Incentives - The Great Differentiator



 

W hen it comes to making site selection decisions, the big drivers for business are labor availability and costs, logistics, regulatory environment, supplier demands, and real estate. But when all those things are essentially equal, economic incentives can often tip the scales in favor of one state or community over another.

The use of incentives harkens all the way back to the country’s founding, when the fledgling U.S. government was eager to encourage people to move west, says Jubal Smith, executive vice president at JLL. Smith leads the firm’s site selection, credit, and incentives practice. Land grants, he says, helped compel people to move to uninhabited areas—a program that was critically important in the early development of Texas.

Since then, the state has flourished. It has worked hard to create a superior environment for business, and has gained a national reputation for effectively using incentives to lure corporate relocations. But some myths still exist, says Mike Rosa, senior vice president of economic development at the Dallas Regional Chamber.

“When you say ‘incentives’ in the general public, people think of that as writing a check and losing taxpayer money,” he says. “But it is a much more thoughtful-minded approach. Our communities are interested in spending a dime to make a dollar, if it would work out that way. They are very conscious of whether or not an incentive offer is good for the bottom line of that community.”

The city of Dallas, for example, performs a detailed cost-benefit analysis before ever offering incentives to a business to locate a facility within its borders. 

Companies, too, do their homework, and they first consider a variety of other factors, says Kelley Rendziperis, a principal with Site Selection Group, a global advisory and incentives firm based in Dallas. “Once you’ve determined various sites where there is an abundance of those various factors, incentives are used to bridge any gaps that may exist,” she says. 

Any community, no matter the size, has the ability to offer incentives. Chapter 380 agreements are among the most popular—and most common-—business incentives offered by North Texas cities. Named for a chapter of the Local Government Code, these agreements offer a wide variety of options for cities to provide economic development incentives. They can involve grants, foregiveable loans, sales tax revenue sharing, property tax rebates, job creation and job retention grants, and other forms of incentives. 

Chapter 381 agreements are similar but pertain to counties, not cities.

Smaller communities can also use Type A or Type B economic development corporations, funded by a portion of a city’s sales tax, while larger cities may consider other options, such as property tax abatements.

 

Case Studies, Big and Small

Voters in the northern Dallas suburb of Frisco approved a Type A Economic Development Corp. in 1991. Three years later, they approved a Type B tax for lifestyle improvements. The city has been very proactive in using various economic development tools to generate success, says Jim Gandy, president of the Frisco Economic Development Corp.

Gandy began working for the FEDC in 1996, when the city had a population of about 10,000 and was generating about $600,000 in annual economic development sales tax revenue. For fiscal 2014, which ended Sept. 30, the city was expecting to bring in more than $16.5 million through its half-cent Type A tax. Gandy cites the development of Toyota Stadium, home of the FC Dallas soccer team, of one of its most successful economic incentive initiatives. In a public-private deal, the Frisco Independent School District invested in the stadium with Hunt Sports Group and uses it for school sporting activities. 

But the development of Stonebriar Centre was the real game-changer for the city. Announced in 1998, the deal with General Growth Properties called for the development of a 1.6 million-square-foot regional shopping mall. The center opened at 9 a.m. on Aug. 4, 2000—a date still clearly marked on Gandy’s calendar.

“Prior to the mall opening, you couldn’t buy a pair of socks in Frisco,” he says. “Once that opened, people were coming to Frisco for the first time and therefore importing new money into the city.”

Stonebriar Centre has since sparked the development of 4.5 million square feet of retail space within 1 square mile of the mall, Gandy says. Funds generated from the sales tax have allowed the city to support incentives packages for a wide range of businesses that now make Frisco their home. Among them is a new headquarters for Conifer Health Solutions, a 200,000-square-foot office that opened earlier this year. It was the largest build-to-suit in Frisco’s history and is expected to add up to 2,000 direct jobs.

Larger cities have tapped other types of incentives. In downtown Dallas, tax increment financing has allowed for the redevelopment of several aging skyscrapers, says John Crawford, president and CEO of Downtown Dallas Inc. TIFs were critical, for example, in the redevelopment of the old Mercantile buildings, he says. The payout is over a long period, sometimes as long as 10 to 12 years. 

“These are sizable grants—worth anywhere from $20 million to $60 million each,” Crawford says. “Without question, downtown Dallas would not be where it is today without the TIF capability that we have.”

 

Bottom-Line Impact

Some state incentives are “built-in” and make the state an attractive place to do business, says Rosa at the Dallas Chamber. Texas has no income tax, for example. Others states might offer a huge incentive package that includes a discount on state income tax.

“If I’m offering you something at no cost (in Texas), it’s hard for me to give you a discount on that,” Rosa says. “We encourage companies not to measure the value of the incentive package but to consider it in the context of ‘What does it mean for the bottom line?’ ”

Texas also has plenty of tax exemptions for manufacturers that are essentially a “right” that they don’t have to negotiate, Rosa says. The state has a sales-and-use tax exemption for manufacturers that fabricate or process tangible property for sale, for example. Manufacturers are also exempt from paying taxes on utility costs incurred during the manufacturing process.

 

Challenges Ahead

Despite its strong success, Texas has some challenges ahead on the economic development front. It will need to tackle water shortages, transportation bottlenecks, and border security as it continues to grow.

The Dallas Chamber and others are also watching hearings on the state’s Texas Enterprise Fund. The largest “deal-closing” fund of its kind in the nation, the TEF has paid out multimillion-dollar grants over the years to woo big corporate relocations. A legislative committee is currently reviewing the fund. 

Rosa says the state and its communities must have the tools to help it win lucrative projects. It’s a myth, he says that the state is writing checks for corporations “left and right.” The Dallas Chamber has worked on a number of deals that failed to win TEF funding.

“If there needs to be more rigor and more transparency and more rules to secure the ability to have incentives going forward, then that is fine,” Rosa says. “The corporate world and the consulting world don’t mind rigor. What they want is consistency and to understand the process, and whether a particular incentive is something they need to factor into their analysis.”

Rosa, who will become chairman of the Texas Economic Development Council next year, will support a legislative platform that provides cities, counties, and the state with competitive tools to attract companies to Texas, he says.

Site Selection Group’s Rendziperis says she believes corporate incentives have been essential in the business success of Dallas-Fort Worth and the state of Texas.

 

“We can’t slow down,” she says. “I don’t think cutting back on incentive programs is the answer by any means. We can’t stop competing. We are not only competing within the United States. Global competition is increasing, too.”