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From Site Selection magazine, March 2011

Still Sweet Home

Tool maker, railroad player and the nation’s freight handler,
Chicago still lures them, high taxes or no.

This former Alcatel-Lucent complex in Lisle will now be home to Navistar’s corporate headquarters, after a series of deals were worked out to keep the 109-year-old company based in the state in which it was founded. Sunoco spinoff SunCoke also just announced its headquarters location in Lisle.
Photo courtesy of Alcatel-Lucent

t's the dead of winter. Where would you rather be: in Chicago with the wind biting off the Great Lakes and the snow piling up faster than Illinois taxes? Or in Atlanta, where there might be sun, and maybe lower taxes?

SunCoke Energy opted for Illinois when it recently chose a new home for its headquarters, abandoning Knoxville, Tenn., for Lisle, Ill., a western suburb of Chicago located at the junction of I-355 and I-88. SunCoke is the second major corporation to move into Lisle in the last six months. Navistar in December announced it is moving its headquarters from Warrenville, Ill., just a few minutes to the west, to take over a former Alcatel-Lucent facility in Lisle, already home to more than 750 businesses, including operations from corporations such as McCain Foods, Unilever and IKON.

Relocation Expenses

SunCoke did not confirm that the selection process came down to Atlanta and Lisle, but a Sept. 10, 2010, letter reveals the choice. That letter fromLynn Elsenhans, Sunoco's chairman, to Frederick "Fritz" Henderson, who will be chairman of SunCoke after the companies' planned separation, said Sunoco will pay for Henderson's relocation to either the Chicago area or Atlanta.

The letter is in Sunoco's 10-Q SEC filings for the third quarter ended Sept. 30, 2010. That report also shows that SunCoke's business is apparently very healthy. Revenue for the first nine months of 2010 was $1 billion, an increase of 24 percent over the same period in 2009. Net income rose 8.8 percent to $111 million.

SunCoke is being spun off because Sunoco is focusing on its core oil distribution business. The move also will enable SunCoke to better capture its market value as a publicly held company.

The decision to move to Lisle was announced Dec, 21, 2010, a few weeks before the Illinois legislature passed a bill to boost individual income tax rates to 5 percent from 3 percent, and corporate income tax to 9.5 percent from 7.3 percent. The Tax Foundation, a non-profit research organization, noted that the corporate income tax rate is the fourth highest in the United States.

Severe Impact On Business Case

The new rates — a 67 percent jump for individuals and 30 percent for corporations — are retroactive to January 1, 2011. The tax dropped Illinois to No. 23 in the Tax Foundation's State Business Tax Climate rankings, in the middle of the pack of neighboring states. Like many states, Illinois is loaded with debt and strapped for cash. It needs to raise billions — through taxes and apparently debt offerings — to handle its financial crisis.

"The enacted tax increases will severely impact Illinois's attractiveness to businesses and individuals," the Tax Foundation said in a release. The state's individual income tax, in particular, has been one of the best features of Illinois's tax system, helping mitigate a high sales tax and burdensome property tax."

It is not clear yet how severe the impact will be. Two other companies —St. Louis-based Becker Iron & Metal Inc. and Oregon-based Evraz Inc. — announced in January that they will move to Illinois.

The Case for Lisle

A SunCoke spokesman declined to go beyond the press release announcing the relocation to explain why Lisle was chosen. The release from Gov. Pat Quinn's office reported that SunCoke will invest $6.6 million to relocate to Arboretum Lakes in Lisle, and that the state will kick in $4.8 million. SunCoke will bring 105 new jobs to Lisle.

Mark Sweeney, a principal at McCallum Sweeney Consulting who helped SunCoke in the selection process, said that as a stand-alone publicly held company, the new SunCoke will need to hire skilled management, financial, international business development and technical staff that were not needed while it was part of a larger public company. That talent is not readily available in Knoxville.

With O'Hare Airport, Chicago also gives SunCoke the domestic and international air traffic hub that it will need to expand into new markets in Eastern Europe and Asia, Sweeney said. SunCoke already operates a major coke producing plant in Brazil.

