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10 Critical Factors Driving The Location Decision [Area Development Site and Facility Planning](Area Development Site and Facility Planning Via Acquire Media NewsEdge) The articles that follow examine the top-10 site selection factors from our Q1 Corporate Survey. Labor costs, skills, and a nonunion environment are top of mind; highway access is key; and tax rates and exemptions deserve close scrutiny. Find out what else your company should consider when making its next location/expansion decision. #1 Labor Costs Keeping the Cost of Labor in Check Although labor costs seem to trump all other factors, they must be analyzed as part of overall operating expenses. According to a 2012 survey of business leaders by Boston Consulting Group, 57 percent of all respondents indicated the top factor driving future location decisions is cost of labor. This was also the number-one factor in the site and facility planning decisions of more than 90 percent of those responding to Area Development's 2012 Corporate Survey. "There is no question that the true balancing act in site selection involves maximizing labor and skill set value-add, while minimizing the cost functions surrounding it," says Thomas Stringer of Business Advisory Services, Ryan & Company. "Labor tends to dominate the equation for most of our site selection projects," agrees John Boyd, principal for The Boyd Company, a site selection consulting firm in Princeton, N.J. "In particular, what varies the greatest are the nonexempt labor costs - typically hourly positions - that fall under federal wage and hour legislation mandating overtime compensation. Exempt salaries - those positions in supervisory or management - tend not to vary significantly by geography." COSTS OF BEING UNIONIZED "Right-to-work" states typically have lower wages and are less unionized - two factors that are highly attractive to manufacturing companies. About half the states are right to work - in December 2012 Michigan became the 24th right-to-work state. According to reporting by The Wall Street Journal, "Private-sector employees in right-to-work states earned an average of $738.43 a week in the past 12 months, 9.8 percent less than workers in states without such laws; according to Labor Department data, that didn't include healthcare and other benefits." As might be expected, manufacturing employment grew 4.1 percent in right-to-work states over the past three years, compared with less than 3 percent in other states. However, some economists also say that, when differences in cost of living are taken into account, wages are roughly the same - or even higher - in right-to-work states. LABOR PRODUCTIVITY The Economics and Statistics Administration (ESA) indicates that American workers continue to increase their productivity. U.S. unit labor costs dropped nearly 17 percent between 2000 and 2011, meaning that productivity rose faster than labor costs. "This is not the situation in many countries that historically have been considered attractive destinations for outsourcing," states ESA economist David S. Langdon. "In the case of China, for example, wage increases have easily outpaced labor productivity growth. As a result, economy-wide unit labor costs in China have ballooned by more than 85 percent since 2000. Canada and South Korea also face rising unit labor costs, with gains of 21 percent and 9 percent, respectively." Boyd adds that wages in China are rising at an annualized rate of about 20 percent. "Much of the early labor savings in low-cost countries like China is now being trumped by hidden waste and overhead costs and a risky and over-extended supply chain bloated by soaring diesel prices," he says. Langdon agrees. "Some companies have found the expected savings from foreign labor have been whittled away over time in numerous and unexpected ways," he notes. "For example, specialized footwear manufacturer Keen cited the changing dynamics of overseas labor costs as key in its decision to expand its U.S. manufacturing operation." Most companies, adds Larry Gigerich, managing director for Indianapolis-based site selection firm Ginovus, are not strictly chasing the lowest labor costs they can find in a given location. "There is a balance between affordable labor costs and quality of the employee's work," he says. "Companies can certainly pay lower wages, but they are then typically faced with higher turnover, quality challenges, and significant internal training costs. Labor costs are an important factor, but they should be analyzed as a part of other operating costs such as tax rates, utility costs, transportation costs, and real estate costs." Note: The Department of Commerce recently introduced the Assess Costs Everywhere tool (http://acetool. commerce.gov), which outlines the costs and risks firms need to weigh when considering manufacturing and supply chain locations. #2 Highway Access The Road to Profitability A well-connected location is essential for accessing suppliers and customers, as well as connecting to intermodal hubs leading to the global marketplace. A business won't go anywhere without easy access to well-maintained, high-capacity highways that connect to customers, distributors, and shippers. This is especially true for the logistics and manufacturing industry sectors, where transportation costs typically account for more than 60 percent of all supply chain costs. That's why excellent highway connections are essential for a wellfunctioning supply chain, as well as for the on-time delivery of goods to the marketplace. For some site selection projects, highway access should also be viewed In terms of the visibility it creates and ease of access for the work force, especially for labor-intensive operations like call centers and customer service centers. Access to public transit, signage, and the ability of applicants to readily recognize and find the hiring site are all part of the access equation. MINUTES MATTER Highway transportation by truck is often the first domestic stage of