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Financial Advantages of Gain-Sharing Partnerships

By Bill R. Shelton, CEcD

In the site selection process, the traditional role that a community played involved reducing the barriers to development. Incentives in this process were provided by communities to businesses to negate any location disadvantages that might be viewed as fatal flaws.

But today, business incentives have evolved and are not just used to overcome barriers; rather, incentives are an important component of most communities’ economic development processes. They serve a dual function in a community’s business development process—first, as a marketing tool to increase prospect activity, and second, as a sales tool to close a deal.

Incentives are also a discretionary tool available to civic leaders to demonstrate that the community has a proactive business climate. However, there is also a political risk perceived for not effectively using incentives to win new jobs and attract investment.

Business demands for incentives have also evolved. Today, incentives are part of checklists used by location—decision makers to be considered along with standard location factors, such as availability, utility, and transportation costs.

Competition requires companies and developers to continuously seek competitive advantages, and incentives provide a tangible benefit that can reduce not only initial capital costs, but also relocation and startup costs. More and more companies and developers are asking communities for large, upfront incentive packages.

A gain-sharing partnership is simple enough in concept. The agreement makes the company and the community financial partners. The community is not at risk since the company’s or developer’s incentives are generated by the company or development’s growth.

Typically, bonds are issued for construction, land acquisition, and infrastructure improvements—the company guarantees the bonds and often also purchases the bonds. They are retired from tax increases generated and collected from the project. The gains are shared by the community and the company and the community is not a risk.

For the company or developer, gain-sharing has the advantage of upfront cash. For the community, it does not mean an immediate payment burden, but one that is stretched out over the life of the bonds. This partnership between the private and public sectors is a flexible solution that tends to satisfy the needs of both partners. 

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Journey Awareness Persona Economic Development/Elected Official City Government