June 2004 | Commentary | EcoDev

Rethinking the Role of Public Incentives

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When you consider changing a logistics center location, or expanding an existing logistics network, a myriad of crucial factors influence and shape the decisions your logistics team makes. Traditionally, the availability and applicability of local and state incentives is not a make-or-break factor in logistics placement decisions, but perhaps the time has come to elevate incentives to the ranks of more weighty brethren.

While it is disingenuous to suggest that the availability of public incentives is equivalent to a location factor such as workforce availability, companies have much to gain by incorporating applicable incentives into the final rounds of decision-making. If a deadlock exists between two equally suitable locations, the value of your incentive package is certainly a logical tie-breaker.

Timing is Everything

Too often, corporations are either in the dark about the availability and utility of incentives, lack the in-house expertise to negotiate the most advantageous package, or miss the window of opportunity completely by attempting to negotiate a deal too late. If the local and regional entities already know you're coming, and you've spent that first dollar on a new facility, it is most likely too late to negotiate a deal of any significance.

Composing your incentive offer letter is an art, and if you don't have resident in-house artists, consider using the services of a professional firm that has a winning record of incentive negotiation.

Well-known and respected developers or third-party providers often bring with them a reputation that ensures that local and state public officials will make an investment in your facility—or at least open the door to more significant incentive negotiation.

Regardless of who does the talking, be sure that the team considers the following issues before taking any incentive to the bank:

Make sure that what you get is what you need. You gain nothing from accepting incentives that your company can't utilize. As an example, many tax credit programs are extended beyond a firm's annual tax liability. When outlining your cash flow projection, ensure that the credit programs can be extended through a carry-forward provision.

An offer letter does not equal a check in hand. Many public programs require lengthy applications before earmarking and drawing down the incentive. It is important to secure a guarantee that moving forward on the project does not jeopardize your award.

Your project timeline is critical. Many programs stipulate that your company will not receive any public funds until you have met the agreed-upon commitments. These may include meeting capital investment requirements and hiring new employees. Be very clear—before you break any ground—about the timing and draw-down of your negotiated public funds.

Be clear about who gets the money. Some programs require that the applicant be a public entity. This is typically the case with infrastructure programs. While it doesn't mean that your company can't utilize these funds, it does mean that a local public entity must be involved to serve as a conduit. This requires another level of negotiation, and typically, a written disbursal agreement.

The Bottom Line

By considering all these public incentive factors when locating your logistics operation, you will ensure that you make your ultimate decision using meaningful, bottom-line calculations that net your company lower development costs.

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