Economic incentives Featured

8:00pm EDT March 26, 2008

When selecting a site for business operations, or considering a move, the availability of government economic incentives might just help in the decision-making process. In an effort by the state to remain competitive, incentive programs serve the purpose of boosting business in the right locations, creating a win-win situation.

Smart Business spoke to Victor Murray, senior vice president of CresaPartners, Princeton, New Jersey, about how incentives can affect where businesses chose to reside.

How might incentives fit into site selection?

The four major corporate resources — capital, people, technology and information — are constantly being transformed to accommodate the core businesses that they support. By contrast, the fifth corporate resource (real estate) is far less flexible and requires considerable research, in-depth local knowledge and tactical forecasting in order to address the dynamic needs of the other four resources. Most incentive packages attempt to offer a broad array of incentives that can address each (or many) of these resources, since once a site has been selected the prospect of leaving anytime soon is not likely.

My collegue Tim Myllykangas, a principal in our CresaPartners office in Boston, works with incentive programs there and says that, although not always the top criterion at the first phase of a typical site selection project, once a short-list has been developed, incentives can rise to the top as a key factor for selecting the finalist community. Unfortunately, he says most CFOs place a zero value on corporate tax credits, which then reduces the overall incentive package value of some cities/states by 25 to 75 percent. Above-the-line incentives can make or break a final decision since start-up costs are so significant for most projects.

What kinds of incentives are available?

There’s an interest on the part of the state to encourage redevelopment or revitalization in places where it wouldn’t normally occur, so their incentives are really tailored to that. Many incentive packages are put together with equipment and employee investment tax credit programs, like they do in urban areas where there’s high unemployment and low inventory of unchallenged sites.

There are incentives tailored to spurring geographic diversity and urban redevelopment, like opportunity zones. Pennsylvania has ‘keystone’ opportunity zones and they’ve used that with significant success in going to geographically remote areas, like the Scranton and northeast areas, to try to encourage businesses to locate there.

Business employment incentive programs (BEIPs), what we have in New Jersey, are really grants focusing more on the hard assets, like the employment and personnel side. They are offered to companies that are either expanding within the state or who are considering relocating here. In a BEIP, a company can be refunded 10 to 15 percent of the taxes that it pays if it’s in a smart growth area. Or, in an area where they really want to encourage growth, it might be refunded 80 percent of its taxes. There’s various limits depending on whether it’s in an area where the state is really encouraging growth.

Which businesses are good candidates?

Some incentives are tailored toward the larger organizations — 250 people or more — and at any given time the states do change those entry levels for where you can participate. Qualification can vary based on the industry. Sometimes programs are tailored toward technology companies; others are tailored more toward manufacturing or offices.

Are there limitations?

That’s something that changes on a fairly infrequent basis — but it can change. Some of the programs are victims of their own successes, in that it encourages more and more people to participate. Some of the states do cap their incentives because of tough times. They want to continue them, but realize that it comes at a cost. So there is a tendency to start limiting what they can contribute or offering some incentives in lieu of others based on where their financial resources are.

How can companies learn more about programs available to them?

The world of incentives has become very complex in recent years and the need for sophisticated specialists with experience is critical to maximizing your opportunities. At CresaPartners, we’ve seen many companies think they did a great job getting $3 million in incentives, never knowing they could have received $5 million if they’d had specialists on their team focused on the detailed process of negotiating multiple programs in parallel, as well as multiple cities and states. A preliminary estimate or range of potential incentives can be provided quickly by consultants once basic project parameters are known.

One way is to go individually to the different regions that you’re considering or the different state economic development groups. There are also trade associations and real estate adviser groups that specialize in tax and incentive programs. We recommend engaging a qualified professional that can be a single source who has access to all of the areas you might be considering. Dealing directly is also time consuming. And without a proper confidentiality program in place, you let the entire community, not just your intended audience, know that you are out in the market looking; your anonymity is lost and you’ll get barraged by economic groups in every state pursuing you.

VICTOR MURRAY is senior vice president of CresaPartners, Princeton, NJ. Reach him at vmurray@cresapartners.com or (609) 452-8200.