shipping for many products - the closer a company's facility is to interstates and state highways, the faster the products are delivered. "The rule of thumb is '5 to 55' - meaning taking only five minutes to get to 55 miles per hour," says Tim Feemster, managing principal for Foremost Quality Logistics in Dallas, Texas. The bottom line is that every minute matters. For example, David Abney, chief operating officer for United Parcel Service, recently testified to the U.S. House of Representatives' Committee on Transportation and Infrastructure that, "if every UPS delivery vehicle is delayed just five minutes each day, it would cost UPS an additional $105 million annually." This means good highway connections make a huge difference to controlling operating costs and elevating customer service performance. Some companies embrace large centralized/regional facilities, while others prefer smaller market-centric facilities. Companies that are delivering products direct to customers or customer outlets tend to prefer the regional/market-centric facility approach to ensure delivery speed and minimize "last mile" delivery costs. Companies shipping raw materials and/or component parts to other companies tend to have larger and more centralized facilities. Columbus, Ohio, and Indianapolis, Indiana, have been very successful in leveraging their transportation systems to attract business investment. Finish Line's recent expansion project in Indianapolis exemplifies this trend. The company announced it would create over 300 new jobs by 2015 in a multi-million dollar expansion. Part of this investment will strengthen its distribution system to take better advantage of the four interstate highways that intersect in Indianapolis, providing north-south and east-west transportation connections. INTERMODAL'S ROLE Depending on the company and its markets, interstates and state highways that connect directly to intermodal centers (rail, port) are essential for crosscountry or international delivery of products. Key intermodal sites include the Alliance Intermodal Terminal north of Dallas/Fort Worth (connecting BNSF and interstates 20, 30, 35, and 635); San Antonio Intermodal Terminal (Union Pacific, interstates 35 and 410); and CenterPoint Intermodal Center outside Chicago (BNSF, Union Pacific, interstates 55 and 80). Eastern states with strong connections between their highway systems and deepwater ports - such as Florida, Virginia, Maryland, and South Carolina - will likely see more warehousing and distribution activity with the Panama Canal expansion In 2014. The addition of a new highway can transform the economic potential of a region. For example, an interstate has been proposed that would connect Las Vegas and Phoenix, two of the largest metropolitan areas in the Southwest. The proposed interstate, 1-11, would also help make Las Vegas Valley cities like Henderson and North Las Vegas distribution hubs in the Southwest, as well as reduce local traffic congestion. Business executives, labor union leaders, and politicians are all behind the project - the hard part now is coming up with the funding - at state or federal levels. Financing highway construction is one of the most critical issues facing Congress. The Highway Trust Fund is In big trouble - in April 2013 the Congressional Budget Office (CBO) reported, "The current trajectory of the Highway Trust Fund is unsustainable. Starting in fiscal year 2015, the trust fund will have Insufficient amounts to meet all of its obligations, resulting in steadily accumulating shortfalls." Revenue for this fund is largely generated by excise taxes on gasoline and other motor fuels, which have declined steadily because Americans are driving more fuel-efficient cars and spending less on gas. According to the CBO, these taxes come from an 18.4 cent-pergallon tax on gasoline and ethanol-blended fuels and a 24.4 cent-per-gallon tax on diesel fuels. Those taxes were last Increased in 1993. Highway Accessibility Underpins Location Decisions Few aspects of an area's competitiveness are more fundamental than its infrastructure systems, and no other infrastructure system exerts a more elemental influence on a facility's location than the complex of highways that will serve it. Accordingly, Area Development's annual Corporate Survey has consistently ranked highway accessibility among the top-five location factors. A Basic Need While corporate decision-makers, economic developers, and site selection consultants often overtly concentrate on seemingly sexier location decision factors, highway accessibility is never out of mind. Whether it delivers workers, materials, services, goods, or emergency vehicles - or provides entry to markets and customers - an area's highway system is basic to business operations. Further, the efficiency ofthat highway system enables informed decisions as to which modes of transport will best achieve a company's time-to-market objectives. Although highway systems are among the least elastic and most expensive and time-consuming to construct, they are also among the most effective at stimulating new investment. Numerous examples exist to demonstrate this proposition, and one fact is inescapable: highway accessibility exerts a preponderant influence on the distribution of economic activity throughout the United States. Transportation infrastructure is crucial to virtually every facility for access to people, support services, just-in-time materials delivery, and end-product distribution. Moreover, logistics costs comprise the single largest variable cost category for production and distribution. Inefficiency in any one aspect of the supply chain echoes throughout the entire operation, often in an a unfortunate way. Transportation cost, reliability, highway access, and market connectivity are all interconnected. An interstate-quality highway with dual access is highly desirable for large-scale manufacturing and distribution facilities. At the site level, redundant ingress/egress points on high-quality, public secondary roads are