Economic Development Incentives and Tax Abatements and Headquarters Relocations and Government & Economic Development and Government and Economic Development and Real Estate & Retail

Government officials dangle incentives, attracting firms across county lines

July 28, 2008

Marion County economic development officials are proud of their latest headquarters attraction. Bowen Engineering Corp. will inject 103 high-paying jobs into the Indianapolis economy immediately. And over time, the company expects to add another 138. Their average salaries will top $70,000.

The deal didn't require Mayor Greg Ballard to travel to Japan, or even to another state. Bowen Engineering is moving all of 8.4 miles, from its former home in Fishers to the 8800 block of North Meridian Street.

But in crossing the Marion County line, the company earned itself a seven-year property tax abatement valued at $290,389.

"We were pleased that Bowen wanted to make Indianapolis its home, and excited about that," said Deputy Mayor Nick Weber, who leads economic development for Ballard.

"At the end of the day, we're looking for Indianapolis to have a vibrant economy, with employment possibilities for our citizens. Companies that want to be a part of that, we're interested in talking to."

Indianapolis didn't set out to poach Bowen Engineering, which declined to comment to IBJ because lease negotiations for its new location aren't complete. Marion County economic-development officials began courting the company only after it couldn't find new space near its current home to its liking.

And they opened talks only after Fishers granted a release letter--something counties routinely do when companies suggest they might move outside central Indiana.

The letters are necessary because officials in Indianapolis and the suburbs long have agreed that pilfering companies within the region is a no-no.

Yet there has been a spate of such deals lately, most involving substantial incentives. In the last year, Indianapolis landed both Bowen and Haverstick Consulting. At the same time, it lost ASI Ltd., Freije Treatment Systems Inc., Klaisler Manufacturing Corp. and SMC Corporation of America.

But doling out incentives to reshuffle companies that already are in the region strikes some observers as a waste of precious tax dollars.

Over time, suburban competition for businesses could erode Indianapolis' urban core, said Greg LeRoy, executive director of the Washington, D.C.-based economic development watchdog Good Jobs First.

Regional cooperation is the only cure, he said.

"Public officials need to talk to each other. That's got to happen," LeRoy said. "Otherwise, you're in this prisoner's-dilemma situation, where companies control the process."

Indianapolis-area economic development leaders already are working as a team, said Ron Gifford, CEO of Indy Partnership, an economic development group for the region.

"As a general rule, our county organizations and local communities don't engage in cherry-picking," Gifford said.

"Now, if a company decides that it needs to move or wants to explore its options, our ultimate goal is to keep that company in the region. Even though it might be awkward at times for counties that normally cooperate very closely. ... Everyone approaches that with the highest professionalism."

Thin cities

LeRoy has researched suburban business migration for more than two decades, focusing particularly on Michigan, Illinois and Minnesota.

He said competition for businesses within a region often sets up a complicated mix of winners and losers. The richer, whiter, more car-dependent suburbs offer cheap, empty land that's all too easily developed into congested sprawl. And the poorer, ethnic, public-transportation-dependent urban area loses its tax base along with its best jobs.

He argued that economic developers should concentrate on helping the needy find jobs, not providing incentives for successful firms to move within a region.

"Part of the purpose of economic development is to provide opportunity to people at the bottom of the wage ladder," LeRoy said.

"In the long run, you'll get a thinning and a hollowing as more jobs are pulled outward and more people are forced to commute longer. [That means] more global warming and a weaker tax base in the old areas. It's not smart use of your tax incentive system."

Indiana Secretary of Commerce Nathan Feltman takes issue with the idea that Indiana is anything less than judicious with incentives.

He takes pride in the meticulous process Gov. Mitch Daniels' administration uses to award them. He said they're granted to companies for regional headquarters moves only when the alternative is losing them entirely.

He called the state "agnostic" about company moves within Indiana borders and said incentives are offered only in exchange for a strong return on investment.

Indiana gave Freije, which sells salt-free water treatment systems, $1.2 million in tax credits and $60,000 in training grants when the company moved to Greenfield in January.

