When a prime location isn't enough, economic development incentives can be the determining factor in the site selection process.
With lingering high unemployment and a sluggish recovery to the Great Recession, some communities are competing more mightily than ever to attract new businesses and the accompanying jobs.
Companies have always had numerous choices to make when it comes to choosing a site. High-rise or single story? Downtown or suburbs? Lease or buy? But in the last decade, the decision-making process has almost become a bidding war in which location alone is no longer enough to seal the deal.
Commercial and industrial site selection professionals often juggle competing offers and review details regarding labor availability, infrastructure and transportation access. Hoping to stand out, communities usually sweeten their pot with financial incentives offered through municipal, county, state and federal government programs.
The most common incentives are grants, low-interest loans, and tax credits and abatements. Some governments also offer financing programs. But cash isn't always king. "Incentives are part of the whole, but not the sole deciding factor," says Michael Stevens, deputy development director for the city of Columbus.
"You can have the greatest incentives in the world, but without the right site for the company's needs, they don't come into play. We lead with the assets of Columbus: quality of life, workforce, pipeline of talent from our universities, physical infrastructure and location advantage. Then we use financial incentives as a differentiator," Stevens says.
But in today's economy, when businesses are squeezing every cent out of each dollar, financial incentives are moving up on the list of site selection considerations.
Area Development, a national economic development publication, reports that such perks took three of the top 10 spots in its 2009 Corporate Survey. Labor costs were the most important site selection determinant for more than 96 percent of respondents, followed by highway accessibility at 93 percent. Tax exemptions ranked third at 88 percent, corporate tax rates took fifth place at 87 percent, and state and local incentives came in eighth at 85 percent.
"Clients understand these financial tools could be available to help them expand, relocate or start a business. Money is tight these days, and we've found that a lot of companies in all types of industries are looking for incentive money," says Rob Rishel, a partner at Rinehart & Rishel. The Columbus law firm specializes in helping clients secure government incentives.
The credit crunch tied to the recession also has contributed to a growing interest in such programs. "It's not necessarily because Ohio has a lot of money to hand out. Its budget outlook actually is pretty bleak right now. I think it's more that the banks won't or can't lend for the types of commercial projects we're seeing," Rishel says.
Norfolk Southern Corp.'s Rickenbacker Intermodal Terminal was constructed with the promise of transforming Central Ohio's logistics industry. Shipping containers are transferred between trains and trucks at the 175-acre facility adjacent to Rickenbacker International Airport. Each day six trains service the terminal, which has the capacity to handle more than 250,000 containers and trailers annually.
When Hyperlogistics Group co-owners Geoff Manack and Seatta "Sam" Layland learned of Norfolk Southern's plans in 2007, they decided to relocate their logistics business closer to the intermodal terminal. In 2008, they moved a few miles to Rickenbacker Global Logistics Park.
"The location near the intermodal was critical, yes, but we wouldn't have picked this particular site in Pickaway County without the 100 percent, 15-year tax abatement," says Manack. "We don't pay property tax on the improvements, which is our building. That's very significant for us. Real estate tax on a large building like ours over 15 years is a lot of money."
Hyperlogistics bought nearly 30 acres and built a 407,000-square-foot warehouse. The 1,576-acre industrial park straddles Franklin and Pickaway counties and is being developed by the Columbus Regional Airport Authority, Duke Realty Corp. and Capitol Square Ltd.
"Pickaway County has to be competitive to attract logistics jobs, so we've largely mirrored the tax abatements offered by Franklin County," says Nate Green, director of the Pickaway Progress Partnership, the economic development agency for Pickaway County and its municipalities.
"When a company looks at the industrial park, we won't lose the deal because of the tax abatement issue. Our incentives show prospects that we're interested in having them locate in Pickaway County. We want them to come here and succeed, and that means reducing the cost of doing business here. Incentives help us do that," Green says.
The intermodal location made Hyper-logistics' site selection decision clear-cut. The process for other companies is usually more protracted and may involve retaining real estate brokers and other advisers.
"Typically we're the first point of contact for a client," says J.R. Kern, principal at Capital Equities, a commercial real estate services provider. "We partner with other professionals to build a team that guides clients through the decisions that result in the best property and the best deal. That can include financial incentives offered by various governmental entities."
While some commercial real estate companies are reluctant to collaborate on incentives, Capital Equities doesn't shy away from teamwork. "Sometimes it does lengthen the time it takes to close a deal, and any incentive package doesn't make us any more money. It's good for the client, though, and we see that as adding value to the deal and our services," Kern says.
Some business owners try to navigate the various incentive options on their own. Think twice before doing so. "Would you know a good deal? Are you sure you're aware of all that's available and the impact it can have on your company? The incentives can be complex. They're like any other negotiated item in the deal," Rishel says.
Requirements pertinent to equity levels, prevailing wage or project timing may lie in the fine print. "Then mix in money from state and local entities, combined with the project's private financing, and you're dealing with a lot of moving parts that may not always work in concert with each other," Rishel says.
Some executives wrongly believe they won't qualify for incentive programs. "Businesspeople tell me they didn't know what was available to them. Many think they have to relocate or create a huge number of new jobs. That may or may not be true," Rishel says.
