Development

Economic Development Incentives

These tools can help sweeten the deal.

We've all seen or heard headline-grabbing announcements such as the September 2014 disclosure that California-based Tesla Motors would receive a $1.3 billion economic incentive package to build its state-of-the-art lithium-ion battery plant in Reno, Nev. While Nevada's trophy deal with Tesla is widely touted as a job credits package because of the projected 6,500 permanent positions and another 3,000 construction jobs, it is actually an amalgamation of incentives, according to the State of Nevada, including tax credits, infrastructure funding, and discounted utilities.

While few economic development packages match the size of Tesla's, the reality is that incentives come in all forms and are within reach of deal makers across the nation, if they know how to recognize these opportunities and understand the nuances of these largely untapped resources.

Incentive Primer

In an effort to demystify this realm of complex programs and their attractive funding mechanisms, let's explore a few offerings that are commonly available in most states.

Job Credits. Job credits are based upon the number and type of jobs that will be created by an applicant's project. The greater the number of high-paying/skilled jobs produced, the more lucrative the incentives will be. While this incentive is typically linked to the manufacturing sector, it has been used to attract distribution and large-scale call centers as well. However, many states are also targeting higher skilled jobs. For example, Colorado's recently expanded program allows a credit to aerospace, clean energy, technology, tourism, film, and information technology industries. The incentives are usually negotiated at the state level, but counties and economic development councils may participate as well.

When properly implemented, the actual job creation is closely monitored by the issuing governing agency to assure that the projected numbers are reached in a timely manner and sustained over the long term. States often compete with one another to land big job-generators as an economic base multiplier for an expanded region.

TIF. Tax increment financing is a property-tax-based program. The local taxing authority establishes a fixed valuation for property values or rates within a special improvement district. Then it pledges all or a portion of future annual property value increases within the district to pay the debt service on the upfront cost of capital improvements such as infrastructure. This structure is designed to stimulate new development and attract users that might not otherwise locate within the district.

Sales Tax Revenue Sharing. These agreements typically create a formula for government agencies to share a portion of the future sales tax revenue generated by the retail sales of high volume and/or destination retailers, which provides an inducement to locate a new store within a specific municipality. These agreements often include sales tax contributions generated by other retailers within a specially formed district, such as a TIF. They also may be used in conjunction with a transient occupancy tax revenue sharing structure, which is a similar program fueled by lodging occupancy taxes.

While these programs are usually enacted by state legislatures in the form of revenue bonds or similar financing vehicles, the competition to land these targeted companies typically takes place at the municipal level. Most of these retailers have already determined that they need a presence in the region, and the cities recognize their ability to attract new customers as well as other, compatible sales tax generators in large-scale developments.

CIP. Public funds established for capital improvement projects such as infrastructure can also be used for economic incentives for private developments, especially if the development includes museum or public display features that contribute to the greater good of the surrounding community.

Permit/Impact Fee Waivers and Rent Abatement. Rather than an investment of funds at the outset, fee waivers and rent abatement incentives can simply reduce the occupancy costs for the targeted business. While these discounts are usually delivered at the front end when start-up costs such as tenant improvements, trade fixtures, and inventory investments have the greatest impact, they can also be doled out over an extended duration in the form of reduced business taxes or even rent if government-owned property is involved.

Incentives in Action

Destination retailers such as Ikea, Cabela's, and Bass Pro Shops may be the poster children of sales tax revenue sharing agreements, but they tend to depend upon TIF components to build the infrastructure necessary to support the customer traffic from the surrounding communities.

For example, the Economic Development Growth Engine Board, a partnership between the city of Memphis and surrounding Shelby County, Tenn., voted in January to approve a $9.5 million incentive package for Swedish furniture retailer Ikea. It was the first time that a retailer was awarded incentives from EDGE, with the lion's share coming from the property tax basket, according to the Memphis Daily News. EDGE president Reid Dulberger justified this deviation from the norm by stating: “They're a renowned international firm, it's their first store in a six-state region, they are making a large investment, they're providing high-paying jobs, and they're a destination.” Meanwhile, Ikea officials pointed out that Memphis is the smallest market the company has entered and that the incentives were required to make the Memphis market competitive with other locations.

