Billions of dollars are invested into U.S. businesses every year by economic development agencies across the country. These investments come in the form of tax credits and incentives aimed at attracting, recruiting, and supporting targeted industries. However, many companies are unaware of these incentives or mistakenly believe they don’t qualify. Even those who receive incentives often fail to maximize their benefits due to various reasons. In this blog, we will explore the importance of incentives, qualifying criteria, the best time to seek incentives, and the significance of performance metrics and proof of performance reporting.
Unveiling the Incentives:
Economic development agencies offer a range of incentives to attract and retain businesses. These incentives, often provided as cash or cash-like benefits, can have a significant impact on a company’s EBITDA. Some common examples include training grants, site preparation grants, land/property donations, utility rate reductions, permit fee waivers, cash for jobs, infrastructure upgrades, railway extensions, and property tax abatements. Additionally, there are numerous project-specific incentives that are not widely publicized on economic development websites.
Qualifying for Incentives:
Companies are likely to qualify for incentives if they plan to invest $5 million or more and create 25 or more jobs over a three to five-year period. Qualifying investments include relocations, greenfield projects, expansions, facility recapitalizations, new equipment purchases, and machinery upgrades. While investments and job creation are mutually exclusive, it is generally recommended to have a minimum of 100 new jobs for discretionary incentive negotiation, depending on factors such as location, wages, and industry.
Diverse Industries, Equal Opportunities:
Discretionary incentives are industry-agnostic, meaning most industries can qualify for incentives based on their desirability and positive impact on a community’s economic development goals. Highly sought-after industries include agricultural technology, automotive, information technology, electronics, plastics, energy, metals, pharmaceuticals, aviation, and food and beverage. However, retail establishments typically do not benefit from discretionary incentives unless they involve new or improved headquarters, call centers, or distribution centers, as their location decisions are primarily driven by market demand rather than incentive availability.
Timing is Key:
To maximize community support in the form of financial incentives, it is crucial to initiate relationships and negotiations well in advance before investment decisions or job creation. Incentives are designed to influence a company’s choice to invest in a particular community or state, creating a “but for” scenario. The best time to seek incentives is during early budgeting for a project, allowing sufficient time for negotiations and maximizing the benefits. Delaying negotiations until after committed activities like site groundbreaking or public announcements can limit the potential advantages.
Performance Metrics: Proving Worthiness
Incentives offered by economic development agencies are performance-based, meaning businesses receive them only when they fulfill their capital investment and job creation commitments. There are two types of performance metrics: pro rata and full performance. A package may include either or both types. Understanding these metrics is vital. For instance, in a pro-rata agreement where a company commits to adding 200 new jobs and only adds 100, the payment would be reduced to $250,000 from the pledged $500,000. In a full performance agreement, no money is paid until all jobs are created. Front-loaded incentives may require additional mechanisms like letters of credit or deeds of trust for lien positioning.
The Importance of Proof of Performance:
Proof of performance reporting is a critical aspect of monetizing incentive programs. Consistent and long-term reporting is necessary, as these benefits and associated reporting can last for a decade or more. Reporting deadlines must be met to avoid forfeiting a portion or all of the benefits. Challenges such as limited bandwidth, employee turnover, vacations, and lack of interdepartmental collaboration can lead to missed deadlines. Establishing dedicated resources, strong collaboration between internal departments, efficient data collection systems, sufficient bandwidth, and a capable accounting team are crucial for successfully navigating the incentives landscape in the long run.
Partnering with Incentive Experts:
For growing companies with limited time and resources, ensuring they don’t miss out on incentive opportunities can be a challenge. Fortunately, there are external incentive experts who specialize in securing and maximizing incentives. These professionals can provide valuable insights, guidance, and assistance in navigating the complex world of incentives, enabling businesses to optimize their benefits and thrive.
Incentives offered by economic development agencies play a significant role in attracting and retaining businesses in the United States. By understanding the qualifying criteria, the best time to seek incentives, performance metrics, and the importance of proof of performance reporting, companies can maximize the benefits available to them. Whether through internal resources or external experts, proactive engagement in the incentives landscape can lead to long-term success, ensuring optimal utilization of resources and fostering economic growth.
About Evergreen Location Strategies:
With over 80 years of combined experience, Evergreen’s Location Strategies team performs operational and location assessments. Our time-tested site selection process uses first-party data and in-depth analysis to identify ideal facility locations for our clients with data-driven confidence, knowing that their location is optimal for all their business needs, including supply chain, logistical, cost, tax structure, workforce, and return on investment. Our client-focused approach to Economic Development Incentives results in holistic incentive packages that are valuable and relevant to our clients. Additionally, due to our commitment to securing our client’s success, we implement the incentive package to ensure the full value is received.