Commentary

The one thing NOT to overlook in your location selection

State and local governments are offering major business and economic incentives to bring tech companies into their jurisdiction for their high growth and skilled workforce.

October 15, 2017

Whether you're looking for a new location, expanding an existing one, merging several or just really into real estate shopping, there's a lot to consider when selecting a place to locate

Talent, amenities, neighborhoods, occupancy costs, and labor will likely factor into your decision. But incentives are one factor that should top your list of “musts”.

State and local governments are offering major economic incentives to bring businesses into their jurisdiction—especially those from the tech industry. Why? Tech companies are a prized asset to the surrounding community.

They bring a young and educated workforce, an in-demand skill set and high expectations for growth—a recipe for major positive economic impact wherever they locate. That’s why almost every state in the country is trying to attract tech companies with incentives, and why you should know how to leverage them.

To put it plainly, incentives are payments or concessions offered to businesses. Government entities provide the incentives to encourage job growth and investment in their jurisdictions.

They can be tax-related and non-tax-related and are secured at the local, state and federal levels.

In most cases, the department in charge of incentives is focused solely on economic development. When you move in, they meet their investment and job creation goals. So to encourage that activity, they try to help you lower costs and grow your company.

Types of incentives

Incentives range from tax relief to direct grants, employee training and more. The availability and scale of what you're awarded depends on what the jurisdiction can afford and the scope of your project.

Ultimately, it’s up to the discretion of government officials. The deals are usually based on the expected revenue or economic impact that your company’s presence and activity will generate.

Here are a few programs often utilized by tech companies:

Direct grants and forgivable loans: The most popular of all incentives, these are direct cash payments given to private businesses to offset project, infrastructure, training or other costs.

The grants are given based on the expectation of more jobs, higher property values, greater sales tax revenue, etc. that wouldn’t be achievable without your company’s presence. With loan forgiveness, you're exempt from repayment as long as you comply with employment, investment or other agreed-upon commitments.

Payments processor Global Payments is set to receive $75,000 in an Economic Opportunity Fund grant for agreeing to expand its headquarters and add 150 high-paying jobs in Atlanta.

Payroll tax rebates: Due to the high wages associated with skilled workers in the tech industry, payroll tax breaks can be very meaningful. While some states like Texas and Florida don’t have payroll taxes, a handful of the many states that do have started to offer payroll tax rebates. The more people hired, the larger the rebate—and it’s cash.

Online auction house EBTH received both state and city incentivesfor opening a processing facility in Blue Ash, Ohio. Incentives include a seven-year payroll tax credit and a forgivable loan worth $125,000.

Site advantage/enterprise zones: Enterprise zones involve land, buildings, exemptions from regulations (tax free zones) or customized services if you agree to develop a certain area.

Notable examples include Oregon’s Enterprise Zones (EZones), which eliminate property taxes and reduce or eliminate state corporate income taxes within underutilized areas.

Another is New York’s START-UP NY program, which creates tax-free zones across the state for new and expanding businesses that partner with a university or college. New York’s program even extends to the personal income tax of owners and employees.

Real and personal property tax abatements: Jurisdictions may abate or exempt (i.e. reduce or eliminate) your property tax on new real and personal property.*

Let’s say you build a facility (real property) and buy new desks and computers (personal property) to fill the space. Since your investment raises the appraised value of that property, you could secure an abatement for the increase to the jurisdiction’s tax base. In other words, you’re rewarded for your property investment and you pay significantly less in property taxes.

The various taxing jurisdictions (city, county, community college, etc.) participate on an individual basis. Some abatements cover 100% of the jurisdiction’s taxes, but typically are offered for a percentage of the taxes incurred. Benefits depend upon the cost and type of property that is installed.

Electric car company Faraday Future captured $215.9 million in tax incentives to move its manufacturing plant to North Las Vegas.

Real property is generally land and buildings. Personal property includes physical items like desks and computers as well as intangible things like software.

Training grants/cost offset: Job incentives are offered when you create jobs or “train up” your existing workforce. You may be reimbursed a percentage of eligible training expenses or otherwise compensated. Again, programs vary widely from state to state, and can come in the form of cash reimbursements, onsite training from outside consultants or customized classes at local community colleges.