As mentioned, municipalities have used CIP funds to support the development, maintenance, and preservation of educational or historical displays as economic incentives. For instance, many of the original Cabela's stores incorporated publicly owned spaces dedicated to conservancy education within the store itself. Las Vegas's Mob Museum was built within the city's designated redevelopment area with funding from a myriad of government and quasi-governmental agencies, including a $12.4 million contribution from the general fund.

The Proud Bird is an iconic restaurant situated on an approach runway at the Los Angeles International Airport that was closing its doors after nearly 50 years due to a substantial rent increase from LAX's governing board. Under the guidance of DBC Advisors, and with overwhelming community support, The Proud Bird convinced LAX's board to designate a large outdoor display area filled with vintage World War II aircraft as public space and then separated it from the “leased premises” calculations to effectively reduce the asking rent by nearly 50 percent, resulting in a new 20-year lease.

Implementation

How could these incentives impact your commercial real estate practice and where would you begin? The answer to this question depends on your location, as laws can differ dramatically based upon your locale. These guidelines address the basic criteria for further implementation.

Identify Opportunities. There is no shortcut for research. Develop a working knowledge of the available programs in your area from the municipal to the federal level. Regional economic development councils are a good place to start as they typically list their programs on their website. But local agencies are not always aware of the full spectrum of offerings, so do your homework at the state and federal level to find niche programs that the regional EDC may have missed.

What comes next, the property or the user? Unless you're providing site-selection services for a notable destination retailer, manufacturer, or targeted industry, the next step will be to identify a suitable property. Once again, visit the EDC website to review a list of available sites and/or existing redevelopment or TIF districts. Also research historical districts, buildings, and other properties that might fit a user's site criteria.

Are you able to secure a listing agreement to make the next steps worthwhile? If so, the homework begins anew with the research of potential users and their needs, wants, and applicable trade areas.

Approach. Once you've successfully identified a logical fit and have an agreement in principle between a user and a site's owner, connect the dots between the user's deliverables, such as jobs or projected retail sales, and the available incentive programs. It's best to introduce the incentive concept and engage the appropriate officials at the front end to be successful in the long run. More often than not, a user will insist upon a contingency clause in the purchase and sale agreement to assure that satisfactory incentives have been delivered. Teamwork is essential from this point forward, and your lead EDC person plays an integral role in mapping out and executing the game plan with the governing agency charged with voting on the incentive package - make that person your new best friend.

Proforma. Projections must be well-defined and defensible since they are the make-or-break keys to a successful campaign. It is critical that your numbers are accurate whether they're job-creation or projected sales figures. You must be both realistic and honest with yourself and the principals at this juncture. I developed an axiom years ago: An early “no” can be more valuable than a drawn-out “yes.” It is far better to fold your tent and move on to the next opportunity than to spend irretrievable hours trying to promote a marginal proforma that has little chance of success.

While the end user is the first and most reliable source for proforma figures, be sure to research like-kind projects in other locales for supporting numbers as well. Research potential developments that could impact the projections: For example, an unannounced marina development near your Bass Pro site would drive additional boat sales. Factor in the economic impact that shadow retailers or dependent manufacturers may have on your proforma if they usually set up shop near the primary user. If there's a legitimate case to be made, include the potential for an increase in hotel room nights and restaurant meals that are driven by your primary user.

Engage the Stakeholders. Be proactive and shape your story around the forthcoming community benefits that will result from landing this user. Involve community members in the early planning stages to encourage their ownership in the project because their support and influence are critical in determining the ultimate vote by the decision makers. Always be ready with a cost/benefits breakdown to steer the public conversation toward community benefits. For example, while the $9.44 million incentive package was the headline for a recent announcement of a Cabela's store in League City, Texas, just 36 percent of that award went to the retailer as a reimbursement for land acquisition - and only if/when stringent retail sales benchmarks are achieved. The remaining 64 percent was earmarked for highways and other direct community benefits.

It takes a strong commitment of time and resources to be successful in the economic development field. Adding this skill set to your menu of professional services opens up a fresh income stream, but there's so much more to it than the additional fees. You can truly make a difference in your community when you help deliver new jobs, infrastructure, and yes, civic pride.

 

Daniel B. Cromwell, CCIM, is the owner of DBC Advisors based in Newport Beach, Calif. Contact him at dan@dbcadvisors.com.

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