Figuring out what wins relocation contests.

Reprinted with permission from National Real Estate Investor, copyright October 1993 by Argus Business, a division of Argus, Inc., Atlanta, GA.

Trying to figure out what corporations want out of a new facility is no easy task for the economic development agencies whose job it is to lure new industry. But, while everyone admits incentives are important, they aren't the only factor a relocating company considers when choosing a new site, and often they only come into play when a community makes the short list.

Aiken had nabbed a big one. The bustling South Carolina community of 105,000 people could boast a major corporate relocation. Beaulieu of American, a Dalton, Ga., company and the second largest carpet manufacturer in the country, announced it would build a 400,000 sq. ft. facility in the city, bringing in 300 new jobs.

Aiken's win was Augusta, Ga.'s loss. The two cities were neck and neck in consideration by Beaulieu, but Aiken's incentive package tipped the scales. The state committed $1.22 million for infrastructure improvement and $400,000 in highway set aside funds, and the county sweetened the deal by purchasing the property for $650,000. The county even got a $100,000 contribution from the state electric cooperatives to aid in site preparation.

Becky Blalock, manager of facilities location for Atlanta-based Georgia Power, wasn't happy about Beaulieu's decision. Her company, which promotes Georgia's economic development, had worked hard to keep Beaulieu in Georgia, but, as she said, "Georgia had never been an incentive-rich state."

It didn't have to. Atlanta was a popular destination for companies expanding to the South, with the giant Hartsfield-Atlanta International Airport a bonus for companies looking for good transportation connections. International companies expanding to the United States often chose Georgia because of the quality of life in the state, the low cost of living and the good international connections from Hartsfield. But that was before the global recession. In 1982, 78 foreign companies opened facilities in Georgia; in 1992 there were only 13 foreign transplants.

SLOWER PACE OF RELOCATIONS

The recession has dried up not only international relocations but domestic ones as well and the competition for those companies that are expanding has become so intense that even Georgia has begun to offer incentive packages.

Recently, the Georgia Public Service Commission approved the first job creation tariff for a state utilities company. Any new or expanding company in Georgia gets a discount on its electric bill, with the amount of discount dependent on such factors as number of jobs created, the lease or purchase of a building that stood vacant for at least six months, and whether the relocation is to an economically depressed area.

Georgia's increasing involvement with economic development incentives comes at a time when the industry in general has been looking at the effectiveness of such programs.

Recently, Deloitte & Touche Realty Consulting Group, Chicago, in conjunction with the International Association of Corporate Real Estate Executives, West Palm Beach, Fla., surveyed corporate real estate executives as to the importance of incentives.

The findings of the Deloitte survey at first glance are surprising. According to the results, incentives ranked only 14th out of 17 location decisions. As the survey noted, promises of infrastructure improvements, property tax abatement, tax credits, subsidized training and other incentives "play a relatively minor role for corporate real estate executives who are in the initial stages of determining where to expand or relocate."

It's important to note that the operative words in the survey's result were "initial stages." Incentives weigh heavily at the back end of the decision-making process -- narrowing the final choices.

STILL, INCENTIVES COUNT

Even the Deloitte survey notes that 82 percent of the respondents said incentives were important in comparing the top three to five locations, and 61 percent of the respondents said incentives were important in the final community selection.

The majority of cities and states still view incentives as essential to their efforts to attract and retain industry, feeling they are at a disadvantage without a full complement of incentives, notes Mark Klender, national director for Deloitte's corporate real estate services unit. Many communities may question the bottom-line effectiveness of incentives, yet companies big and small expect and demand them.

The Nevada Commission on Economic Development, Carson City, Nev., reports the biggest trend it has come across is the number of companies interested in incentives, mostly because so many are moving operations from one state to another.

James Schriner, a partner in the New York office of PHH Fantus Consulting, the largest site selection company in the world, adds, "We do 200 to 300 projects a year and in each and every case the incentives are a very important issue because they help to minimize costs." Even the federal government, he says, is now pushing for incentives when it looks to expand.

Although incentives are more important in the final stages of site selection, they are mostly front-end loaded programs designed to save companies money in the early years of relocation.