IT services provider PCM agreed to open a sales center in Rio Rancho, New Mexico and will receive $700,000 in funding to help with infrastructure costs as well as $568,676 to help train new hires.

In case you’re wondering...

The money “lost” through all these tax breaks, grants and other incentives will be recouped by job creation, property values and tax revenue in the long run.

There are many business activities and initiatives beyond relocation that qualify for incentives. If you find yourself doing any of these activities, consider yourself a potential candidate.

Start early

Incentives programs can make a significant difference in the economics of your location decision, but they need to be looped into your decision process early on. Opportunities for incentives should be identified before you make capital investments, sign a lease or hire new employees.

Timeline varies by location, but you should allow at least 4-6 months to get cities and states aligned on a plan. The earlier you can start the conversation the better your leverage.

Perform your due diligence

Economic development authorities want to encourage innovators and support the promise of future jobs and economic value. However, they want to know how a company plans to build its success; they want to envision the end game, not just the short term.

Whether new or established, your tech company should come to the table with a well-prepared business plan focused on benefits for the state or city.

You should be able to show how you plan to grow your business and provide a detailed look at the local economic impact. From that perspective, seeking government investment is similar to seeking private investor dollars, in that both parties can gain from sharing information.

A thorough analysis of the proposed project is critical to capturing the best incentives.

Bring the following information to incentive negotiations: 

  • Number of jobs
  • Payroll
  • Job skill level
  • Type of investment
  • Type of product being produced
  • Location of investment
  • Timing of project

With thorough preparation, you may leave the table with more than you anticipated. Economic development agencies are privy to a wide range of options and ample funds to support growth.

Know where to look

Funding for these incentives varies nationwide. All states have programs that can usually be found on their website under economic development. It is important that you compare the requirements and processes in detail before making a final decision, especially since some requirements can be inflexible.

Because the incentives landscape is so inconsistent from one location to the next, it can be extremely helpful to have an experienced incentives consultant on your side of the table.

In this scenario we’ll assume the negotiations with state and local governmental bodies occurred prior to a commitment to a location, and an in-depth project analysis revealed that this project would bring the following investment for a new HQ location:

  1. The creation of 300 new jobs
  2. Average wage of $65,000 per year
  3. Investment: $50,000,000
  • New building: $15,000,000
  • Furniture, fixtures and equipment: $25,000,000
  • Infrastructure: $10,000,000

Ideally, the project should commence by evaluating 3-5 sites then narrowing them down to two. Each site should be analyzed for a potential financial partnership by examining the financial programs offered by each jurisdiction.

Strategic meetings would position the project for success within the area, and the result of a successful strategy may look like the following.

Sample incentives agreement

Property tax abatement

  • City: 75% for 10 years = $2,000,000
  • County: 50% for 10 years = $1,200,000

Local infrastructure grant

  • $4,000,000 (provided with local bond financing)

State corporate income tax credit

  • Equals 10% of qualified capital investment
  • Not to exceed 50% of total state liability in any one year
  • Allowed to carry forward for up to 10 years
  • Program = $800,000 over 10 years

State payroll rebate

  • Equals 4% of total payroll
  • Rebate offered during the first 5 years of project
  • Program = $3,900,000

State job creation grant

  • $5,000 per new job
  • Payable upon holding new job for one year
  • Requires competitive out-of-state location
  • Program = $1,500,000

State enterprise zone program

  • Sales and Use tax rebates based on job creation
  • $2,500 per new job created
  • Payable upon job creation
  • Program = $750,000

Programs will vary significantly by state and locality, but this should give you a sense of how many different incentives one project can capture. 

Billions of dollars in incentives are awarded to competitive projects each year. With more than 36,000 jurisdictions in the United States—and within those a much larger number of individual sites to choose from—it is critical for companies to pursue competitive business incentives that are available.

Whether you’re relocating, expanding, making capital investments, or adding new employees, incentives can have a significant impact on your business decisions. 

 

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