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Mention the word "incentives" in relation to retail development and you'll get a lot of comments. The feedback will range from hugely positive to overpoweringly critical.
By definition, a public incentive is a financial, tax or non-financial inducement used by local governments or states to influence business location decisions by enhancing the inherent advantages of a particular site.
This article isn't jumping into the debate over the merits or drawbacks of incentives. Instead, it will briefly illustrate how municipalities are using incentives and explain how incentives can be used wisely.
First, a bit of history. Traditionally, retail locations were thought to not need incentives. The prevailing wisdom was "if you have rooftops, retail will come." This thinking has changed as attracting retail has become more competitive. Also, cities are increasingly aware that incentives can be used to overcome location disadvantages, particularly in geographic areas that are underserved or have not reached critical mass.
My personal observation shows that four financial and tax incentives are most commonly used for retail recruitment.
Tax abatements. This is by far the most
popular incentive with both municipalities and retailers.
Tax abatements started as the elimination or reduction in
property taxes for a specified period of time. Now, some state
laws also allow the abatement of sales taxes as incentives.
Assistance with infrastructure. The next
most common incentive is to help developers pay for infrastructure
enhancements including streets, sewers, lighting and utilities.
A common approach is for the city to create a TIF (tax increment
financing) district, for which bonds are issued to finance
the project. The bonds are retired using future tax dollars
generated by the project.
Facade improvements for existing developments.
Cities often help retailers defer the cost of fixing up the
facade, but generally not the interior, of redeveloped properties.
One example occurred with the facade improvement of a strip
mall in Mesa, Ariz. The city provided almost $153,000 of the
cost of improving the facade from an outdated 1950s box to
an updated Spanish-style exterior.
Sales tax rebates. These differ from sales
tax abatements in that the sales tax is actually collected
by the retailer, but is then partially returned as a rebate.
The City of Denton, Texas, offered this type of incentive
for a new shopping center development. The developer invested
$8 million in the infrastructure for the project. To help
offset that investment, the city rebated 1/2 cent sales tax
from the center's tenants for 15 years or until $7.25 million
was recovered.
Cities can also offer some non-financial, but still powerful,
incentives.
These days, many municipalities offer some form of site
location assistance or site databases. For instance,
if you visit the Web site for Auburn, Neb., you'll learn that
this Midwestern community provides information about local
prospect-ready sites through its Auburn Development Committee.
Another non-financial incentive includes proving
detailed customer demographics and buying habits
to developers and retailers. With this incentive, a municipality
commissions a retail-oriented study that specifies the specific
market segments in the community. These studies are used as
marketing tools for the community and as cost-saving measures
for the retailers.
A guarantee for timely permitting and other ways of eliminating
red tape can be an appreciated incentive to developers.
Knowing that their project will proceed without holdups can
greatly motivate builders and investors.
To be effective, incentives must be used wisely. Incentives
cannot make a bad site good. They can, however, help make
a site more competitive. It's crucial to understand that the
project always drives the incentives; the incentives shouldn't
drive the project.
Any consideration of offering incentives should be put through
a cost-benefit analysis. A project that has a high benefit
to the community is more valuable and should receive more
benefits than one with a lower value. What's valuable to each
community will differ. For instance, an area in need of grocery
stores might be more generous with incentives to that type
of retailer than other kinds of businesses.
To maximize the use of incentives, follow these guidelines:
- Incentives policies should be part of the community's
economic development strategy. Incentives are not a stand-alone
program but should be an integral part of a long-term
strategy.
- Always negotiate incentives with the company to get
the best benefit for the city.
- And finally, make incentives part of a binding contract
that include penalties and non-payment for non-performance.
Incentives, to be effective, should be considered an investment
for the community.
This retail focus has been wildly successful. One year after
the study, Perris has close to 3 million square feet of retail
projects in varied stages of development. McDermott, who worked
closely with Buxton, said the CommunityID project went smoothly.
"It went very well," he says. "Buxton provided the city with
an additional and powerful tool. As I speak to the various
developers and retailers, the study serves to lend credence
to the city's ability to successfully support major retail
development"
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Manage Incentives to Drive Retail Growth 
