Expansion Management

An Expert Explains Why Timing Is Critical for Incentive Negotiations

Don’t reveal too much information too soon about your project — and always follow through to make sure you collect the full incentive amount.

[ 5/8/2006 ] By: James Renzas

Incentives are an intrinsic factor in selecting a new location for a corporate expansion or relocation. Corporate executives seem to understand that incentives and tax credits are just as important as availability of skilled labor, proximity of transportation and operational costs, but lack the expertise of a professional incentive negotiator to maximize incentive packages.

Several states recognize the significance of utilizing incentives to entice companies considering an expansion or relocation. Some can be aggressive in the recruiting process by offering great incentives, but the negotiation must be handled properly. The new jobs and tax revenues generated by companies greatly exceed the cost of incentives the states provide.

But incentives should not be the primary concern in a company’s site location search. Incentives should not be treated as the icing on the cake or the “deal breaker” when two locations are situated alike.

Know When to Negotiate

The timing for incentive negotiation in the site location process is crucial.

Companies that include incentives as a criterion in an initial site search can end up locating in a community that is not a right match for the organization.

Companies that start the negotiation process after they have chosen a location have lost their bargaining power and may not be offered any incentives for their expansion or relocation.

Incentives should not be the primary concern in a company’s site location search. Incentives should not be treated as the icing on the cake or the “deal breaker” when two locations are situated alike.

Before incentive negotiations can start, a company needs to establish its requirements for the site. It should determine the logistics, labor and other site needs. Once the company determines its criteria, it should use an expert in site location and incentives negotiation to assist in the location search.

A company should search for two to three locations that match its critical location requirements and then conduct an economic analysis of each location. The analysis should evaluate the operational costs of the facilities, including labor costs, utilities, resources and local taxes.

A company should evaluate sites that are located in different states. This is because states often are precluded from offering incentives when there is no other state involved as a potential location. The state does not care which community the company locates to, as long as it locates within the state.

When a company completes the economic analysis, it should begin the negotiation process. Companies should never disclose to economic developers the alternative locations. Some locations can only legally provide incentives when a decision has not been made. Also, states may be reluctant to offer incentives to a company if it knows that the company is already fixed on locating there.

Upon completion of the negotiation process, it is vital that the legal, engineering and construction personnel be informed of the compliance requirements. Failure to follow through on compliance requirements will nullify the incentive agreement that the company has worked hard to achieve.

Know What Incentives Are Available

There are more than $50 billion in state, federal and local incentives available to expanding and relocating companies each year. Deciding which incentives are best for the company depends on the composition of the company and its objectives.

Some of the most innovative incentives are offered by states. Several states will provide the company with a percentage of the employees’ salary for a designated amount of time to offset operational and relocation costs. States that contribute to employees’ salaries require specified documentation in order to distribute the benefit.

In order for companies to obtain incentive credits, they need to know what programs are available, how the programs were used in the past and what the compliance requirements are.

In order for companies to obtain incentive credits, they need to know what programs are available, how the programs were used in the past and what the compliance requirements are.

Several incentive programs come with pitfalls or hidden regulations. Companies need to be cautious of the stipulations involved with compliance.

In Texas, for example, companies can only receive a sales and use tax rebate if they include the appropriate language in the contract with the equipment vendor, regardless of whether the company is located in an enterprise zone.

Top incentive programs that companies should search for include: customized training for new employees, property tax abatements, payment in lieu of taxes, industrial revenue bond financing, new market tax credits, state investment tax credits, federal employee zone credits, golf opportunity zone credits, community development bock grants, federal renewal zones, Native American tax credits and local urban renewal zones.

There are many compliance requirements involved in the incentive negotiation process that companies are unaware of without the help of a professional incentive negotiator.

Maximize the Value of Your Incentives

Most corporate executives do not feel that they are maximizing the use of available incentive and tax credits on expansion and relocation projects. More than 50 percent of all negotiated incentives are never collected. This is because companies lack the attention and organization that an outside source can offer.

Most incentive programs are negotiated by multiple departments within the organization, from real estate and finance to legal and tax. Because these departments do not actively involve each other in the negotiation and follow-up processes, details are frequently neglected.

Since compliance requires the implementation of a dedicated system to monitor information requirements, outsourcing to an incentives management company, which has the resources and financial motivation to maximize collections, is vital for companies looking to harvest all available incentives.

How to Choose an Incentives Negotiator

Corporate executives that are looking to outsource the incentive management program should find an experienced professional negotiator who is knowledgeable in the local community and familiar with the real estate, finance and tax industries.

The negotiator should have knowledge in the incentive programs available and what has been offered in the past. This will allow the negotiator to know what to ask for in order for the company to obtain an incentive package.

The incentive negotiator should also provide compliance services. The negotiator should be knowledgeable in what contracts a state requires, the conditions that apply to incentive packages and how to collect the incentives for the company.

Not following through on compliance commitments and requirements of an incentive program is one of the most overlooked errors a company can make.

Not following through on compliance commitments and requirements of an incentive program is one of the most overlooked errors a company can make.

Since some incentives can take up to 15 years to collect and are dispersed throughout multiple areas of the organization, collecting incentives can easily slip through the cracks.

An incentives management company can monitor and follow up on the requirements more proficiently than an in-house department to ensure that the company receives the credits that are due.

More importantly, the negotiator should be paid for performance. That means that they are only compensated when the company actually receives the incentives and tax credits. A negotiator that is paid on this basis is more likely to fight for a company’s incentive package and make sure that the incentives are collected.

Paying the negotiator on a performance basis will allow the company to maximize its benefits.

Incentive negotiation is a timely process that needs to be vigilantly managed from the start of the site location process. A successful incentives management program requires diligence.

Maximizing the use of incentives and tax credits can generate a substantial benefit for the company and offset the majority of the expansion or relocation costs.

James Renzas is president and CEO of Location Management Services, a Mission Viejo, Calif.-based site location company that specializes in negotiating financial incentives and tax credits for Fortune 500 firms. Renzas has helped companies find competitive sites in the United States for more than 25 years. He can be reached at (949) 472-4482, or via e-mail at jrenzas@locationmgmt.com. Location Management Services can be accessed on the Web at www.locationmgmt.com .