important, not only to minimize potential barriers to access, but also to ensure access for fire-fighting, emergency medical, police, and other essential services. Additionally, assurance of adequate design standards to accommodate commercial traffic needs careful attention. Appropriate controls for truck access and employee vehicle access are also important, as is highway access for other transport modes coincident with highways. Considered together, transportation and infrastructure factors converge at the highway to promote or constrain commerce. Interconnected Modes A rail-served site is often key, with strong emphasis on competing carrier access. Some preference for a connection to a main-line carrier is appropriate, although shortline rail carriers are playing ever-larger roles today, as major carriers concentrate services on higher-volume tracks in denser markets. A rail yard or transloading facility is frequently desirable in close proximity. As with the air transport considerations noted below, each transport component relies heavily on highway access and ease of use to carry out its role efficiently in the business process. Air transport is often critical for customers, suppliers, vendors, and company executives alike as we move deeper into a truly global economy. Typically, proximity to a hub with flights to primary destinations is a preferred, but not absolute, requirement. Most North American operations have fairly common domestic destinations and often enable businesses to source high-value materials or services from distant suppliers. Such reach becomes more advantageous when combined with good highway access. The need for waterborne transportation will vary with each project depending on where components are sourced, the nature and volumes of the commodities shipped, and their ultimate destinations. In many cases, containerized subassemblies, components, or finished goods may be coming from South America, the Caribbean, Asia, or Europe, and a link to a deepwater port via rail and interstate highways is important. Under any conditions, highway accessibility provides the essential connection among all modes of transport in use. Highway accessibility is often assumed, but not always explored openly in site selection discussions. Arguably, it may very well be a factor that we take for granted. Nonetheless, highway accessibility undeniably forms the essential nexus between workers, suppliers, producers, distributors, and markets. And while it may be supplanted from time to time by other decision factors - such as labor availability or energy cost - highway accessibility will remain near the top in its enduring influence on the location of new business investments. Excerpted from an article by David V. Brandon, Senior Vice President, Site Selection Group, LLC, that appeared in the August/September 2008 issue of Area Development magazine Although it may be a factor that's taken for granted, highway accessibility undeniably forms the essential nexus between workers, suppliers, producers, distributors, and markets. #3 Skilled Labor Availability Workers Who Have the "Right Stuff" Having a pool of highly skilled workers can tip the balance in a location's favor. Finding highly skilled labor is the numberone driver for nearly every site-selection decision. Companies are increasingly seeking more refinement in identifying specialized skill sets as their labor needs become more specialized. For example, the software development field has an extensive array of specialties and certifications that can be critical requirements for employers - yet there is very little reliable data on the depth of these specialties across markets. "The best method to evaluate the depth of the market for these specialties is to put the data aside, roll up your sleeves, and start talking to experts in the market," says Mark Seeley, senior managing director for CBRE's Labor Analytics Group in Phoenix, Arizona. "HR managers and recruitment agencies can provide a wealth of insight into the availability of highly specialized skill sets. While this can be a time-consuming process, it is also highly enlightening and provides insight into local labor dynamics that go well beyond what the data can tell you." CBRE Labor Analytics Group recently completed a relocation project for a large financial services company that required 350 corporate IT jobs. Because these workers required such specialized skill sets, the site selection criterion was highly focused on the supply, skills, and costs of the available work force. After conducting a nationwide search for the financial services company, the client selected New Orleans as the final location for its IT center of excellence. "The operation has been open for approximately 12 months and has already measured a 25 percent increase in productivity," says Seeley. "They attribute a large part of this improvement to the skilled labor force they found in New Orleans." John Boyd, principal with site location firm The Boyd Company in Princeton, New Jersey, has worked extensively in the pharmaceutical sector, helping locate GlaxoSmithKline's Stiefel Laboratories to North Carolina's Research Triangle Park and Melbournebased Mayne Pharma to Montreal. Requirements for both projects included finding clusters of highly skilled scientific and technical talent in the life sciences to staff these expanding operations. "Many site-seeking clients, especially in the life sciences sector, don't want to be the 'pioneers' who go first into a city or region," says Boyd. "The successful retention of key management and technical staff in the initial move, and the ability to recruit top talent nationally in the years ahead, will be severely compromised if transferees or applicants feel that, if the current job does not work out, they have limited options in the same field in that city." WORK FORCE DEVELOPMENT CAN HELP Companies also like to have access to state-run work force development departments that are eager to help design pre-employment assessment and selection processes for identifying