Staying earns Steak n Shake state, city rewards

April 14, 2008

Local governments plan to throw Steak n Shake Co. a life raft of incentives worth about $275,000 to help the struggling chain keep its headquarters in Indianapolis.

The company has quietly agreed to retain about 180 employees here in exchange for a $200,000 state training grant and a five-year personal property tax abatement worth about $75,000.

The incentives, though modest, are unusual given that the company does not plan to expand or add employees.

Steak n Shake agreed to the deal after months of negotiation, but the incentive offerings still must win final government approval.

"This is an opportunity to help them succeed," said Nick Weber, the city's economic development director and a deputy mayor. "They're an Indiana-headquartered company with superior wages."

Weber would not say whether Steak n Shake threatened to move elsewhere, but he said headquarters deals often pit local officials against counterparts in other cities who are intent on stealing good companies and good jobs.

Officials at Steak n Shake refused to discuss, or even confirm, the incentive deal, which abates part of the tax liability of new test-kitchen equipment.

The company lost its former chairman and acting CEO, Alan Gilman, to a proxy battle that culminated in mid-March with the election of dissident Texas investor Sardar Biglari and an adviser to company board seats. Biglari, 30, had been making the case for a company shakeup since the fall of 2007.

The 500-restaurant chain has reported 10 consecutive quarters of declining same-store sales, and its shares are trading at their lowest point since January 2001. The company has been looking for just about any opportunity for savings, including at its headquarters in downtown's Century Building, 36 S. Pennsylvania St. It occupies 57,000 square feet in the building under a lease that expires in 2013. The company also operates a divisional office at 5980 W. 71st St.

"In this difficult operating environment, we will continue to aggressively review our cost structure," Steak n Shake executive Jeff Blade told analysts on a Jan. 24 conference call. He said the company was on track to achieve a plan announced two months earlier to cut general and administrative expenses $8.1 million annually across the entire chain.

Incentive deals like the one Steak n Shake won usually are not essential to persuading a company to add to or retain its local presence, said John L. Mikesell, a professor at IU's School of Public and Environmental Affairs.

The things that matter more are access to labor, utilities and an availability of appropriate land, he said.

"Most of the time, taxes are not a deal breaker," Mikesell said. "At the same time, local government officials are afraid not to fold."

Mikesell said incentives are "an indicator of basic defects" in the tax system. Local government should focus on remedying the basic tax system instead of riddling it with holes for chosen companies. Lower taxes for one company raise the burden for others.

"You can't blame the business for making the application; I would presume that's part of due diligence," Mikesell said. "You blame the government for automatically caving and for making the incentives broadly available."

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