Thoughts about business and economic development in rural areas.

 

October 2007
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Archive for October 23rd, 2007

Land as an Incentive.

One topic that every community struggles with is how to price land in their industrial or business park. If there’s enough competition for space that you can charge market rates that cover your costs and provide a profit that’s great. In fact, if that’s the case your community probably should just step aside and let private developers handle land development. There’s no real need for you to be involved. But for most communities, especially in rural areas, that’s not the case. In fact, communities usually develop land for business use because no private developer is willing to take the risk.

So how do you charge for the land and does it even matter if you intend to provide the land as part of an incentive package that encourages development? Some communities will set their land price at a level that covers all of their investment costs and not negotiate at all. They feel that the fact that the land is fully developed and ‘ready to go’ is incentive enough. Other communities will go to the other extreme and say the land is free to any ‘good’ employer that wants to build a business here. (I once asked a Mississippi utiltiy rep at a national conference what the going rate was for industrial land in his state and he just laughed and said, “I don’t really know, we’ve never charged anyone for land.”)

Both approaches have merit so what do you do? My answer lies somewhere in between the two. I suggest developing a “Land Price Formula” that discounts the cost to the business based on three factors: the number of jobs created, the quality of the jobs (pay & benefits) and the taxable investment being made by the business (the building and other improvements).

So how do you figure out the discounts? Well, first set your end points. What is a reasonable cost for the business park land. Look at your investment costs and look around at your competition, both nearby parks and the cost of green site development in other areas of your community. Pick a number in that range. Then determine what you consider to be a ‘great’ prospect. How many jobs would they have to create and at what quality level and how much of a building would they have to build to get us to say, “Omigosh, we really want to find a way to ‘give’ them five acres to make this project happen!”

Now do the math. What discounts do you have to give to get to ZERO for your ‘great’ client? Run several scenarios and the numbers will start to fall in place.

Once you have your “Land Price Formula” you can now say ‘yes’ to those warehouse distribution requests that eat up land but don’t create big job numbers or to those small businesses that need a couple of acres and only have one or two jobs. They end up paying a fair price for the land and receive a minimal discount while someone who creates more jobs and makes a bigger facility investment will receive a more substantial discount. The community provides more substantial incentives to projects that provide more substantial return while still being fair to other projects.

Everyone knows where they stand and you avoid listening to ‘the community bends over backwards for an outside company and doesn’t do anything for the ones who are already here’ complaint. The same rules apply whether it’s someone local or a business from outside your area. Fair to everyone involved and you can figure the price in 5 seconds using the formula that the community has agreed to in advance. No need for silly delays as you go back to the City Council or Economic Development Committee to discuss this part of the incentive package because it’s all cut and dried.

Plus the business knows the exact value of the incentive they are receiving. If community ‘A’ gives five acres to a prospect for free because they never charge for land, then that incentive has no real cash value. If community ‘B’ has a base price of $10,000/acre and provides five acres discounted to $1 then the cash value of that incentive is $49,999.

Two critical points. First: Always take your discounts against the total cost of the acreage involved and not against the per acre cost. Doing the latter just encourages the prospect to take more land than they need. Second: Always include a performance guarantee in your contract for the sale of the land. If the prospect does not meet the agreed upon levels of employment or investment in a set time period then the community should retain a legal right to a reimbursement for a portion of the incentive not earned. A ‘clawback’ provision is essential and any legitimate client will understand that this is just a good business practice on the part of the community.

And a final point about the amount of acres to provide for a project. Every business will want more land than they are likely to use. From their point it makes sense for them to plan for future expansion. But your community shouldn’t be tying up valuable developed land that may never be used by that business. You also don’t want to encourage any land speculators to take advantage of your community’s investment. What to do? Your proposal involving incentives should include just the land essential for the initial project and then include a ‘right of first refusal’ offer on any additional land that the client might have an interest in. It protects their future and doesn’t needlessly tie your hands when it comes to working with future development prospects.

Land can be free…..if the incentive is fair to all involved.