When and How to Engage in the Economic Incentive Process
by Kelley Rendziperis, on Nov 27, 2018 4:51:04 PM
My colleague, Josh Bays, wrote a blog in September 2018, When Should Manufacturers Engage in the Site Selection Process, addressing many issues such as timing of the site selection process, establishing project specifications and identifying an experienced site selection consultant. This blog seeks to fold the economic incentive process into the overall site selection process for all industry types. While economic incentives are rarely the rationale behind a company’s site decision, it is still a very important site selection criterion and when and how the process is initiated can make a meaningful difference in the ultimate outcome.
Often in the site selection process, a company will begin doing preliminary research such as workforce availability, labor rates, transportation studies, identifying available real estate, etc., but this is likely not the right time to start thinking about economic incentives. The reason is because most companies do not yet know how the outcome of the due diligence performed above will affect their final project parameters. A few examples of preliminary findings that could alter a company’s projected project commitments are:
- Availability of the necessary unskilled or skilled workforce
- Availability of rental square footage in desired locations
- Availability of infrastructure
- Size of available land sites
- Cost of real estate
- Adverse tax structure
It is common for a company to begin the site selection process with a clear idea of the size of their project and the general geographical area in which it wishes to locate. However, discovering that a desired location may not have the necessary real estate, infrastructure, workforce, etc. could not only eliminate a site, but it could force a company to reevaluate its plans, which will inevitably alter the company’s capital investment and headcount projections.
For this reason, we typically recommend a company hold off on requesting economic incentive proposals from jurisdictions until the site selection process yields a list of final sites. There is no exact number of finalist sites which will initiate the incentives process because it will vary based on the project, but, in general, Site Selection Group starts the economic incentive proposal process when three to five finalist sites are identified.
We cannot overemphasize how important it is to try to accurately determine your project commitments before requesting economic incentives. A few of the reasons project commitments could change were described above, but a company can also avoid material changes by ensuring it has a clear understanding, and board approval, if relevant, of the project scope. This includes understanding the services to be performed or product to be manufactured at a particular site and the intended market for such services or products. It also includes understanding how any existing facilities and operations will be affected. Ambiguity behind a proposed project could be a result of initiating the site selection process too early. This can be a difficult balance because a company should ensure it has ample time to make an optimal site location decision, but it should simply be phased accordingly and guided by a competent, experienced site selection consultant.
When a company makes an official request for economic incentives, most jurisdictions will try to be as aggressive as possible to win a project. This typically involves getting early support of elected officials and key stakeholders. Thus, changing parameters make it difficult for a jurisdiction to garner continued excitement and buy-in of a project. In some instances, it may even make a jurisdiction leery of the validity of a project or company.
While we understand that trying to accurately estimate project parameters is a bit like looking into a crystal ball, it is important to maximize available incentives and maintain productive relationships with economic development officials. Our suggestion is to be realistic to the best of your ability, while presenting a base case of projected capital investment and headcount. Present specifications that you would be confident in committing to in an executed Economic Development Agreement. Economic developers would much rather see a project scope increase than be forced to re-negotiate a package because project parameters have decreased.