Economic times as they are, virtually every state and local economy is suffering. Government coffers are low or empty, local unemployment is up, and local productivity is down. Most, if not all, localities wish they had more business, particularly large business, operating within their jurisdictions. When we were in the midst of double-digit economic "expansion," some statistical and econometric pundits indulged themselves in policy and efficiency debates over economic development initiatives. Yet just a few month' worth of the current economic "reality check" was all that was needed to bring matters into sharp focus: there is no better time than the present for investing locally in your own future.

From the governmental standpoint, the investment comes in the form of adopting a proactive and cooperative spirit toward attracting business, mastering "off-the-rack" incentives that are available and deciding how those incentives can be tailored and improved for that particular locality' fiscal, social and demographic needs. However, all too often the most important factor is overlooked -- honestly and earnestly comparing the proposed local incentives to those offered by other localities across state lines, not just across city limit boundaries.

From the industry standpoint, the investment takes a more literal, but no less complicated, form. And, more often than not, the analysis starts with real estate. Because real estate is only one piece of the economic development puzzle, however, and because the success of a real estate professional in landing a business prospect may depend upon a familiarity with these other pieces of the puzzle, it is important to survey a bit more of the landscape and take a brief look at the other considerations involved in attracting business.

The Role of Real Estate and Real Estate Professionals

The real estate professional is often a busines' first contact with a locality. Business relocations require real estate, often a great deal of it, and site acquisition considerations are typically at the top of the economic development checklist.

Pricing Considerations

As compared to the other components of a large capital relocation project, the demand for real estate is relatively inelastic (i.e., it does not fluctuate greatly as real estate prices vary). Real estate can become more of a factor if the locality is willing to actually donate acreage, which is done in many projects, and a real estate professional should be conversant with the locality' attitudes and capabilities in this area. In general, however, while low-priced real estate is a consideration in the relocation calculus for a business, it is often not a principal consideration, and the real estate professional must be conversant with more than just pricing and comparables.

Development Cost/ Infrastructure Considerations

Development costs, particularly as they relate to infrastructure, are often more important to a business. Are existing roads sufficient? Will a highway exit or other access roads be needed? Will a railroad spur or turnout switch be needed? How much will up-fitting cost? Grading and drainage? Is the current state of existing electricity, water, sewer and other utility facilities sufficient? How much will tap-on and permit fees and deposits cost, and what are the utility rates for such businesses? Will there be demolition involved? Will environmental or other impact studies have to be performed? What do Phase I and Phase II environmental studies generally run in the area for such properties? How much do impact and land disturbance fees run? These questions represent just a small sampling of the development-related factors that businesses often take into consideration with economic development projects.

A critical question that follows is which of the above costs can be reduced -- or absorbed -- by the locality. A real estate professional would do well to be familiar with the litany of economic development incentives that are offered in attracting business.

For those who remain skeptical, consider the following scenario. A business purchases a large tract of land. Time is money, and the company' real estate department is anxious to start grading. The real estate professional refers the company to the quickest turn-key contractors in town, and work commences immediately. In many jurisdictions, this broker or developer has just done his client a tremendous disservice. Many state economic development incentives require application and approval prior to groundbreaking. Had the real estate professional advised the client to apply with the state prior to breaking ground, the business might have been eligible for 10 year' worth of tax credits. This is but one example in which the real estate professional can not only land the deal and impress the client, but can even "save the day."

Other Economic Development Considerations

What to Know

As you review any list of economic development incentives, it is important to note that availability, legality, structure and so on vary greatly from jurisdiction to jurisdiction. As a consequence, the easiest way to "save the day" is to make sure that the first referral that a real estate professional makes for the client is to a legal or consulting firm that has demonstrated economic development expertise -- the second referral can then be to those turn-key contractors.

The following high-level summary of economic development incentives should demonstrate the need for lawyers/consultants and provide the real estate professional with a glimpse of what the client will (or definitely should) take into consideration.

Cash, Cash, Cash

Cash, or its equivalent, is the most important incentive. Cash equivalents include donated real estate and reduced or absorbed development and infrastructure costs. Cash in the form of grants and direct funding are also highly sought-after incentives.

Governor' opportunity funds, quick action closing funds, enterprise funds, economic development assistance funds and a myriad of other state-, region- and locality-specific funds may be established for various markets, and real estate professionals should be familiar with them and their eligibility requirements.

High Impact Performance Grant (HIPG) and Community Block Development Grant (CBDG) funding may be available. Road access and business energy loan funds may present additional opportunities; other activity-specific funding may be available in the area of retraining grants. Tax-exempt financing, such as industrial development or industrial revenue bonds, may also be available.

