The site selection process is one of the most significant aspects of opening a new facility or corporate location. When companies are deciding where to site a new location, factors such as labor, real estate, demographics, proximity to market, taxation, state & local regulations and many other factors must be considered. If the initial discovery or ultimate conclusions are incorrect, the effects can be detrimental not only to the business unit but to the parent company as a whole. The magnitude and complexities of siting a new location and resolving all the inherent negotiations is a daunting task; however, companies don’t have to go it alone. Many companies hire outside consultants like one of our channel partners, Cresa.
The Process of Site Selection
Site selection is a rigorous process. Matt Ryder, Managing Principal with Cresa gave us some insight. “Within the scope of operational strategy, location strategy can be amongst the most difficult to develop and properly implement. This difficulty should inspire organizational leaders to consider long-term planning criteria, not intimidate these leaders into simpler, short-term planning mindsets. This is especially true when long-term site selection frameworks are available to organize planning efforts and increase the likelihood of success.”, says Ryder. Most corporations have a laundry list of criteria that are ranked according to the strategic goals of the new operation. Although most criteria are quantitative, some qualitative ones are sprinkled in and must also be weighed in the decision-making process. If all these criteria are not met, it can lead to an excessive amount of time and money spent ultimately resulting in a subpar outcome. The number of factors under consideration can also drive the initial scope of geographic locations. In fact, you might start with a potential list of 50 different jurisdictions before nailing down your finalist sites – and hopefully they’re in different states. There’s a ton of work to get from 50 jurisdictions down to 3 or 4 finalist facilities, but that’s the goal. And once you reach this stage it’s time to start negotiating discretionary tax credits & incentives.
Crossing the Finish Line
Typically, your finalist sites will have roughly the same start-up and net operating costs. At this stage of the game it’s all about negotiating discretionary incentives with each jurisdiction to find the one that will rise head and shoulders above the rest. But in order to get the project across the finish line, your client will need to sign off on all the commitments and all legal agreements need to be passed by each governing jurisdiction. The waters can get muddy here for many reasons – political factions, slow moving government officials, due process allowing public comments, or even environmental issues. Assuming everything eventually lines up and you ink all of your incentive agreements, you can pull the trigger on your real estate commitments and either break ground or sign your lease.
Unfortunately, the finish line you just crossed is more aberration than concrete. The true finish line now lies in all the commitments you’ve made as a company to these various jurisdictions and how you plan to uphold your end of the bargain – over the next 10, 20 or even 30 years.
The Last Mile
Each of the jurisdictions where you are taking tax credits & incentives require annual – or sometimes quarterly – compliance with the terms & conditions of your agreements. If you fail to report your required compliance numbers back to the appropriate jurisdiction, clawback clauses may void your deal and cause you to not only lose the value going forward, but to pay back any money you’ve received to-date. Because of these compliance requirements, it’s incredibly important for companies to very carefully manage each incentive proactively to ensure all of the negotiated conditions are met to the letter.
If you only operate 3 or 4 facilities, the process may not be as difficult. But for large companies the process is a massive undertaking with many moving parts that only increase the probability of mistakes at scale. As a result, corporations generally use third-party service providers to ensure that deals are fulfilled and everything goes smoothly. But even service providers are looking to minimize their risk in helping their clients by leveraging tax technology platforms like BIGcontrols. “We love working with partners like Cresa who really understand our value and how our technology helps enable their services,” said Scott Nelson, Founder & CEO of BIGcontrols.
“Solutions like BIGcontrols can help companies de-risk and ease their fiscal stress by giving them one source of truth they can trust,” says Nelson. It seems that getting across the finish line is always the goal in site selection and incentives negotiation. But it’s the last mile that’s truly the most important if companies want to guarantee their incentives are locked down and secured for good over their entire lifecycle.