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July 2010

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From Site Selection magazine, July 2010

Zones of Opportunity II

Creating jobs and economic growth is the goal of specialized areas around the U.S.

Insmall towns across the U.S., Main Street districts are frequentlydesignated as opportunity zones to receive special tax financing. Qualifying businesses often can operate tax free for 10 years or more by locating an operation inside the boundaries of the speical district.

conomic Development Zones go by many different names across the country, including Enterprise Zones (Virginia), Renaissance Zones (Michigan), Keystone Opportunity Zones (Pennsylvania), or Empowerment Zones (Federal Government). While names may vary, so also do the benefits to the corporate user.

Essentially, these zones serve a similar purpose wherever they exist. The primary purpose behind the specialized zones is to create areas of special economic opportunity for job creation in areas that are in greatest need of employment growth. Once established, these zones serve as a focal point for economic development due to the unique benefits that accompany them.

Attractive from a government prospective, these zones extend very aggressive incentive programs to targeted geographic areas in need of economic development. By extending more aggressive economic incentives to companies locating in these areas, governments can encourage higher levels of targeted growth in specific locations. Most important, the zone must be attractive to industry. This means it must have a good location and financial benefits that companies find beneficial.

Must Haves

What does it take to make a successful zone? Some things to look for include:

Usable Benefits

The benefits granted by the zone must be usable by a company immediately for the zone to be the most effective. Benefits such as real and personal property tax abatements, free or subsidized land or buildings, sales tax abatements, job creation grants or credits, infrastructure improvements, permit acceleration, and job training are most beneficial. Within the first three years when they need the benefits the most, benefits such as income tax abatements, or business tax abatements are not as desirable because, after relocation or expansion, a company may initially operate at a deficit, thereby receiving no benefit in the crucial early years of a new operation.

Clarity of Benefits

One of the most useful zones is the Michigan Renaissance Zone. What makes it desirable is the clarity of the benefits a corporation receives. By simply locating in the zone you receive 100-percent abatement for most taxes. This simplicity and clarity of benefits make it easy for executives to understand and take into consideration in making a location decision. When compared with zones with complicated formulas for benefits or benefits that must be applied for and negotiated, the Renaissance Zone is far more attractive to the decision maker because of the clarity of the benefits that will be received. Your state can have the best benefit package around for their zone, but if an executive cannot easily understand what they will receive, and predict the future value of the benefits then the value of the benefits is diminished.

Desirable Locations

Originally, when Economic Zones were first developed, they were designed to bring economic stimulus to blighted areas. Today, these zones have become far more useful and have adapted to a variety of situations for business attraction. Not all companies can or are willing to go into a blighted area. Such blighted economic development zones are often removed from contention for more high-end projects with higher wages and a greater chance of long-term success. Sometimes the location is so problematic relative to crime, infrastructure, transportation or employment accessibility that no amount of tax abatements will make the property a viable location for most companies. For larger communities it may be helpful to have some zones in blighted areas and others in more desirable locations. In the end the kind of jobs you wish to create can be determined by your zone's location.

Have Product to Sell

Ten years ago it was possible to take an executive to a farm field and tell them that this is your proposed site and that they just needed to buy it and improve it. This scenario plays out less and less frequently as economic development organizations and potential clients have become more sophisticated. Many communities and states now have site certification programs to progress the development of the property along as quickly as possible so that when potential opportunities come along they have the greatest chance of being able to handle the project. If your site is not ready for development and requires significant time to reach an equivalent level of development to the other sites being looked at, your site is at a significant disadvantage. That is why the property in an Economic Development Zone should be certified as ready for development to maximize the opportunity for success.

Floating Zones

The majority of Economic Development Zones are fixed locations with statutorily defined borders. The issue arises where the property within these boundaries does not adequately meet the location needs of the potential client. If the potential client needs a building and all you have is land, then your zone cannot come into play for the project — removing an important tool from your economic development arsenal. To counter this, states and community can use a hybrid system with some fixed locations and "floating zones" which are discretionary zones that can be located anywhere at the discretion of the economic development organization for special projects where existing zones may not work. By having a few floating zones you can counteract one of the major problems with zones, making them flexible and adaptable to the needs of the widest range of clients.

Flexible Time Limits for Zones

With some zones, benefits start the day the zone is established and end on a specific date. Thus, a company moving into an older zone may have a very limited time to take advantage of the zone's benefits. The best zones are those in which the time limit for benefits begins when a company moves into the zone, allowing the firm to receive a full term of benefits. By not having a floating activation date you have turned the zone into a depreciating asset, becoming less and less valuable to potential clients over time.

BrentPollinaBrent Pollina, vice president of Pollina Corporate Real Estate, Inc., represents corporations in all aspects of the companies' real estate transactions, including site and building evaluation, lease negotiations, purchase contracts, and lease administration. His responsibilities include real estate financial analysis. He also conducts location analysis studies, which include factors such as state and local taxation; labor availability, cost and reliability; transportation costs and utility costs. As part of the Pollina Corporate negotiating team, he is active in analyzing and negotiating state and local incentives on behalf of corporate clients. In 2008 Mr. Pollina became the primary author of the Pollina Corporate Top 10 Pro Business States Report. He is a member of the International Tenant Representative Alliance (ITRA) and a member of the International Association of Attorneys and Executives in Corporate Real Estate (AECRE).

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