Many incentives have ongoing requirements, such as investing a certain amount of money in a facility or generating a set number of jobs. Occasionally, businesses that are granted tax credits or abatements fall short of those metrics. Sometimes that results in sanctions, but other times government officials are willing to work something out. "An overlooked aspect of accepting the incentive is meeting the parameters. They're usually tied to job creation. If the company cannot meet the goals it initially agreed to, we can help the company explain to the city and the citizens why that is and help forge solutions," Rishel says.
Goodbye Columbus, Hello Worthington
Last year, Lutheran Social Services of Central Ohio (LSS) turned to Rishel and Kern when it considered relocating its Downtown offices-and 33 jobs.
"We cover 55 counties with more than a few facilities, so we're pretty spread out. We asked ourselves if the best place for our administrative offices was premium downtown Columbus office space when our focus is on programming that helps our clients," says Rick Davis, vice president of the Greater Columbus Region of LSS.
In the end, Worthington beat out several suburban communities and the agency relocated there in July 2010. LSS received a $50,000 Venture Grant from the city in exchange for agreeing to maintain an annual payroll of at least $1.95 million for seven years.
The Venture Grant program provides funding to new and expanding Worthington businesses that have at least 25 employees and/or minimum annual payrolls of $1 million. "If the company doesn't meet the thresholds when they come to Worthington, they have three years to achieve them. Some meet them right away and others grow into them," says Assistant City Manager Robyn Stewart.
If the thresholds aren't met, the grant essentially converts to a no-interest loan that must be repaid. "We look at each year in isolation. If they miss the mark one year out of five, they only repay one-fifth of the grant amount," Stewart says.
An advisory committee reviews the applicants based on five years of projected payroll. "Companies commit to a specified payroll amount that's subject to Worthington income tax. If they have several locations, we only consider the payroll subject to our income tax," Stewart says. "The committee scales the grants to the payroll. It also considers the timeline needed for us to capture the new income tax that's to be generated."
Venture Grants range from $7,500 to $350,000, but most are less than $50,000. The typical grant period is five years, but a few extend to seven or 10 years. "The grants are provided to the company when they move into their Worthington office. Companies can use it however they choose. It gives them flexibility," Stewart says.
LSS put its grant toward the physical move. "It would've been a stretch to make the move without those funds, because of our client programming needs. We also applied it to the considerable computer and phone expenses associated with relocating our offices," Davis says.
Worthington awarded its first Venture Grant in 2003. "Since then, we've awarded $1,085,000. The anticipated payroll over the life of the grant contracts is more than $315 million," Stewart says. "The city projected we'd take in $3 million in income tax. The actual has been $3.4 million. The performance has been very good and the grants have been well-received by the businesses."
Competition and Collaboration
For Worthington or any other governmental entity, income tax revenue is a critical yardstick.
"Look at the model of how local governments are funded. It's through income taxes from people who work in the municipality. Every city is looking to attract jobs and investments to boost tax revenue to fund city services," says Columbus's Stevens. "Economic development financial incentives leverage public money to maximize private investment and jobs."
No wonder competition among communities is so stiff. Still, economic development professionals say it's a misconception that Central Ohio municipalities are deliberating stealing business from one another rather than trying to lure new companies to the region.
"The perception is that incentives play one city against another. That's not the case. The site has to fit the need. We've never had a client walk in and say they'll go anywhere. They usually have two or three sites in mind based on factors pertinent to the property," Rishel says.
Those sites often are within a particular region. "Those of us who work in economic development know this is not about shuffling jobs within the region. That's not a long-term growth strategy. We know we need to attract jobs from outside the region. As we see growth and net new jobs, all communities in the region see the benefit," Stevens says.
Some deals do require collaboration. "At times, we partner with Franklin County or the state. A coordinated effort can help convince a company to make a move here," Stevens says.
Piling on incentives to see who offers the most carrots isn't the answer, Stevens maintains: "We don't want to over-incentivize the company. We want to level the playing field with the other sites that Columbus is competing with."
After discussing a business's plans, the specific incentives then fall into place. "The public-private partnership evolves as the deal progresses. Once we see what the private side is doing with the land, space, financing and things like that, we can tailor the incentives to enhance those terms," Stevens says.
This summer, the Ohio Economic Development Association (OEDA) board of directors crafted the 2010 Economic Development Policy Paper. In it, OEDA recommends reforms that create fewer, but better, incentives.
"The States which surround Ohio are very aggressive in promoting their incentive programs. Ohio needs tax incentive tools to ensure successful competition for major corporate site location projects. However, Ohio's Department of Development (ODOD) and their local economic development partners operate with an unusually wide array of generally underfunded, often narrowly applicable programs. These programs create inflexible regulations that often impede the goal of job retention and expansion," the policy paper says.
The OEDA recommends simpler, more flexible economic development programs that are better funded. It also suggests eliminating unneeded and rarely used programs, and having state and local tax incentive programs be made equally available.
The new General Assembly will get a look at the recommendations early this year. The list already has been shared with ODOD, as well as former Gov. Ted Strickland and Gov. John Kasich, who vowed to shake up state government even before winning the November election.
Businesses and economic development professionals expect big changes at ODOD, one of the state agencies Kasich singled out for reform when he announced his intention to replace ODOD with Jobs-Ohio, a private nonprofit corporation dedicated to economic development.
Kasich has suggested he would chair JobsOhio, with a 12-member board made up of current and former CEOs reporting to him. As of early January, the governor's staff was preparing legislation to create JobsOhio.
Lisa Hooker is a freelance writer.
Reprinted from the February 2011 issue of Columbus C.E.O. Copyright © Columbus C.E.O.