Considering the Reasonableness of Development Assistance Incentives

It’s in your toolbox – but is it the right tool? Questions economic developers should ask to confirm the reasonableness of incentives being offered.

What economic development tools are you working with right now? Like many economic development organizations, you probably have some sort of tax abatement or stabilization tool in your toolbox that you pull out as needed. Developers are often proposing exciting projects but asking for some form of assistance with phasing-in or stabilization of the assessed value to limit their property tax burden in the early years. While many economic development organizations and developers have found these types of incentives (for example a Payment in Lieu of Taxes/PILOT) to be critical in making projects happen, how can the deciding boards and public be sure that the assistance was truly necessary to make the project happen?

With the national conversation about the pros and cons of economic development incentives growing louder, it is no longer good enough to take the developer’s word that the incentive is needed. More and more economic development organizations are looking to validate that the assistance being provided is necessary to make a project viable and isn’t simply helping the developer make more money, quicker. Tasked with protecting the use of public resources, economic development organizations and their boards are looking for ways to ensure that that decisions they make are based in the realities of the market, are not extending more assistance than is needed, and will have the greatest impact possible for their local economy.

To confirm that the financial support being offered is reasonable, we have started working with economic development organization clients to help them answer a series of questions. This conversation begins at the point that they receive an application for financial assistance and the questions include:

1. Are the assumptions that the developers is basing their request on reasonable?

A review of the developers’ assumptions on the expected costs and revenues to operate will confirm that the analysis being conducted is based on good data. Comparing the revenue and costs to regional and national benchmarks for similar projects ensures that there isn’t something funny in the numbers that seems to impair the project’s viability and therefore show a need for more incentives.

2. Is the project financially feasible and expected to earn a reasonable return on the initial investment?

The answer to this question would establish whether financial assistance in the form of a tax abatement or other program is even necessary for the project to be viable, both from a private investment perspective and from a bank perspective. A developer is expected to earn a return on their investment, in exchange for taking on the risk of a project. The question is whether the expected return on investment is already within typical benchmarks, or needs financial assistance to deliver a return that compensates for the risk of that type of project.

3. What is a reasonable amount of assistance required from the economic development organization in order to make the project work?

Once it is deemed that the project without financial assistance is not strong enough to be viable, the amount and type of assistance to be given can be calculated to help the developer achieve a standard return without overburdening the public resources.

You know that saying about how if all you have is a hammer…. Sometimes the hammer is the right tool, but sometimes it’s a bit too strong and the only way to make sure is to take the time to analyze the scope of the job. Similarly, taking the time to determine the reasonableness of the incentive being offered can be a very valuable exercise when economic development organizations are working hard to make the right decisions about offering assistance to projects.

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