DIY approach can be a bad bet when negotiating credits and incentives
Experience needed to get and document the best deal
INSIGHT ARTICLE |
This article was originally published on July 22, 2015 and has been updated.
Businesses that are starting new or relocating existing operations can often realize significant economic advantages through various state and local tax credit and incentive opportunities. Unfortunately, businesses that attempt to navigate this process without experienced advice often miss out on key opportunities or find that the benefits they thought they had negotiated are not the benefits they actually receive.
Why? Three key reasons:
- First, there is the sheer volume of incentives available. From tax increment financing districts, statutory credit and incentive programs tied to investment, or employment targets to customized incentives negotiated directly with the taxing jurisdictions involved, it is unlikely that a business that has no or little experience identifying and securing incentives will understand the full scope of help that might be available.
- Second, timing. Businesses often make the mistake of picking and announcing a location and then investigating the incentives available to them. Incentives that might have been available to lure a company to a jurisdiction will not be available to a company that has already announced its decision. Credits and incentives can’t be an afterthought. They have to be an integral part of your site selection strategy.
- Third, documenting your deal. The economic benefit you receive will be the result of a contract between you and the jurisdiction granting the incentive. Even with the best intentions on both sides, the agreement documenting the deal often fails to deliver the full benefit intended because the business involved failed to execute an agreement that fully reflects the verbal commitments made by both the company and the jurisdiction.
Governmental economic developers’ role
Businesses sometimes take a do-it-yourself approach to credits and incentives because they rely on the local economic development teams to drive the process. While local economic developers are motivated to attract your business, you should not count on them exclusively to guide the process.
Developers are charged with attracting investment and jobs to their communities, first and foremost, so they will be well-versed in the benefits their jurisdiction offers. It is not their responsibility to inform your business about the incentives that might be available from a competing jurisdiction. Additionally, they may not be fully versed on options available at the state or federal level, including those that may run concurrently with the local programs.
Working with professionals experienced in the credits and incentives process helps ensure that you investigate what is available from all the sites you are considering and helps you understand exactly how competing offers compare. An experienced advisor can also use the competitive atmosphere to enhance the benefits for your company. While many credits and incentives are defined by statute, jurisdictions will also offer customized incentive programs. An objective third party can help you investigate your full range of options and handle negotiations with potential locations and enhance the relationships you will rely on as new members of the business community.
The deal you have is the deal you document
Getting the best offer is just the beginning; next, you have to ensure that the deal you document is the deal you negotiated. This is another area where good intentions may inadvertently get lost in the detail if you do not have deep experience working with the distinct language of incentive packages.
Consider this example:
A company is planning to build a new manufacturing facility. They negotiate a package of credits and incentives that is based on the total investment in the plant and on the number of jobs created. Working with the economic development representative, they document and sign the deal. But the deal is with the company itself, while the actual project is far more complicated. A commonly owned, but separate real estate entity is actually procuring the property and building the plant, which is then leased back to the company. The company is also staffing the plant through contract employment relationships with another party. Both the company and the economic developer documented the deal in good faith. Because the developer was not aware of the internal workings of the deal and the company did not understand how they would affect the final document, the company finds, when it files to collect the benefit, that it does not qualify. This is because it neither made the investment in the plant nor actually employs the personnel working there. Those investments were made by separate legal entities that are not parties to the incentive contract.
In such cases, these mistakes are usually resolved so that the company receives all or most of the benefits it was promised—economic developers are not looking to negatively impact anyone and actually do want you to receive the benefits they offer. But resolving these situations takes time and money, and sometimes a lot of both. That resolution can also be complicated by the political environment. Sometimes, before a revised agreement can be finalized, it must go through public hearings. Depending on the timing of the revised agreement, the board that approves the revised agreement may differ from the board that approved the original agreement and may be less inclined to approve changes.
Working with experienced credit and incentives professionals can help your business negotiate a better deal and will also help you ensure that the deal you thought you had is the deal you actually receive.