It gave even more to SMC when it moved to Noblesville--$4 million in tax credits plus $387,000 in training grants. The state hasn't announced any involvement in Bowen's move.

Feltman refused to view Bowen's relocation in win-loss terms.

"The last thing we as a state want to do is [entice] somebody to move from one spot to another," Feltman said. "What we want to do is, in a competitive situation, make sure Indiana wins the jobs."

SMC's relocation is a big win for Noblesville. The company will close its Indianapolis plant and move 500 jobs to the Hamilton County city. It also expects to create another 250 jobs there.

In addition to the state incentives, SMC is receiving $14.6 million in incentives and infrastructure improvements, such as road widening, from Noblesville.

But the town didn't initiate SMC's move by knocking on its door, said Noblesville Economic Development Director Kevin Kelly. It simply responded aggressively when site-selection consultant Colliers Turley Martin Tucker made contact on behalf of SMC, looking for land.

Kelly acknowledged a friendly competition among economic developers in central Indiana. But he said they all share a common goal: doing whatever's necessary to keep companies in the region.

"There will be a vacant building in Indianapolis that hopefully will be filled [after SMC completes its move]," Kelly said. "I'm sure Indianapolis would have liked to retain that company. But in the broader context, the region retained it and the company is not only going to expand, but increase its investment here."

LeRoy calls that mentality hogwash.

"Companies want to retain their skilled employees and proximity to suppliers and customers. They are where they are for good reason," he said. "This idea you're defending yourself against Kentucky or southern Ohio strikes me as hollow."

Economic development officials disagree. They say they'll need to remain responsive to locally based companies assessing their relocation options. Often, the result will be Indianapolis companies moving to the suburbs.

"Unfortunately, due to age of facilities and the nature of Indianapolis, the [headquarters relocation] trend is probably going to continue," Noblesville's Kelly said. "There will be a net exodus of companies. That's a phenomenon that's happened around the country, and that's probably not going to change."

Choosing sites

Incentives alone aren't usually enough to lure a headquarters across a county border. Indeed, they're often the last factor in a company's relocation equation, said Indiana University business professor Myron Kanning.

He said availability and price of real estate as well as overall business costs have far more weight.

"I'm quite sure, giving most businesses the benefit of the doubt, they're using more than the tax rates as the basis of decisions on where to move," he said.

Local examples bear him out. Last year, Indianapolis-based architectural products supplier Spohn Associates Inc. agreed to move its headquarters and 30 employees to Zionsville in exchange for a three-year tax abatement worth $80,000.

But Chairman Jack Spohn said his company reconsidered after deciding the Zionsville site was too expensive, even with the incentives. Instead, Spohn is moving to a cheaper building in Park 100.

"We didn't want our ego to get in the way of our pocketbook," he said. "So we decided to do something more utilitarian."

City and state economic development officials awarded Haverstick Consulting a $68,000 tax abatement and a $30,000 training grant when it agreed to move from Carmel to Indianapolis. It made the move after it couldn't find a facility to its liking in Hamilton County.

But Haverstick President Howard Bates said it hasn't collected any of those incentives yet, since the company hasn't reached the "stretch goals" it set for job creation. The company is eligible for its incentives only if it meets growth projections.

For Haverstick, Bates said, geographic factors were far more important than incentives. Haverstick's largest local customer is Indiana state government, which has many of its operations in downtown Indianapolis. Haverstick employees also are regulars at Indianapolis International Airport, commuting to meet clients across the country. Moving to the city dramatically cut time wasted in traffic.

"We could find a less expensive area in some very remote county, but we would not have the kind of proximity to our customer base that we do here," Bates said.

Fishers Town Manager Gary Huff said Bowen Engineering had similar challenges. Like Haverstick, it turned to Indianapolis after it couldn't find space it wanted near its current home.

On the other hand, Fishers already has found a replacement tenant for Bowen's old headquarters. The town is in negotiations to attract Indianapolis-based Hagerman Construction.

The company has 70 existing jobs and plans to add 30. Fishers is contemplating a tax abatement.

"The system seems to work well," Huff said.

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