis in Site Selection Group’s newsletter analyzing the largest announced economic incentive deals.
The level of economic incentives which can be achieved for an office project vary by project type: headquarters, contact center, shared service center, IT services, etc. The main driver for office projects is typically headcount and wages. Headquarter projects naturally have higher wage positions, while contact centers have lower average wages. This explains why many jurisdictions offer targeted incentives for headquarter investments.
On the opposite end of the spectrum, rural communities or jurisdictions with high unemployment or poverty rates will target projects with high job growth potential despite low wages. We have seen economic incentive packages worth millions for call centers which employ thousands of people, but there are also comparable multimillion-dollar packages for call centers employing 200 to 300 people at minimum wages with minimal capital investment due to the distress of the region in which they locate.
Manufacturing and industrial projects
Similar to office projects, manufacturing and industrial projects — and the economic incentives they are offered — can vary widely by jurisdiction based on the same set of project parameters. Not only is this the case in competing states across the U.S., but also in competing cities and counties within the same metropolitan statistical area.
Locating in a jurisdiction that is outside the city limits of a large metro region can improve the overall return on investment significantly. This is mainly because any average wage requirements are likely lower and there can be local cash grants available to attract projects. One underutilized area for manufacturing and industrial projects is retention incentives. Communities know that keeping the businesses you have is a key component to remaining competitive. A well-diversified economic development platform will have economic incentive programs structured to aid existing companies with such things as incremental capital investment or training needs.
Data center projects are known for having large capital investments, but low job creation. States encourage this type of investment because it can increase tax revenue via property tax and/or sales tax, as well as increase utility revenue. Sometimes these investments will qualify for existing economic incentive programs, but other times these investments will not qualify primarily due to low job creation and/or wages; therefore, states have created specific data center incentives to attract this type of investment.
So, what is the sweet spot for a data center to obtain incentives? Well, it depends. The qualifying criteria vary widely depending on the jurisdiction. For example, Texas requires a 100,000-square-foot single-user facility with a minimum investment of $200 million and 20 net new jobs with wages above the county average; while Arizona only requires a $50 million investment. Thus, the magnitude of incentives, which will primarily be sales and property tax benefits, depends on the minimum requirements of the subject jurisdiction.
Unfortunately, there is no turnkey, cookie-cutter approach to obtaining economic incentives. Every project is unique and should be viewed in consideration of the all the facts and circumstances. A project which would earn no incentives in one jurisdiction could garner millions in another. If a business is investing capital and creating jobs, an opportunity for incentives may exist.
Site Selection Group recommends setting an internal threshold, which would trigger an evaluation for potential economic incentives. The threshold could be 25 jobs and $5 million of capital investment, but will depend on the specific profile of the company. Thus, there is no set rule for the level of capital investment and job creation required to garner incentives.
Instead a company should identify a jurisdiction’s objectives — improve their unemployment rate, increase their property tax base, attract investment that will result in trailing suppliers or seeking headquarter projects that would provide name recognition for the community — and then marry up the company’s project specs to yield a win-win for the community and the project.
When a successful partnership occurs, then you have achieved the sweet spot.
For additional information, please contact Site Selection Group.