As Gary Buesgens, director of real estate for Minneapolis-based Ceridian Corp. (a spin-off from Control Data), says: "Incentives usually involve tax increment financing that a local community can generate with respect to giving some tax breaks for the first few years. Communities may also give an incentive for job creation. It is mostly a front-end tax benefit."

RICHLAND'S ODD DISTINCTION

Richland, a small city in eastern Washington, has an odd distinction. With the Batelle Pacific Northwest Laboratory and the Hanford Nuclear Reservation nearby, it probably boasts more Ph.D.s per capita than almost any other city in the country. Billing itself as the "Technology Nucleus of the Northwest," the city has been aggressively involved in economic development.

However, it takes a different approach from most economic development agencies that have set programs. Generally, abatements are offered which give tax relief for five years "before reality hits," says James Wade, marketing specialist with the city. "What we prefer to do is sit down with a company and design a complete program including taxes, land, infrastructure, permits and anything else that may come up in the conversation."

Richland's objective is long-term benefits. "Typically when you use the term incentives, it is the standard. 'We will give you three years of relief.' The better answer is, 'We will design or maintain a predictable program that will be a long-term situation." So far Richland has been able to attract such companies as Interstate Nuclear Services, as well as a number of smaller manufacturing companies.

When Sears relocated its offices from downtown Chicago to suburban Hoffman Estates, the community basically purchased the land for the company, but it expected to recoup those costs through the various taxes Sears would pay in the future.

The incentive package that Hoffman Estates put together was important to Sears' decision making process, recalls Vann Avedisian, a vice president with LaSalle Partners Ltd. in Chicago, but it wasn't the primary issue. The most important consideration was whether the company could get the work force it needed there and did the executives want to work there.

A PITCH FOR THE WORK FORCE

In fact, Avedisian makes the point that work force considerations are probably the key factor in any location decision. The Deloitte survey ranked labor force issues first, behind real estate costs, and ahead of transportation, real estate availability and market access. But, Deloitte's Klender, says, "Usually labor force issues are the top issues." Nevada has been fortunate of late. It's been one of the places most companies consider when looking to open West Coast manufacturing or distribution operations. It is also one of the states California companies look at when considering relocating.

Although the list of companies opening facilities in Nevada has been fairly diverse -- Ocean Spray, Chromalloy, Lockheed, State Farm -- there has been a high proportion of high-tech, electronic companies relocating there. In addition, almost 70 percent of the relocations or expansions have been manufacturing facilities.

One of the big reasons companies consider Nevada, says Lori Martin, director of marketing for the Nevada Commission on Economic Development, is the labor issue, including such factors as wages, workman's compensation and industrial insurance. Obviously, if the whole cost of living in a certain area is lower, then the costs for the company are lower, which is why many companies move away from major metropolitan areas, or from one state such as California to another state such as Nevada.

Incentives are big factors as well, and Nevada offers a QuickStart Training program aimed at educating the work force in necessary skills. A number of states now offer training packages, because in many industries the availability of skilled labor is more important than the availability of inexpensive labor. "It used to be companies were looking for an abundance of cheap labor, but they are now looking for high-skilled workers and workers with certain educational standards," says Georgia Power's Blalock.

REAL ESTATE CONCERNS

The Deloitte survey noted real estate costs as the primary concern of respondents. In reality, the actual cost of the real estate is a minor consideration, since it is a one-time expense. Real estate costs on a more general level are the expenses involved in a particular site location.

As Bill Stephenson, manager of economic development with Arizona Public Service Co. in Phoenix, says, location is the absolute top consideration, meaning where the market is in relationship to, for example, a manufacturing plant, and how markets can be accessed from a particular location.

Transportation costs is an important factor in location decisions, says Stephenson, but that is a function of location. As in Nevada, manufacturing and distribution companies that want to access the West Coast without being in California often choose Arizona.

Companies may weigh the particular benefits of Phoenix, Tucson, Las Vegas or Reno before making a choice, but the general considerations of access to the West Coast put those municipalities in the running. A company would prefer not to distribute to the West Coast from an Indianapolis location.

"Your constraints are fairly specific in that you need to service certain markets, so you can't do it from too far away," says Skip Law, vice president of real estate with San Francisco-based McKesson Corp.

