How Incentives Can Help When a Company Enters the U.S. Market, Relocates or Expands its U.S. Operation
Written By: Linda McCarty, Esq
Wall Esleeck Babcock, LLP
Winston Salem, North Carolina
Although incentives can be an important means to increase the bottom line for a company that is either entering the U.S. market or relocating or expanding its operations within the U.S., they are often overlooked or not fully explored or understood by companies.
To set the stage, there is an inherent competition among states to attract job and revenue creating companies. To recruit companies, states use a wide variety of statutory and discretionary incentives, including tax credits, property (real and personal) tax exemptions, project grants, grants to improve infrastructure, donations of land, grants associated with capital investments, workforce training and wage assistance, and utility discounts, just to name a few.
The competition for companies continues at the local level where each individual county within a particular state does its part to try to attract companies to set up operations within its particular county. This too is done through a wide variety of incentives.
So, why are incentives so often overlooked by companies? Perhaps the most common reason is that most companies don’t know what to ask for. Companies often rely on state and local authorizes to tell them what incentives are available, failing to recognize that a state or county will only be forthcoming with incentives if there is a fear that the project may go to a competing jurisdiction
There are typically two types of incentives, statutory and discretionary, available to companies that are seeking to enter the U.S. market, or expand or relocate existing operations in the U.S.
Most companies are familiar with and have used statutory incentives. Statutory incentives generally include income tax credits that a company qualifies for by meeting certain criteria, generally through job creation and capital expenditures. These are the incentives that a state will first offer up to a company that is looking to relocate or expand its operations in the state. Statutory incentives are non-discretionary. In other words, any company that meets the specific statutory criteria is eligible to take advantage of them. With statutory incentives in hand, companies often think that they have maximized the incentives that are available to them, failing to explore discretionary incentives all together.
Unlike statutory incentives, discretionary incentives must be negotiated with the respective state and local authority. Generally, discretionary incentives have a more direct impact on a project, in that these incentives directly provide for a reduction in the capital costs or operating costs. For that reason, discretionary incentives are often referred to as impact incentives. Impact incentives can take a number of different forms including cash grants, property tax reductions, land or lease buy-downs, building or land improvement offsets, utility costs reductions and infrastructure installations. A well negotiated incentive package should represent between 10 to 20 percent of the total capital investment by a company in a project.
As a company considers expansion or relocation in the U.S., it should consider the following:
Assemble and know your team. Assemble a team of professionals, knowledgeable in site selection and incentive negotiations. Chose the team wisely so that that the company enters the new community as a partner and not an adversary. For instance, an aggressive, take no prisoners, negotiator may obtain the result the company is looking for in terms of incentives, but may also accomplish a public-relations nightmare in the local community before the company sets it foot within city lines.
Do not negotiate incentives in a vacuum. Incentive negotiations should be viewed as a piece of a three-dimensional puzzle and should never be negotiated in a vacuum. Performance requirements under many incentives can have a direct impact on other non-incentive agreement, such as leases, land acquisitions and construction contracts.
Know your incentives. Before initiating contacts with a state or local community, the company should have reviewed all available incentives, discretionary and statutory. The company also should determine the performance requirements of each incentive, including requirements regarding job creation, capital expenditures, loss of incentives, and time limitations. This information is critical when determining if a particular incentive meets a company’s needs.
Evaluate the benefits the project will bring to a particular location. A compelling application for incentives should be prepared for each state in which a company is considering relocation. Each application should outline and analyze the benefits a state will obtain if the company locates it operations there.
Keep the project confidential. Companies always should avoid making any public (or non-public) announcements until the negotiation of the incentive package, including accompanying agreements, have been finalized. Many incentives can be revoked by the state or local authority if the company announces the location of a project before the incentives have been finalized. Also, once the location has been announced, the company loses all leverage since there will be no reason for the state or local authority to offer addition incentives.
About the Authors:
Linda McCarty, Esq. is a partner with the law firm Wall Esleeck Babcock, LLP in Winston Salem, North Carolina. Her practice is focused on commercial business transactions, particular at the international level. Linda devotes a significant portion of her time assisting clients at all stages of corporate relocation or expansion of operations in the United States. She is a director of Wall Esleeck Babcock Consulting, LLC, a wholly owned subsidiary of Wall Esleeck Babcock, LLP. Wall Esleeck Babcock Consulting, LLC specializes in negotiations of state, local and private economic development incentives for companies across the United States. Through its strategic alliance with Development Advisors, LLC, it offers its clients a comprehensive platform for the negotiation and structuring of incentives.
Patric Zimmer is the founder and president of Development Advisors, LLC. Founded in 1996, Development Advisors has leveraged over $6 Billion in capital investment creating over 6,000 jobs. Development Advisors has worked with clients throughout the United States including projects ranging from $2 million to over $450 million in capital investment. Their highly skilled team includes bother former public sector officials and senior business executives. Their diverse industry sector knowledge, subject matter expertise, and market understanding will consistently add value to their client’s capital investment decisions.