the best job candidates. Some states also provide low-cost or zero-cost, statemanaged training programs to tweak the skill sets of new employees, if needed. Georgia's program -Quick Start - is one of the most renowned in the nation. "The Atlanta, Charlotte, and Nashville regions are doing some excellent work in work force development to match employers and employees, including delivering credential/certification programs for residents in their areas," says Larry Gigerich, managing director for Ginovus, a site selection firm based in Indianapolis. "This focus in Atlanta and the state of Georgia was critical to ExactTarget's decision to add 200 positions in Atlanta during the next three to five years," he adds. ExactTarget, a digital marketing software-as-aservice provider, will invest $1.25 million in the expansion. Top site selection factors the company focused on included a talented work force with solid IT skill sets, advanced IT infrastructure, and low operating costs. Advanced manufacturing is another industry that requires highly skilled labor, especially with computerized equipment and assembly operations. That's one reason firearm manufacturer Sturm, Ruger, and Company will invest $26 million in a new manufacturing plant in Rockingham County, North Carolina, hiring about 500 new employees over the next five years. New positions will include production workers, toolmakers, manufacturing engineers, and product design engineers. "There is a phenomenal work force in this area," states Sturm, Ruger, and Company President and CEO Mike Fifer. "We've had two job fairs and the response has been tremendous - the caliber of the potential employees is really impressive." "SKILLS" AND "QUALITY" Some companies confuse "skills" with "quality." Companies want both, of course, but the methods used to evaluate these factors can vary widely. Data can be used to evaluate a market's depth of certain skills (although, as skill requirements become more specialized, data integrity erodes and more "boots on the ground" methods are required). Evaluating "quality" - a blend of work ethic, attitude, and skills - is a far more subjective process that is not easily defined by data. Measuring the cost impact of locating in a market with a larger talent pool of higher-quality, highly skilled labor is very difficult, because It impacts each company differently. However, a company is likely to see substantial savings from the benefits of the higher productivity that are often associated with a skilled labor force. "By locating in a market that provides a deep base of the requisite skills, companies will experience shorter training cycles, lower turnover, and overall improvement in operational performance and efficiencies," says Sean Carman, senior director for CBRE's Labor Analytics Group. "All of these things have a positive effect on a company's bottom line and profitability." #4 Advanced ICT Services "Connected" Locations Support Innovative Companies Locations offering a robust telecom infrastructure - with adequate speed, choices, and bandwidth - are becoming hotbeds for technology development and entrepreneurship. p Information and communications technology (ICT) is all about connectivity and speed - telecommunications and wireless, Internet capability, fiberoptic networks, back-up systems, and the integrated software that makes it all run smoothly together. U.S. companies are doing more business globally, so it is more important than ever to have advanced ICT systems in place that can handle all business needs, including the transmission of big data. Perhaps more important than the technology itself, cities that invest in advanced ICT services are showing a commitment to the future that companies find attractive. Most high-tech companies have needs for advanced ICT services to increase the speed of delivery of their products and services. Location consultants agree that ICT is an especially important factor for companies that are pursuing a data center or shared-services type of facility. Telecommunications infrastructure, including multiple carriers and redundancy, are critical issues for these types of projects. Speed, choices, and bandwidth can impact a region's competitiveness when trying to attract and grow these facilities. Places like Austin and Salt Lake City/Provo have done a great job of attracting these types of projects. Therefore, it's no surprise that these two locations are consistently ranked among the top cities for technology development and entrepreneurship. Austin, for example, was ranked as the second-best hotspot for technology start-ups by Payscale.com in 2012 and was ranked fifth among major cities as a technology market by Jones Lang LaSalle in 2012. ULTRA-HIGH-SPEED OFFERINGS Google Fiber has announced it will enter both the Austin and Provo markets - attracted by the high-caliber ICT infrastructure that can handle its ultra highspeed gigabit Internet offerings. Only a few cities have the fiberoptic networks that Google Fiber or other gigabit Internet services require. Atlanta is also well known for its ICT infrastructure, which supports a booming health IT industry. Seven top Atlanta-based health-related IT companies generate nearly $4 billion in revenue every year. In terms of overall technology, Atlanta is among the fastest-growing high-tech metro areas in the country, with 13,000 technology companies employing more than 260,000 people. This kind of rapid cluster development is only possible with a top-notch ICT infrastructure. Two of the country's largest fiberoptic routes - north/south and east/west - cross in metro Atlanta, placing the city in the top-five U.S. markets for total bandwidth and fiber access. This kind of robust cluster growth and ICT support continue to attract new business development to the city. For example, Athenahealth, a provider of cloudbased services for electronic health records, practice management, and care coordination, will undertake a $10.8 million expansion in Atlanta. In addition, PointClear Solutions, a leading healthcare