Our clients often ask if it is worth the effort to negotiate for incentives.
For most companies, the answer is a resounding yes. Experience shows that millions of dollars in grants, tax abatements, and training incentives are available for new facilities.
Incentives are specific to each project and community; so the first trick is to find communities that will satisfy your project needs and that want to help you to be profitable.
This suggests that it pays to cast a broad net, particularly in the early stages of a site selection study. Assuming that you have completed that phase of the project, it’s time to negotiate. Based on recent projects, some typical incentive programs might include:
* Cash grant
* Free site
* Infrastructure assistance and targeted site development grants
* Low interest loans and bond financing
* Property tax abatement, payment-in-lieu-of tax
* Tax credits applied to corporate income tax
Training and recruiting assistance
* Negotiated utility rates
* Tax incremental financing
* Site preparation and other in-kind assistance
However, before beginning the negotiation process, it is necessary to establish several facts in the community’s mind — namely that your company is credible and management is serious about making the investment.
These are two requisites for a successful negotiating strategy. In addition, you will need to know which negotiating procedures are likely to yield results, taking into account the community’s hot buttons.
It helps to understand how to work with governing boards, committees and elected officials. Some questions that must be resolved early include:
* Who has authority to commit to the project for the city/state regarding each incentive program element?
* Are the programs funded?
* What commitments will be required of the company, and how will these affect operating efficiency?
* What do we require to make the site work? Improved access? Better drainage? What can the community do in this regard?
Early in the process you should arrange for each candidate-community to present its initial negotiating position and explain it to the team during a brief visit to the community and site (for those that have not yet seen it).
Prior to this meeting it would be wise to distribute a brief document to each community that quantifies the project’s beneficial economic impacts.
We often present this document to the community at a forum specifically for this purpose. The objective is to encourage them to sharpen their pencils.
The best overall approach is to be flexible. However, the following is a guide to compare offers and secure a commitment for incentives:
* Set negotiation strategy and objectives. The company team (or acting in concert with its consultant) agrees on the most beneficial negotiating strategy. It is implemented in steps, building upon each community’s initial offer.
* Request for proposals. After the initial round of discussions we typically solicit a “best offer” incentives proposal from the remaining communities as their key to continue in the running for the project. Don’t be awed by the stated values. Analyze the offers and determine the true value of these offers for your project, for example, by comparing sites using a discounted cash flow analysis.
* Response. Make appropriate responses to inquiries or offers from the communities and continue to value offers as these are received. If you are using a consultant, allow them to press the community on difficult issues and distance yourself from uncomfortable situations by allowing the consultant to bear responsibility.
* Closing and formal announcement. At the proper time you will need to document the agreement.
It is important to understand the community approach to negotiations and what it will expect from the client.
Negotiations have become complex undertakings in recent years, with many communities moving toward formal, structured agreements with the company. The following stipulations are common in today’s incentive and inducement packages:
* Clawbacks are provisions in the contract that permit communities to recover all or part of the subsidies they provide a company as inducement to locate in their community, if the company does not perform as expected.
* Penalties are charges added to clawbacks under certain conditions.
* Recision allows a community to cancel an agreement with a company that fails to perform as stipulated in the agreement.
* Recalibration allows a community to recalculate the level of a subsidy to a company that has underperformed on its promises.
Keep such stipulations to a minimum, while working toward an agreement that both parties can live with after the negotiation is completed.
Remember that the community wants to be your friend, and is gambling that in the future you will be an asset that helps to attract even more investment and jobs to the area. They want you to be successful.
Robert L. Price is a senior consulting principal with Atlanta-based Lockwood Greene. He has participated in more than 250 site location projects for headquarters, back office, distribution and manufacturing operations. He can be reached at bprice@lg.com.
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