Many readers might remember the tremendous competition Amazon created in 2017 for its HQ2 initiative. Amazon issued requests for proposals asking various municipalities and economic development organizations to submit incentive packages in an attempt to lure Amazon’s second headquarters location to their city. The initiative took over local and national headlines and caused widespread hysteria with pundits, politicians, community activists and real estate professionals all chiming in on the potential positive and negative impacts of this process. All told, some 200 cities, representing three countries, submitted packages in an attempt to win over Amazon. In the end, the company decided to award two markets as winners, receiving close to $2.5 billion in incentives. Some would say numbers that large were worth the bad press.
Although your company may not be as big as Amazon or receive billions in incentives, do not assume, economic incentives are not available to your business. This edition of Farm to Frozen will explore powerful, yet often overlooked strategies, to boost the effectiveness of your site selection. There is a cottage industry of site selection and economic incentive consultants, specializing in advisory services for companies wishing to relocate or invest in certain geographic areas. The amount of different programs and incentives continue to grow year over year, so it would be difficult to list them all, but here are some that have stood out to me over the last few years.
Property Assessed Clean Energy (PACE) Loans
C-Pace, or the commercial version of the Property Assessed Clean Energy Program, is a program that allows property owners to finance refrigeration and other energy efficient improvements through a special vehicle, where the payback is actually done through an additional voluntary tax assessment. The repayment is secured by the yearly tax assessment, with terms that tend to be longer in nature, like 20 to 30 years, rather than typical commercial loans of seven to 10 years. These longer terms can make the amortized cost of refrigeration and energy improvements much more manageable than the traditional financing route.
One of the most attractive features of C-Pace loans is the limited up front capital requirements. Since C-Pace funding can finance up to 100% of the improvement costs, businesses can undertake energy efficiency or renewable energy improvements without having to worry about the initial costs. Further, the benefit of these improvements, whether higher efficiency equipment or lower utility costs, cascades into increased cash flow for the business.
Another advantage of C-Pace loans is they are attached to the property, rather than the individual. This means the loan is transferable to the new owner if the property is sold. Finally, C-Pace funding allows for the retention of other tax incentives, such as solar credits or credits from utility providers, further reducing energy and operational costs.
New Market Tax Credits (NMTC)
New Market Tax Credits attract private capital into low-income communities by permitting individual and corporate investors to receive a tax credit against their federal income tax in exchange for making equity investments. There is certainly some financial wizardry involved, and it necessitates intermediaries, but the program also provides tremendous tax credits: in the realm of 39% of the original investment amount, claimed over a period of seven years. This significant subsidy can make a substantial difference to the financial viability of a project, particularly in the early stages when capital needs are often at their highest.
Economic Development Corporation (EDC) Grants
Living in Texas, we enjoy an incredible network of motivated and well-capitalized Economic Development Corporations (EDCs). EDC’s are organizations that promote the economic development within a specific geographical area. They are usually nonprofit organizations that are funded with revenue bonds, sales and use taxes, or with federal funds.
Our firm, Yukon Real Estate Partners, has successfully engaged EDCs on Texas projects, even going as far as buying land directly from the EDC. It is a poorly kept secret that if the opportunity for employment is great enough, cash grants from EDCs to the business considering a relocation can be on the table. Cash grants often require certain performance hurdles such as closing on land, starting, or completing construction. They often also require a certain investment amount, job creation number, or average wage be guaranteed. The unfortunate thing is that EDCs often are motivated by FOMO, or fear of missing out. This means their desire to offer support, grants, or incentives is highest in competitive situations. If you can make two or more EDCs compete for your business relocation or investment, you have the highest chance of receiving the best incentives.
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Property Tax Abatements
Property tax abatements are another type of economic incentive that can significantly reduce the cost of new construction. They are typically offered by local or state governments, spurred by or in cooperation with the local EDC, and are meant to reduce or eliminate certain parts of the property’s real estate taxes. Which part or how much of the real estate tax is impacted depends on the jurisdiction of the entity providing the abatement.
Sales Tax Abatements
Sale tax abatements are reductions or eliminations of sales tax imposed on certain types of transactions. In the context of new construction, these abatements can apply to the purchase of building materials, equipment or other items for the project. This can significantly reduce the overall cost of the project increasing its financial viability.
On cold storage and food manufacturing projects specifically, sales tax abatements can add up to significant cost savings. These buildings in particular require much more equipment and materials in general than standard ambient temperature warehouses. Depending on the location of your subject property, the sales tax abatements can come from a number of different authorities. Depending on the jurisdiction, these incentives can come from the state, county, or local municipalities.
Non-Financial Incentives
It is important to mention there are economic incentives that are very valuable, but may not be explicitly financial. A few examples are land rezoning, expedited permitting and offsite improvements. Municipalities often recognize that current zoning regulations might be preventing a desired project from coming to fruition. It's not unheard of for the local municipality to allow a zoning variance, or even implement a rezoning, in order to make the desired project reality. The municipality might also offer expedited permitting to get the project out of the ground quicker and with less hassle. Lastly, the local government can offer to improve infrastructure around the site. Though your project budget is not directly impacted, improvements in utilities, roadways, or additions of traffic signals can significantly improve the long-term viability of your project.
Conclusion
Itemizing each available economic incentive is an impossible task. Much like listing all available college scholarships, the list is innumerable. The good news is that there are advisors who have specific expertise in this area. So-called site selection advisors go beyond real estate brokerage and incorporate a deep understanding of tax planning as well as corporate real estate strategy. In combination with real estate brokers, site selection advisors can shepherd you through various options to supercharge the financial feasibility of your project. From cash grants to energy investment financing, economic incentives are not just for mega-corporations. You too can take advantage of the motivations of these various agencies.