software development provider, recently announced plans to relocate its corporate headquarters to Atlanta. "We made the decision to move our corporate headquarters to Atlanta due to the large footprint of health IT companies and the breadth of academic and technology resources it offers," noted David Karabinos, CEO of PointClear. #5 Occupancy and Construction Costs Costs of a New Vs. Existing Facility Of course, it's less expensive to rehab an existing facility than go with a build-to-suit, but the latter will give a company a custom fit. One of the most critical site selection factors for any project is occupancy and construction costs. Although it is one of the biggest expenses a company faces during a relocation or expansion, it is a fairly predictable cost that is generally not complex to determine and factor into budgets. There are also some key options associated with occupancy and construction - it may be more costefficient to move into an existing building compared to constructing a new facility, for example. It is also easier to get up and running when leasing or purchasing an existing facility, compared to waiting on a construction project - especially if funding is a challenge. However, if a company is highly specialized, it may prefer constructing its own building that totally fits its needs. Construction costs - including site acquisition, site preparation, and installing infrastructure - can often be discounted through incentives from local and state governments. Land may even be donated to the company for the project. CONSTRUCTION LABOR & MATERIAL COSTS The larger the rehabilitation or construction tab, the more important the cost differences become in the site selection process. Construction costs are mostly tied to labor and material costs. As a result, the main difference from location to location will be labor costs for construction, since material costs are about the same across the country. Construction labor costs can also be impacted by whether the area is experiencing a construction boom or is struggling economically. Construction labor costs can vary by up to 10 percent or more depending on the region - this difference can have a big impact on an expansion/relocation budget. Site selection experts often consult the RS Means Construction Cost Index for the latest material and labor costs across the country. Presented by Reed Construction Data, the index tracks construction cost trends from January through December, with reports issued every quarter. Cities that show higher construction cost trends over the last year or two may have more difficulty competing with other locations on the short list. VARIABLE ACROSS REGIONS Just like construction costs and labor costs, occupancy costs also vary dramatically from region to region. For example, according to CBRE's December 2012 Prime Office Occupancy Costs report, occupancy costs in downtown San Francisco increased to $90 per square foot from September 2011 to September 2012 - a 36 percent jump. In Seattle the increase was closer to 22 percent. These trends are driven by the resurgence of high-tech companies in these areas as the economy improves. Oftentimes, site selection consulting firms maintain their own proprietary databases. The Boyd Company of Princeton, N.J., put together such a database for a manufacturing client in the metalworking sector. Key considerations included a work force of 225 people, land acquisition (25 acres of fully serviced, industrially zoned land), construction of a 140,000-square-foot light industrial building, and local property and sales taxes. Land and construction costs were amortized over 25 years at 5 percent interest. According to Boyd's database, annual occupancy costs (land, construction, property, and sales taxes) for this project ranged from a high of $6.8 million in Toronto to a low of $3.3 million in Greenville, South Carolina. (Go to our website to see the online comparison table.) #6 Energy Availability and Costs Powering Up While Keeping Costs Down While some operations are more energy-intensive than others, reducing energy costs is always an important consideration in the location decision. f Every development needs energy - it would be difficult to work in the dark. But how big a factor the availability and cost of energy is ^ depends a lot on the kind of development. "The two main types of projects most sensitive to energy costs and availability are data centers and manufacturing," says Ginovus' Managing Director Larry Gigerich. "Data centers tend to consume a lot of energy, whether they're a single location or collocation. Not only [are they] cost-sensitive, but also having energy availability from multiple sources [is important]. Often the requirement is to have direct feeds from two different substations and transformers." While manufacturing operations also tend to take big gulps of energy, it's not always electricity. In fact, says Gigerich, the plunge in natural gas costs has changed the playing field a bit. "In a lot of cases they're trying to do more using natural gas as a part of the manufacturing process," he explains. In any case, energy is a big deal. "A few locations are really good and competitive for electric costs," Gigerich says. The Mountain/West part of the country has been quite attractive for data centers, he points out, with the prevalence of hydro power a significant reason. "Those areas offer not only an abundance of energy but the price point is attractive." Of course, many companies require data centers in more than one region. "If data centers are geographically dispersed, the Midwest is attractive," Gigerich adds. The U.S. Energy Information Administration's most recent annual report shows industrial rates averaging the lowest in the West-South-Central States - Arkansas, Louisiana, Oklahoma, and Texas - followed closely by the Mountain States and the West-NorthCentral States ranging from the mountains in the west across toward Minnesota, Iowa, and Missouri. Industrial rates in the East-South-Central region that includes