Maximizing Economic Incentives in an Evolving Market
30 mar. 2022 8 Consumo de tiempo Read
Incentives MonitoringIncentive agreements typically establish a long-term relationship between businesses and federal, state, local and other economic development organizations. Given the challenges that businesses continue to face, it is in the interest of all parties to review the obligations set forth in incentive contracts, be mindful of the relevant laws and program requirements, and understand the implications on current and future performance criteria. Below is a checklist for what businesses should be thinking about now amid our changing incentives landscape.
► Review active incentive agreements for all locations, specifically looking for:
- Transaction Milestones: Document the value, conditions and ongoing oversight for each economic incentive accepted. Monitor the progress toward performance milestones.
- Default Provisions: Examine contracts for clawbacks (provisions that allow organizations to reclaim incentive funds already paid out to the company) or clauses that outline what will happen if either party fails to hold up their end of the agreement.
► Review any changes in headcount and capital expenditures:
- Evaluate key factors that are used to establish target incentives, including headcount growth, salary levels and capital investment.
- Changes to these key targets and corresponding deadlines can cause repercussions in incentive payouts.
► Develop financial models to understand the potential risk of pending changes.
► Create a near-term, medium-term and long-term incentives assessment addressing, at a minimum, the following questions:
- Do we need to add flexibility or time into our agreements?
- Are we in danger of defaulting on our commitments?
- If we default on one agreement, do we trigger defaults in other agreements?
- Are we going to meet our commitments?
- Are we going to exceed our commitments?
► Update the business and leadership team on the status of your incentive agreements.
- Communicate the follow-up steps required to collect each incentive to help provide senior leadership with financial clarity.
Furthermore, it is imperative that companies consult with their auditors and tax accountants to ensure that they are in compliance with the new accounting standards released by the Financial Accounting Standards Board (FASB) effective for fiscal periods beginning after December 15, 2021. FASB’s update requires more disclosure and greater transparency about what kind of assistance is received, how it is accounted for and how it affects a company’s financial statements. All businesses, except for nonprofit entities and employee benefit plans, must now disclose the following about transactions with a government:
- Nature of the transactions and the form in which the assistance has been received
- Accounting policies used to account for the transactions
- Line items on the balance sheet and income statement that are affected by the transactions and the amounts applicable to each financial statement line item in the current reporting period
- Information about the significant terms and conditions of transactions with a government agency
While not acting as auditors or tax accountants, an experienced Location Incentives team can help clients prepare for the new FASB accounting rules for disclosing government incentives.
Case Study: CBRE’s Location Incentives team provided annual incentives monitoring assistance for existing agreements & uncovered additional savings
Challenges & Opportunities
- The client was seeking to expand its U. S. footprint, specifically evaluating options in Indiana and surrounding markets.
- As part of this initiative, the client was seeking assistance with economic incentive negotiations, as well as the recurring incentives reporting required to capture the value negotiated.
- Since our 2018 engagement, CBRE Location Incentives has helped manage the full scope of procurement, negotiation and ongoing monitoring of the Client’s discretionary and statutory incentives structures.
- We deployed tools to monitor and track economic incentive milestones and assist in the preparation of relevant reports required for each of the incentives secured.
- During engagement on annual incentives monitoring for the existing agreements, CBRE was able to identify modifications to existing incentives deals, which led to an additional $10 million in incremental savings.
Virtual Employee IncentivesEconomic development incentives provide an array of benefits strategically designed to promote new business activity, as well as encourage business and job retention. Most incentives are typically awarded based on net-new job creation, wages of new jobs and capital investment. As many companies have embraced hybrid work schedules and remote work, many states are adjusting their incentive policies to include virtual employees. The following table summarizes the U.S. states where virtual and hybrid employees currently qualify for incentives.1
Case Study: CBRE’s Location Incentives team provided incentives monitoring services to protect against clawback provisions caused by remote work arrangements
Challenges & Opportunities
- In response to the COVID-19 pandemic, our Client decided to shift to fully virtual working arrangements and sell its office location. As a result, our Client was at risk of clawback provisions for their existing incentives agreements.
- Over five months, CBRE worked with city, county and state economic development officials to persuade legislators to make changes in incentives legislation that would allow work from home employees to count as employees at the project location address.
- This statutory change will enable our Client to collect $8.8 million in tax credits over the remaining seven years of the agreement.
- As a result, our Client avoids having to repay $6.4 million in tax credits it received over the past eight years. Due to our incentives monitoring services, the overall financial impact to our Client is $15.2 million.
A Note from CBRE Location Incentives:All of us are operating in an environment unlike any we’ve experienced before, however CBRE provides knowledgeable incentive services to help our clients secure eligible benefits and cost savings. On average clients receive 10% to 25% of their capital budgets in potential economic incentive savings.2 Working together, we can deploy our proprietary tools and proven processes to identify opportunities, model scenarios, monitor incentives and make sound recommendations that align with our clients’ business objectives.
1 Source: CBRE Location Incentives and State Economic Development Agencies, 2022. Data current as of March 1, 2022. This list is not exhaustive and updates are continually being made.
2 Client results may differ depending on individual circumstances.
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