Being Incentivized To Grow In Place
Being Incentivized To Grow In Place
The Midwestern consumer goods manufacturer faced a decision: Expand its facility and modernize its equipment to increase efficiencies, outsource work to another region, or close the plant entirely and move operations to an area where its entire product line could be made less expensively. This decision loomed as the manufacturer struggled through operations while building its business case for a much-needed expansion.
Understanding the importance of their role, local, state, and utility officials faced their own decisions: Find ways to partner with the company to support the plant’s modernization and expansion or risk losing the community’s chief taxpayer and utility user, as well as the company’s current employee base and the prospect of new capital investment and 25% job growth with the plant expansion.
Losing the plant would cost many local suppliers their best client, one that provided educational programs that enabled long-term efficiency gains for the suppliers. The area would lose a good corporate citizen, one whose taxes funded many local infrastructure projects and whose employees owned homes in the community and contributed to the local economy. If the officials could utilize their incentives to lower operational expenses and capital cost, it would support the manufacturer’s local expansion and preserve the social and economic value of the Company.
Knowing the impact that its economic development programs could have, government and utility leaders drew up an extensive incentives package, drawing on over 15 programs, valued at $7 million to help make the case for local expansion as competitive as possible.
But was the offering worth $7 million of real value to the company?
As a long-time advisor to the manufacturer, the Location and Incentive Strategies (LIS) team was asked to take a look at the list of incentives offered to plant leadership to aid in the facility’s expansion. The offering seemed impressive, but only at first glance…
A closer look showed that the true or realizable value of the incentives offered was well overstated. Altus found that a significant portion of the offered incentives were of little to no actual value to the company. Some of the incentive values were based on incorrect capex assumptions, while others provided relief from taxes from which the company’s industry was statutorily exempt. Altus also found that numerous incentives were back-loaded and the realizable value was deferred as far as 10 years into the future, well beyond the scope of the business case and essentially unable to impact the cost of plant expansion. After its analysis, Altus determined that the actual value of the incentive package to the company was closer to $2 million, rather than the $7 million previously assumed.
The Company asked the Altus LIS team for its help in working with local and state leadership to bridge the $5 million gap by renegotiating the original incentive offer and identifying incentives that provided actual and more immediate value to the contemplated investment.
After reviewing the incentives offered and facility’s key cost drivers, the Altus LIS team met with its client’s corporate and local leadership and local and state officials to present and review its findings. The goal was to identify new or alternative incentive programs and develop a new incentive proposal that delivered real value to the company.
Through the work of the Altus team, a revised incentive offer was developed, totaling more than $6 million in actual value, with a substantial portion being realizable by the company within the first three years. This revised offer included incentives not previously included in the original offering, including an enhanced discretionary grant, a low-interest loan, with a large portion forgivable, training fund for new employees, state income tax credits, reduced utility rates and rebates, utility infrastructure improvements, and property and sales and use tax relief. The Altus team also identified and secured a state grant, allowing the company to partner with a state university research department to develop new and improved production methods for local
Although the new $6 million incentive package was less than the original $7 million offer on paper, it was nearly $4 million greater in actual value to the company.
The locality would benefit from additional jobs, capital investment, and operations growth from the expansion that would drive higher output and, in the long run, add value to the region.
It’s the goal of the LIS team to negotiate the best possible incentive agreements for its clients’ unique needs, while fostering strong public-private partnerships with the state and local communities. Working with this Midwestern consumer goods manufacturer and the state and local economic development authorities, the team positioned the business and the community for long term mutual success.
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