Tennessee, Kentucky, Alabama, and Mississippi are nearly as low, too. REDUCING COSTS For larger companies, there are ways to make energy cost less of an issue, even for sites in areas that tend to have higher energy costs, says John E. Robbins, cofounder and principal of Turner & Townsend Ferzan Robbins. "These days we're dealing with a lot of clients having great success on the energy side by buying bulk power," he explains. Power is still delivered by the local utility, but sourced through a national contract. "Companies well represented across the U.S. are able to bulk-buy their power needs at better rates. They're able to really bundle their business across the country." And eBay's new data center in South Jordan, Utah, offers an example of an additional twist. Utah already enjoys favorable electric rates, but the new center is employing fuel cells as a primary source of energy. It's also connecting to a waste-heat recovery system that will generate power using the waste heat from the pipeline that delivers natural gas to the site. An indirect energy-related factor is the climate - while the site is subject to desert heat during summer days, it's a generally cooler-than-average location, which means less energy used on cooling the racks and racks of servers. A relatively new General Motors data center in Michigan enjoys a similar energy-related benefit. Green energy considerations also come into play at Google's data center in Pryor, Oklahoma. Like Utah, it's a location known for reasonable energy rates, but Google is buying the entire output of a Texas wind farm to help offset the power consumption of the Oklahoma center. Corporate Tax Rate Keeping Government's Hand Out of the Company Coffer Although corporate tax rates figure more prominently into some location decisions than others, there's generally an overall tax bite - including property and sales taxes - that needs to be looked at carefully. It's not a surprise that everyone wants lower taxes, so it makes sense that corporate tax rates are a key factor in site selection decisions. "It goes into every decision," says Mark Sweeney, senior principal with McCallum Sweeney Consulting. How much it goes into every decision, though, can vary quite a bit, he adds. "If it's a branch manufacturing facility for a large company and they do have a presence, they would have to pay some, but the burden isn't particularly onerous. In most projects, it's not frequently the key." DEPENDENCE ON PROFITABILITY In fact, if it's early enough in the deployment of a new manufacturing facility or other project with high startup costs, corporate income tax might not be due at all. "There are lots of deployment projects where the deployment isn't expected to be profitable for the first several years," says Darin Buelow, principal and the national leader for Deloitte Consulting's Real Estate and Location Strategy Practice. "They're not going to be paying state corporate income taxes while they're chewing through those net operating losses," he explains. "If you're not profitable because of all of the capital expenditures you put in during the early years, it's not going to be as much of a deciding factor." On the other hand, the activities at some locations are expected to generate large profits, and in those cases, the corporate tax rate is a much more significant consideration, Buelow says. Further, "corporate income tax rates are much more important when you're looking country-tocountry than when you're looking just in the U.S.," he adds. "Then, all of a sudden you have the federal rate involved." TYPE OF CORPORATION Another important distinction involves the type of corporation. "A lot of small businesses file as S corporations," Buelow says, which means profits may end up on the individual tax returns of the owners. "They're going to be paying tax on corporate profits, but at a personal income tax rate." C corporations, on the other hand, will owe taxes at the corporate rate, putting that rate more into play in a decision. What about those states that don't have a corporate income tax at all? It pays to look closely. Ohio, for example, has a commercial activities rate instead, and taxes are collected on all revenues, not just profits. It's not that one is better than the other, notes Buelow - they're just different, affecting various companies differently, and Ohio formerly had a corporate income tax. "Most examples would suggest that Ohio businesses that were in place before and after the switch tend to pay a little bit less than they were." The bottom line, Buelow advises, "A wise site selection team is going to look at all the taxes in play, such as corporate income tax, property tax, sales tax. The state is going to get its money for operations somewhere." #8 Available Buildings Existing Facilities Satisfy Demand for a Quick Project Turn-Around The economic downturn left a lot of available buildings on the marketplace, although not all have the infrastructure needed by specialized firms. It's hard to find many silver linings connected to the Great Recession. But for some companies planning facilities, the recession left behind the gift of available real estate. That's helpful, because the availability of buildings moved from 15th to eighth on the list of most prominent factors in Area Developments 2012 Corporate Survey. "No question existing buildings have become more important," says Larry Gigerich, managing director of the Indianapolis-based site selection consulting firm Ginovus. "As you look at the last few years, there's been a slow, steady economic improvement," he says. "In this economic environment, companies have tended to wait as long as they can to do a project. If they have to invest capital and hire people, they want to make sure there's momentum in their business, and they want to be sure they have done everything they can to leverage their facility and their people." That kind of timetable, says Gigerich, often rules out build-to-suit. "They want to go quickly because they waited as long as they can," he says. Such a strategy