In my last RealPoints blog entry, I addressed the ever-present question, “Are incentives really important?” I believe that incentives, one of the key factors in corporate site location decisions, is worthy of continued dialogue.
According to our company’s incentive negotiation consulting experiences and those of most of our colleagues, the offer of incentives has grown in importance over the last decade. Globalization has put increased pressure on companies to take measures, often very drastic ones, to reduce costs. We’ve seen a great deal of this in recent years with the consolidation, downsizing, and rightsizing in commercial real estate. Corporate decision-makers thus look at incentives in the context of their overall impact on investment and operating cost environments.
As previously touched upon, because of the ‘cost factor’ and the role incentives can play in reducing a tax burden or defraying relocation or start-up costs, they are often addressed earlier in the site search process. It is important to understand the incentive negotiation process and the time-savings now realized through the use of the Internet. Just because incentives may come up in the initial encounter with a city, economic development corporation, county, or state, do not jump to the conclusion that incentives are all that is driving the site decision. The Internet has drastically reduced the search time for narrowing the field in evaluating real estate, workforce, quality of life, and other drivers, with about 80 percent of that research now conducted online.
All site search requirements are not created equal, so the cost priorities can differ. The type of incentives a company should pursue may also vary depending on the company’s growth stage. Start-up companies, which often are working with a large net operating loss, may not derive much benefit from tax credit incentives. Such is the case with many of the new alternative energy, bio-tech and medical device companies. For such companies, minimizing uncertainty through establishing lease-subsidized incubator programs and helping with up-front costs, such as training and infrastructure, can be very valuable contributions. Startups tend to follow venture capital sources so assistance with relocation costs can be an attractive recruiting tool.
For a more established firm, tax rebates and tax credits can be attractive and sway a site decision. Often an incentive in the form of a ‘tax credit’ looks more appealing to a company than its actual impact will have on the bottom line. Tax credits tend to function more to level the playing field when comparing the cost-benefit of a state with an income tax or withholding tax to one without it—a factor that has played significantly into Texas’s effectiveness in recruiting companies to the state.
Even if the topic of incentives comes up later in the process—after the markets have been analyzed, the workforce evaluated, and the real estate surveyed—a package that includes cash or tax rebates (the most desirable incentives), together with other types of assistance, such as subsidized job training programs, can help seal the deal. The importance of incentives when it comes to bottom-line costs in our competitive global economy should never be underrated.
Linda Burns is a national site consultant based in the Dallas area who specializes in incentive negotiations and economic development location strategies. Contact her at firstname.lastname@example.org.