How Discretionary Incentive Deals Are Made: A Consultant's Perspective

Economic incentives are a key tool in economic development designed to encourage economic activity by offsetting companies’ capital and operating costs. Economic incentives range from property tax abatements to cash grants to job-related or investment income tax credits and are generally classified as either discretionary or statutory. This blog summarizes the high-level process of securing discretionary economic incentives sometimes referred to as negotiated economic incentives.

The “But-For” Requirement

The first major tenet of discretionary economic incentives eligibility is the “but-for” requirement. Most programs require a company to prove and/or certify that, if not for the state or local commitment to provide incentives, the company would not expand or locate its project in the subject jurisdiction. This is known as the “but-for” requirement. Examples of activities that may compromise the “but for” requirement include executing a land or building purchase or lease agreement related to the proposed project, announcing the project, including a groundbreaking or ribbon-cutting ceremony, or posting job openings or hiring personnel. While it is common for companies to truly evaluate incentives in advance of making a location decision, sometimes companies assume discretionary incentives will be available when they are ready to move forward; however, it is imperative that they understand the overall process and timing for each program and pursue benefits before failing the “but for” requirement by committing too early. 

Garner Early Support

The type of project and its location can influence how it is perceived by state and local officials. In today's environment, this is especially true for Chinese-backed investments, solar projects, and data centers, where political and community support can vary significantly. An early, informal conversation with state and local economic development organizations can provide valuable insight into how the project is likely to be received and whether pursuing discretionary incentives is realistic from a project management standpoint. If there is political and community support for discretionary economic incentives, the next step is to understand the scope of the project. 

Define the Project Scope

From an economic incentive perspective, the three biggest influencers are projected job creation, average wages, and total capital investment. Since this is often hard for companies to estimate with absolute certainty, a company should try their best to provide a conservative estimate with a realistic timeline. Jobs should be accurately delineated by position (i.e., standard occupational classification codes), capital investment should be bifurcated between real and personal property, and the impact of any significant state and local sales tax revenues should be estimated.

With a clear understanding of the project, the next step is engaging state and local economic development organizations. 

Making the Request for Incentives 

Initial conversations are typically high-level and often use a project code name to maintain confidentiality. Depending on the company's preferences, nondisclosure agreements may also come into play. Once these discussions have taken place, formal requests for incentives (RFIs) are typically submitted. While the structure can vary, they generally outline the project parameters as detailed above, along with real estate, infrastructure, and utility needs. Depending on the location, additional project information or supporting documentation may be requested before an incentive offer can be issued.

After the RFIs have been reviewed, formal incentive offers are provided. Each offer should be assessed carefully to understand the underlying assumptions, identify any operating cost gaps, and determine whether there are opportunities to negotiate additional support, such as infrastructure or training assistance. Comparing offers across finalist locations can be valuable, but incentives should ultimately support the final site selection decision rather than drive it. Factors such as workforce availability, operating costs, and existing infrastructure should remain the primary considerations.

Application and Approval Process

Once a company has evaluated the proposed economic incentives and decides to move forward, the offer is accepted, and the approval process begins. Depending on the program, the next steps may include submitting an application, providing financial information for due diligence purposes, completing company certifications, and obtaining state or local governmental approval. 

When completing applications, it is highly advisable to mirror the same project parameters that were provided when making a request for incentives; however, more often than not, a company may want to alter certain job creation, capital investment, or timeline metrics, but any adjustments should be immaterial, or the process will have to restart. Ultimately, companies should include job creation and capital investment figures they can confidently achieve to avoid overcommitting and risking a clawback. 

To preserve negotiating leverage throughout the approval process, the company should avoid signaling that a final site has been selected, even if only one finalist location remains. As approvals conclude, announcement planning may begin, if applicable, typically in coordination with the company and the state and local community. 

Agreement Drafting

Once the project has been announced, economic incentive agreements are finalized. Although economic incentive compliance reporting may not begin until months or even years after the project is sited or announced, it's critical to ensure the commitments and requirements outlined in the economic incentive agreements mirror the parties’ intentions throughout the negotiation and application process. Note that some jurisdictions will require economic incentive agreements to be finalized and approved prior to moving through the formal approval process. This is also when internal or locally based external legal counsel may be engaged to assist in the drafting, reviewing, and execution of agreements. 

Conclusion

Overall, securing discretionary economic incentives is a complex process with many moving parts. Staying organized, communicating effectively with all parties involved, and addressing potential challenges early on are all key to successfully moving an incentive deal to the finish line. Although each project presents its own unique opportunities and challenges, helping companies navigate the incentive process is incredibly fulfilling. One of the most rewarding aspects of this work is seeing the positive impact these projects can have on local communities, from job creation and private investment to long-term economic growth. If your business is interested in pursuing incentives or would like support throughout this process, please reach out to Site Selection Group’s economic development experts.