works hand-in-hand with the supply of buildings, at least in some markets. "Because of the downturn, there are a lot of quality buildings available," he notes. He cites Columbus, Ohio, as an example, noting that a spec building spree had taken place just before the economy tanked. Yesterday's problem is today's opportunity. "They've had a lot of good quality buildings available," Gigerich adds. AVAILABILITY IS MIXED The generous supply of available industrial buildings has been steadily declining in a lot of markets, though, as the economy has slowly recovered. Colliers International tracks vacancy rates and, in the company's mid-year 2013 report, noted that U.S. industrial warehouse and distribution center vacancies had been on the decline for eight straight quarters, to just over 8 percent. Available spaces vary significantly from one place to another, of course. According to Colliers, going into 2013 the vacancy rate in Las Vegas, for example, was three times the rate in Omaha. New construction, meanwhile, is increasing but, not surprisingly, it's primarily build-to-suit. In fact, some of the fast-growing users have little use for available buildings because their needs are so specialized, according to Rich Thompson, managing director and leader of the Supply Chain and Logistics Solutions practice at Jones Lang LaSalle. That includes big e-commerce companies in search of distribution space; they're more likely to go build-to-suit. "They're really defining exactly what it needs to look like - how high the ceilings are, the column spacing," he says. "There are very few buildings existing that can fit their requirements." Data from Cassidy Turley shows ongoing improvement in the industrial sector, slowly drying up the roster of available buildings. "Among the primary demand drivers fueling the gains are the auto sector, housing construction, e-commerce, and manufacturing of durable goods," according to the real estate firm's U.S. Industrial Trends Report for the second quarter of 2013. Available buildings and space certainly can't be found everywhere, or across all kinds of property. For example, John E. Robbins, co-founder and principal of Turner & Townsend Ferzan Robbins, does a lot of Manhattan office work. "By and large, for large tenants with multiple floors, the inventory is pretty limited in buildings that they find acceptable," he says. And what tenants find acceptable has a lot to do with IT infrastructure. "Even companies that five years ago would have been less sophisticated in their technology needs are looking for buildings that have robust infrastructures." #9 Tax Exemptions Making a Dent in the Tax Bill With Exemptions Although there are variations in which taxes are exempt in different jurisdictions, they not only offer an upfront break when a facility is being deployed, but also can result in ongoing tax savings. Considering just the base tax rate Is kind of like knowing the initial charge on a bill from the doctor's office - nobody wants to pay that much, and few people ever do, once all of the discounts and deductions are figured In. That's why tax exemptions are a key factor in choosing a site. Certainly, the base tax rates are Important, but exemptions can make a big dent In the tax bill. Actually, there are a number of ways the initial tax bill can be reduced - one is through tax exemptions, and the others are similar but with their own twists, says Darin Buelow, principal and the national leader for Deloitte Consulting's Real Estate and Location Strategy practice. Most prominent are tax exemptions, tax credits, tax rebates, and tax abatements, he says, and "all four have different nuances." The key to exemptions, Buelow explains, Is that "you never have to pay the tax. With tax rebates, you have to pay the tax, but assuming you do X, Y, and Z, you can get It back." He adds, "With tax credits, it's like a bucket full of credits. You typically apply them to state income taxes, and once you use the credits up, they're gone." Abatement, he says, seems a lot like an exemption in that you don't have to pay a certain tax, though it's typically for a set length of time, and the amount of the reduction may diminish as time passes until It eventually sunsets. VALUABLE ADDITION TO THE BOTTOM LINE Tax exemptions, says Buelow, most often apply to sales taxes, and they often drive some sort of public policy goal. A state may, for example, levy sales tax on all purchases, but exempt the purchase of machinery and equipment that will be used In the manufacturing process. That can be quite valuable, says Mark Sweeney, senior principal with McCallum Sweeney Consulting. If there's normally a 5 percent sales tax but such equipment is exempt, that'll save half a million dollars on a $10 million capital investment. Some states also exempt various components that go Into the manufacturing process, from raw materials to energy - that not only adds to the value of the exemption, but makes It an ongoing savings, not just an upfront break when the facility is being deployed. "One exemption that's getting a little more common is a sales tax on the construction materials used for a factory," Sweeney says. Buelow adds that states Interested in attracting distribution centers are exempting such things as warehouse conveyors, racks, and forklifts. "On the property tax side, there are classes of property that are sometimes exempt, as opposed to an abatement. The most common is pollution-control equipment," says Sweeney. Property tax on inventory may also be exempt, depending on the jurisdiction. Suffice it to say, as Buelow notes, "It's complicated. There are a lot of variations." M m Many communities...offer targeted economic development incentives - such as sales tax exemptions - that reward companies for capital h h expenditures. - J J Tim Comerford, Senior Vice President Strategic Consulting, Biggins Lacy Shapiro & Company #10 Low Union Profile Union Activity Can Be a Deal Breaker In order to be able to keep wages in check and maintain a flexible operating environment, many