With the economy and financial markets rebounding, many businesses are exploring the possibilities of adding new machinery and equipment or expanding their facilities. Most business owners are aware that public sector programs can augment planned expansions, but they often have little experience with these programs and the expectations of local, county and state governments.
Private sector goals are obvious — profitability for owners or shareholders — while the public sector looks for revenues (income via income tax revenue) to provide services to residential and business clients. Businesses and residents have certain expectations of their government to provide police and fire/EMS protection, adequate water and sewer service, and quality roads.
Be sure to keep the local community’s responsibilities in mind when approaching local governments or economic development representatives for economic incentives. Some businesses ask for unrealistic incentive packages that no private sector organization would consider after calculating return on investment.
Risks and incentives
Local incentives can vary by community while state incentives and loan programs are available throughout Ohio. Most local governments offer revolving loans, occupancy grants and tax exemption programs. Revolving loan programs provide gap financing through a loan that works in conjunction with bank financing to fill the financial gap between the owner’s equity and the bank loan.
To evaluate their lending risk, local governments require at least three years of financial statements or tax returns plus three years of projects. The community’s representative will commonly work with financial institutions providing the primary funding. Normally, if the bank is satisfied with the financials and projections, the local community is satisfied. Expect the local government entity to file a subordinate lien or mortgage to secure the loan adequately.
Employee withholding grants, sometimes called occupancy grants, are performance-based wherein a contractual agreement for a specific term exists between the local community and the business; the business agrees to create new jobs and income tax revenues. The community may match half the period of a new lease or the expected project ramp-up period to assist the business’s growth and ultimate success. Occupancy grant agreements give back to the business a percentage of the new employees’ paid income tax.
Real property tax incentives provided through Ohio’s Community Reinvestment Area (CRA) and Enterprise Zone (EZ) programs offer tax incentives on increased property values resulting from new construction or major building additions. These incentives work best when new buildings or large physical renovations are anticipated. The term and exemption percentage of the CRA and EZ programs can vary with each community, but limitations are set. Generally, communities will not exceed a 75 percent exemption and a 10-year term. These programs take longer to negotiate since approval is required from the local school board and local government or county board of commissions. All agreements must be in place prior to any construction.
Consult your local economic development representative, banker or regional economic organization early in project planning to be aware of all local, state and Small Business Administration programs.