Sometimes location requirements and employee considerations overlap. Recently, Shell Oil was considering relocating its marketing unit based in Hartford, Conn., eventually deciding to stay in the area but move to the outskirts of the city.

"The manager needed to look at the geographic location from a micro aspect," says Fred Parrow, manager-office leasing with Shell Oil. "Does he want the office closer to hotels, restaurants, freeway access? He has people coming in from Houston. Should the facility be near the airport, so Houston people don't have to drive across town when they arrive? You may not have all those things at the office where you are presently located, so you may want to relocate and make sure those considerations are in your lists of needs and wants."

WHAT THE WORKERS THINK

Where employee considerations overlap with location needs is usually in a gray area called "quality of life." Issues involved in quality of life decisions usually revolve around whether the employee will be happy and be able to satisfy his important needs, i.e., family or education, in a particular location.

Quality of life issues mostly spring up when considering headquarters or similar white-collar relocations. It is a very minor issue when expanding manufacturing or distribution sectors. It's not that a company discriminates against its blue-collar employees, but headquarters changes involve relocations and a good location makes it easier to keep or attract the educated employee.

On the other hand, manufacturing and distribution expansion usually means hiring from the local talent pool -- the people who already live in the area. When Beaulieu decided it was moving to Aiken, Skip Johnson, general manager of the raw materials division, announced all the jobs would be filled locally.

While quality of life considerations received a lot of mention at the end of the 1980s, in the recession-weary 1990s, quality of life has been put on the back burner as companies are more focused on cutting costs.

"Bottom-line performance drove many companies to quality of life considerations and certainly those issues are still important," says McKesson's Law. "But what has become even more important is the cost of that quality."

One of the biggest changes in the corporate location process has been the increasing internationalization of business markets, necessitating acceleration of overseas facilities development. As Fantus reports, in five years something on the order of 90 percent of its clients will be considering three to five overseas locations. With many companies, considering a site in Omaha is really no different from considering a site in Berlin.

GLOBALISM'S INFLUENCE

"We are a global company," says Harry Stein, director of corporate real estate with General Electric. "There is no more overseas or United States. We locate wherever our global needs dictate."

"Organizations are becoming more global," echoes Fantus' Schriner. "A company is either selling to global markets, has operations in many countries or is trying to compete against companies on a global scale." What organizations are finding is that to best compete against, for example, a Southeast Asian company, they too should be in Southeast Asia.

Rules and regulations maybe be different in France or Saudi Arabia than in the United States, but, as Stein says, the difference between the regulations in New York City and that of its suburbs can be equally great. Of course there are other considerations involved in overseas relocations such as political risk, distance from support services and ability to get goods in and out of a country without unusual difficulties.

With different countries, the site selection demands change, says Schriner. "That criteria may be cost-driven or supplier-driven, but if you start looking outside a fairly consistent market to places like Mexico or Southeast Asia, then you start looking at skills available, service time, services, politics."

The benefits to internationalization as far as local communities are concerned is that foreign-based companies must be competitive as well and that includes establishing facilities in the United States. Blalock at Georgia Power has often worked with foreign companies coming to the United States and notes:

"The big difference between international and domestic companies is it takes an international company a lot more time to evaluate where it wants to be. It might take six to eight months for a domestic company to decide as compared to 18 months to two years for an international company." The downside of internationalization is that the availability and accessibility of foreign locations puts extra pressure on domestic locations already reeling from the recession and the consolidation of major corporations.

KEEPING WHAT YOU HAVE

These days it is not enough for a community to make the extra effort to attract business -- it must do the same to keep the businesses it has. With companies consolidating, observes Blalock, "The sad truth of economic development is, either you win big or you lose big." When Ceridian Corp. was looking to expand its Arbitron subsidiary and perhaps relocate, the Maryland community in which it was already based kicked in some hefty incentives.

In the end, Arbitron stayed in the state but moved to another town 30 miles away. "Even though the community that was losing us was offering the company more money (in incentives)," Buesgens says, Arbitron needed to be closer to a big city and have improved transportation links so it moved nearer to the Baltimore airport. No matter how good incentive packages are, there are not enough incentives for a company to go or stay someplace where it can't operate profitably.