companies put low union profile high on their list of site selection priorities. Much has been written about the declining influence of labor unions in the United States, and it would not be terribly surprising to see union-related factors drop in relative importance as time goes on. For now, 73.5 percent of the respondents to the Area Development 2012 Corporate Survey list low union profile as either "very important" or "important," but that's down several points from the year before. Check stats from the U.S. Bureau of Labor Statistics and it's easy to see why. In 2012, 11.3 percent of employees were union members, down half a percent from just a year earlier. Two decades ago, that figure was about 20 percent. But union profile is certainly not a moot point just yet, and in fact is a big part of a site's labor considerations, says Rich Thompson, managing director and leader of the Supply Chain and Logistics Solutions practice at Jones Lang LaSalle. "It's probably the very first filter from a labor perspective," Thompson notes. "For manufacturing, it's near the top of the list," Larry Gigerich, managing partner with Ginovus in Indianapolis, says of low union profile as a location factor. "We've seen it a little more on the logistics and warehouse side as well." "From a distribution standpoint it usually is a factor, if it's a fairly decent-sized facility," Thompson agrees. "But there are certain markets when you can't get around it." PERCEIVED ACTIVITY When it comes to how the union question plays a role in decision-making, "Number one, you start with perceptions," Gigerich says. But it's also important to take a closer look at unionization activity to get a sense of how things are trending. As for where things are at present, "all states in the Middle Atlantic and Pacific divisions reported union membership rates above the national average, and all states in the East-South-Central and West-SouthCentral divisions had rates below it," according to the latest unionization report from the BLS. South Carolina, Arkansas, and North Carolina had the lowest rates of union membership, while New York, Alaska, and Hawaii were at the high end of the spectrum. It's an important topic for a number of reasons. The most obvious is the rate of pay commanded by union members. According to the BLS, last year union members had a median usual weekly paycheck of $943, compared with $742 for non-union members. That can easily impact not just those workplaces where the unions operate, but nonunion employers that must compete for workers. STEERING CLEAR OF UNIONIZED AREAS But it's not just the money, of course. Companies that put low union profile high on the list are eager to steer clear of potential disruptions in their operations, as well as any potential impediments to the kind of workplace flexibility they see as essential to being globally competitive. With that in mind, many site selection professionals will cross a location off the list right from the start if it's in an area with very active unions - and they may even steer clear of entire states if they're not right-to-work states. Mark Sweeney, senior principal at McCallum Sweeney Consulting, Greenville, S.C., says 100 percent of his manufacturing clients express a preference for operating a nonunion facility because of workplace flexibility, "which allows companies to compete more effectively and respond in a more timely manner to opportunities in their highly competitive global markets." According to John E. Robbins, co-founder and principal of Turner & Townsend Ferzan Robbins, the unionrelated influences can impact a new location well before its workers clock in for the first time. Even if it's likely to be a nonunion operation, project owners might have to deal with the question of union vs. nonunion construction. What's more, he says, labor influences may even vary from one part of town to another and, if the community is big enough, have an impact on the site choice. Take New York, for example. "On the union front, we're often confronted with that," Robbins says. "There are certain key neighborhoods that unions in the construction world have a strong hold over. But there are some neighborhoods where they're still working on a nonunion basis." Sponsors FLORIDA GREATER FORT LAUDERDALE ALLIANCE ** Greater Fort Lauderdale offers "Life. Less Taxing" to more than 150 corporate and international regional headquarters including AutoNation, Citrix, DHL, Emerson, Microsoft, and Nipro Diagnostics through a cost-competitive business climate and no state personal income tax, combined with robust domestic and international air and seaports and exceptional quality of life. PEGGY DOTY, Executive Assistant & Project Coordinator, Greater Ft. 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TED ALLISON, Director of Economic Development, MidAmerica Industrial Park P.O. Box 945 Pryor Creek, OK 74362-0945 918-825-3500 or 888-627-3500 [email protected] www.maip.com TEXAS GREATER LAREDO DEVELOPMENT FOUNDATION ** Laredo, Texas, is the major port of entry/exit along the U.S./Mexico/Canada trade corridor. Recording $239 billion in trade with Mexico alone in 2012, this major truck, rail, and air cargo hub earned its ranking as the No. 1 inland port and 3rd-largest Customs district in the nation. OLIVIA VARELA, Executive Director, Greater Laredo Development Foundation 616 Leal St. PO. Box 2682 Laredo, TX 78044-2682 800-820-0564 rgi Fax: 956-722-6247 L~ii [email protected] www.ldfonline.org PLANO ECONOMIC DEVELOPMENT ** Plano, Texas, located 19 miles north of Dallas, is home to 265,000 residents. It has a national reputation as one of the best places to live and work, with excellent schools, a low crime rate, and affordable homes. Plano offers incentives on a case-by-case basis to stimulate business attraction, retention, and expansion. SALLY BANE, Executive Director, Plano Economic Development 5601 Granite Parkway, Suite 310 Plano, TX 75024 972-208-8300 Fax: 972-208-8305 [email protected] www.planotexas.org (c) 2013 Halcyon Business Publications, Inc. |