Picking Incentives by Monetary Value
When comparing incentives offered by two competing locations in different states, it is important to assess the actual value of the packages that are on the table.
Q: We are looking to build a new manufacturing facility, and we have narrowed our search to two sites in two different states. We are evaluating the incentives offered by each state, but we are having a difficult time comparing the two states since their programs are different. What is the best way to compare incentives?
The Expert Says: You have already taken a step in the right direction by waiting until you are down to your finalist sites before you evaluate the incentives in each of those communities. Incentives will not make a bad site good, so it is important to first find sites that will work for your new facility. Since you already have determined your finalist communities, you are now ready to evaluate the incentives in the two communities.
First, it is important to include all incentives in your comparison. You need to include not only incentives offered by the states and communities but also those offered by other parties such as utility companies and community colleges. It also is important to include incentives from all parties involved, even the non-monetary incentives such as in-kind donations. For example, if the local community is willing to offer you office space free of charge until your new facility is constructed, you need to include the value in your incentive comparison.
Once you have compiled all the incentives offered, you need to assign a monetary value to those which do not have a monetary value already assigned. An example would be job training provided by a local community college at no charge to your company. While you will not have to pay anything for this service, it is a cost that you are avoiding, and thus, it needs to have a monetary value. Another example of an incentive to be given a quantitative value would be any fast-track permitting. If one finalist location is able to fast track your permitting but the other community cannot, it is important to quantify the savings you will have by having your operation up and running sooner in Community A. It is important to give all your incentives a monetary value in order to be able to compare them.
Once you have quantified all the incentives offered by each community, you need to evaluate each of the incentives to make sure they are applicable to your company. Just because a community offers you an incentive does not mean you will be able to use that incentive. For example, many states offer a tax credit against income tax. Often, a company’s new operation will not be profitable for a few years, and thus, these income tax credits would not be useful to you for a few years, or possibly not at all. Therefore, it is important to evaluate each incentive to make sure you will be able to use the full value of the incentive. If you only are able to use a portion of an incentive, it is important to determine the value of the portion you will be able to use.
Once you have identified all the incentives being offered, assigned a monetary value to each of them, and determined which incentives will or will not be useful, you should now find the net present value of all the incentives. For example, Community A may offer a tax abatement for five years while Community B may offer a tax abatement for eight years. It is important to evaluate each incentive equally, and by finding the net present value of each incentive, you are able to compare apples to apples. With this information, you should be able to make a more informed decision of which location is going to be the home for your new manufacturing facility.