Other creative opportunities are presented in some jurisdictions in the form of tax increment financing or job development fees. In the case of tax increment financing, incremental property taxes are imposed on a project and are earmarked for the payment of costs for the future development of public works associated with the project. Job development fees are opportunities through which all or a portion of the busines' employment taxes are rebated to the business for its use during a pre-defined start-up period, under a self-funding mechanism. In yet another variation on the theme, grants might (indirectly) "fund" the payment of business expenses and taxes, particularly property taxes, by the award of grant monies in amounts equal to the expense/tax concessions sought.

The Tax Landscape

State and local income, sales/use, franchise, excise, personal property and real property taxes play key roles in a busines' multi-state relocation analysis. Also critical are the ways in which those rates are applied to particular business situations. What transactions/property/etc. are excluded from the tax base? Are inventories taxed? Are purchases of raw materials? What depreciation schedules are permitted for property tax purposes? What is the state income apportionment factor (e.g., is the sales factor double- or single-weighted)? How aggressive are the neighboring states in asserting nexus (tax jurisdiction based upon incidental cross-border activities)? Does the state employ a "throwback tax," by forcing the inclusion in the state taxable base of sales to other states that would not have taxed those sales? Does the state impose a unitary tax, such that it would seek to tax the operations of the busines' affiliates in other states?

Tax "Opportunities"

With the proper assistance and expertise, the tax landscape may be shaped and developed so as to attract economic development business.

• "Off-the-Rack" Tax Incentives

Income tax incentives such as jobs creation tax credits are probably familiar to most. The same is most likely true for investment credits, corporate headquarters credits, retraining credits, childcare credits, R&D credits, enterprise/development/empowerment zone credits and work opportunity tax credits, all of which are usually taken against corporate income.

While these incentives are often referred to as "off-the-rack" incentives, they should not be taken lightly or for granted. Their actual mechanics and conditions are intricate and require careful analysis by specialists in the area. These incentives are often also subject to technical "clawback"/forfeiture provisions, which limit their true present value. Finally, property and sales/use tax exemptions are usually more important than these better recognized "off-the-rack" income tax incentives because it is often many years before a relocated business is operating at a profit and has taxable income against which these income credits may be taken. Stated another way, the impact of income tax incentives, in contrast to property and sales/use tax incentives, is "below the line" and does not impact the busines' profit and loss statements (a large portion of manager compensation is based upon profit and loss performance).

• "Customized/Discretionary" Tax Incentives

Less well known, though typically more important, are tax-related incentives such as agreements reached with taxing officials in advance regarding equitable apportionment of income, depreciation of personal property (annual depreciation and salvage value), waivers of special district taxes such as fire and sanitation tax components to the property tax base, aggregate property tax abatements and pre-clearance of sales tax exemptions. More esoteric (and complex) still are the benefits arising from multi-jurisdictional economic development agreements, joint development authorities and economic development agency sale-leaseback transactions whereby government tax exemptions might be applied to the fee ownership of real and personal property. Some jurisdictions also authorize Fees in Lieu of Taxes, through complex "FILOT" agreements, and some may waive business license taxes.

Other Incentives

The list of potential incentives is limited only by creativity, cooperation and applicable law. It is therefore impossible to catalog a comprehensive list of economic development incentives. Worker training/re-training and executive and employee placement incentives are often offered. Spousal relocation incentives are sometimes offered. Revenue sharing and tax allocation agreements with quasi-governmental agencies are becoming increasingly important in attracting big business. For the largest relocation projects, it is also customary for relocation to be contingent upon changing existing state law, particularly in the area of regulatory matters that would impact the ways in which the company conducted business.

Still, one must not lose sight of the obvious: access to markets, raw materials and skilled labor are highly important considerations, as is local union activity (i.e., lack thereof). Intangibles matter a great deal as well: quality schools, quality of life, the personal cost of living, and the political and social climate will always remain key considerations.

Thus, while a familiarity with real estate and real estate-related incentives will play a role in the economic development analysis, this alone is not enough to attract business to one' locality. Building a better future through economic development will require an up-front investment by government and service professionals alike in understanding, pitching, facilitating and, where possible, improving upon the entire mix of available incentives. The benefits and rewards are manifold, as it takes very little success (in some cases, just a single successful relocation) for that up-front investment to pay off local dividends for years to come.

Neill Edwards is a member of the Tax & Corporate Practice Groups at Womble Carlyle Sandridge & Rice, PLLC, a 450-lawyer law firm with nine offices throughout the Southeast.

©2002 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.