Any time a business is looking to undertake an economic development or capital improvement project, a litany of questions must be asked. Do we need new equipment or new facilities? Are we going to stay where we are? Will we be creating new jobs and/or retaining them?
But in today’s uncertain economic times, perhaps the most important question concerns the availability of funding. Often, private funding isn’t enough.
“Credit is tight, and it’s hard to get financing,” says Kip Wahlers, head of the Columbus public finance group at Calfee, Halter & Griswold LLP. “Transactions that were routine a year ago are nearly impossible today.”
Because of this, it makes sense to reach out to the public sector to assist in financing projects. In many cases, public sector assistance can lower costs and enable your business to make more efficient use of its resources.
Smart Business spoke with Wahlers about economic development and how to create productive public/private partnerships.
Where is assistance available?
In Ohio, if one is undertaking a project, the place to start for low interest loans and job training assistance is generally the regional office of the Department of Development. The drawback of this assistance is that in accepting it, a business may be required to pay prevailing wages for capital improvements constructed as part of the project. In addition, for those businesses with retail projects, the Department of Development’s ability to help is limited by statute. In the case of projects involving capital improvements, local jurisdictions (cities, counties and port authorities) may be able to provide meaningful assistance in the form of tax abatements or tax increment financing (TIF).
What is TIF and what are the benefits?
TIF uses revenue coming from future increases in real property values to pay costs of public or, sometimes, private improvements. Usually, a new capital project will result in an increase in assessed valuation. TIF can be thought of as taking the property taxes (in the form of payments in lieu of taxes) resulting from the new development, and using those payments to pay costs of new capital facilities. In most cases, the cost to the business is minimal, since it would have had to pay property taxes anyway.
If structured properly, bonds that are issued that are paid from TIF revenues can be tax-exempt, often resulting in cost savings when compared to bank financing. In some cases, it may be possible for a business to transfer land in its possession to a local government for public improvements benefiting a project, and for the local government to finance the cost of that acquisition with TIF revenues.
How does a business obtain TIF?
TIF is always done through local governments. And, since it often requires the consent of other affected subdivisions, including school districts, it is important to understand the ins and outs of school financing, and appreciate how school compensation needs to be structured. TIF often takes a few months to put in place, so the process of building support should begin early.
What about prevailing wage?
Ohio’s prevailing wage law applies to construction projects undertaken by public authorities and requires that the public authorities pay the locally prevailing rate of wages to workers on the project. In general, this rate is equal to union scale wages. The majority of projects triggering prevailing wage are traditional public construction works projects, but, if a public entity contributes funding or other direct support (e.g. public land) to a private project, it is possible that prevailing wages must be paid to the workers on that project. This can increase the cost of a project by up to 20 percent.
The Department of Commerce is responsible for enforcing the prevailing wage law. Recently, there has been confusion regarding the determination of whether publicly funded construction activity is intertwined with private construction activity. The issue is whether the activity constitutes a single project, or if the projects are considered to be sufficiently separate and unrelated, so one is publicly supported (thus triggering prevailing wage) and the other is privately financed (which does not trigger prevailing wage).
Because of this confusion, the Department of Commerce has issued new guidelines explaining how it will interpret and apply the law in various sets of circumstances. Therefore, businesses need to know these laws and the Department of Commerce’s views in order to make informed choices about their decisions regarding public assistance and, if possible, to avoid the application of prevailing wages to their project.
What other considerations should businesses be aware of?
Don’t try to move ahead with a project and hope to get incentives after the fact. It’s not going to happen. Plan ahead with your counsel to see if you’ll be eligible for any government assistance, including job training, loans, grants and tax exempt financing.
It’s also important be mindful that governments are public bodies whose records are often available to the public upon request. A business applying for assistance with a government needs to make sure that its vital information, like customer lists or business plans, are protected. Designating confidential information that is provided to a government as a trade secret is a very good idea.
KIP WAHLERS is the head of the Columbus public finance group at Calfee, Halter & Griswold LLP. Reach him at firstname.lastname@example.org or (614) 621-7009.