The use of public incentives is on the rise, thanks to efforts by local and state governments to encourage retail development. Competition among localities is driving the widespread use of incentives as virtually every community has some form of financing or incentive program.

While there are no guarantees for success when offering incentives, at least three business practices should be standard operating procedures. Avoiding these standard procedures will increase risk and possibly lead to making embarrassing mistakes.

Deadly Sin #1-Don’t Do Due Diligence

Incentives can be considered as investments in the community. As with any investment an extensive investigation of the viability of the company requesting incentives should be made.

To determine if the information you have received about the company is valid, conduct an extensive due diligence process. Failure to make this effort may be considered negligence. Due diligence is the way to discover problems before you “buy.” The most financial savvy residents in your community should be engaged in helping making the due diligence effort. 

Deadly Sin #2-Don’t Conduct a Cost/Benefit Analysis

Public incentives represent additional cost over and above the ordinary cost to serve the project. Before making a decision about what incentives to offer and how much to offer conduct a cost/benefit analysis for the project. This type of analysis identifies both the revenue benefits and the government outlays associated with project, from the point of view of the government unit.

Typically, the cost/benefit analysis involves calculating the project expenses and the expected revenue from taxes and other fees that will be generated by the business.  Indirect and induced impacts often are calculated using multipliers. (See The Buxton Report September 2006 for an article on Retail Impact Analysis by Dr. Ron Swager.)

A well-developed cost/benefit analysis will not only help to qualify and quantify incentives, but also it will provide a sense of whether a project is “good” or “bad” and provide quantitative evidence to back up intuition.

Deadly Sin #3-Don’t Require a Performance Contract

With a favorable due diligence and a positive cost/benefit analysis, the next step that helps ensure success is the development of a written performance contract.  The contract spells out in detail the incentives and terms the company will receive and the performance that the community expects from the company. 

The company’s performance expectations may be in terms of jobs created, size of the facility, tax revenues generated or any community goals that justifies public participation. Provisions to cease incentive payments should be written into the contract in case the company fails to meet the contract terms. The performance contract can also include provisions to clawback any incentives paid.

To ensure that the company is performing as expected, the community must put in place mechanisms to monitor the company.  Too many communities fail to inspect the company and often find out too late that the project is not producing the desired results.