He has seen no indication that SunCoke will change its mind about moving to Illinois because of the new taxes, Sweeney said. "While the specific tax change was not known at the time of the decision, the fiscal challenges in Illinois were known and accounted for."

Lisle is also close to many of SunCoke's major customers in the Midwest, Sweeney said. The company already has a manufacturing facility in Granite, Ill., and plans to open a major plant later this year in Middletown, Ohio.

"It is a pretty good time to be looking," Sweeney said. "It is definitely a good time for our clients. It is going to take a little while for the commercial real estate market to recover."

Harold Dembo, a real estate lawyer in Chicago, seconds Sweeney's observation that shoppers are in a good position. Various types of investment allowances, tax abatements, and the deals available to large tenants make it an attractive time to relocate, he said. A Chicago booster, Dembo concedes rents are often lower in the suburbs, but adds that the choice between a city and a suburb is a matter of lifestyle.

Kail Padgitt, an economist with the Tax Foundation and one of the authors of the study on Illinois' tax increase, noted that in addition to taxes, businesses also have to consider the available talent pool, the cost of energy, proximity to their markets and business relationships.

State Budget Gaps

Still, Illinois and California have two of the largest deficit and tax structure problems of all states, says Padgitt, who is also preparing a report on Georgia.

The Center on Budget and Policy Priorities (CBPP), another Washington think tank, says that Illinois faces a 40.4-percent budget gap in 2011, while Georgia's is 25.4 percent.

Whatever the clouds over the deficits, companies are moving into Illinois. Almost the same day the tax increases were enacted, January 21, Gov. Quinn said that Becker Iron & Metal, a fourth-generation family-owned St. Louis scrap metal recycler, is packing up to come to Venice, Ill. The day before, Jan. 20, he disclosed that Evraz, a steel producer, is leaving Portland, Ore., for Chicago.

(Missouri's 2011 budget gap is 14.4 percent while Oregon's is 25 percent, according to CBPP.)

"We look forward to opening our headquarters in Illinois," said Mike Rehwinkel, Evraz North American president and CEO. "Chicago is a financial and manufacturing hub with easy travel access to both our mills and customers, making it an ideal location for our North American headquarters."

Navistar Still Parked in Chicago Area

As for Navistar, it looked at several options before settling on Lisle, where the company bought an 87-acre (35-hectare) site with 1.2 million sq. ft. (111,480 sq. m.) of office space from Alcatel-Lucent, which is shedding unused manufacturing and research facilities. (Another major potential project from Coda Automotive may locate in an Alcatel-Lucent facility in Columbus, Ohio, pending federal support.)

Navistar plans to invest $110 million. The State of Illinois came in with an attractive incentive package of $65 million.

The project originally was on the books as early at 2009, but the company had postponed the move in May 2010 and threatened to leave the state altogether after neighbors had opposed the presence of an engine testing facility in the complex. According to a report in the Chicago Tribune, the company began to consider relocating to South Carolina, Alabama or Texas. But a compromise was brokered by state and local leaders.

Navistar will invest $110 million in the Lisle headquarters, which will include executive offices, business operations and product development. Core features of the research and testing center once envisioned for the Lisle campus will instead become part of a $90-million investment, announced in October 2010, at an existing engine plant in Melrose Park, a closer-in Chicago-area community in Cook County.

Constructed in 1941, the Melrose Park facility originally was operated by Buick to build engines for the B-24 Liberator bomber. In 1946, Navistar's precursor, International Harvester, purchased the plant to build construction equipment and engines. Currently, the facility is home to Navistar's Engine Group headquarters, I-6 engine manufacturing operations and powertrain product development.

Cook County Board President Todd Stroger and the Cook County Board of Commissioners unanimously approved issuance of $90 million in recovery zone facility revenue bonds to provide Navistar with access to cost-effective financing to support improvements at the Melrose Park facility. The bonds were issued at the same time as $135 million of recovery zone facility revenue bonds issued by the Illinois Finance Authority (IFA) for the purpose of financing Navistar's Lisle facility and Joliet Parts Distribution Center. The IFA recovery zone bonds pooled volume cap allocations from several sources across Illinois.

"With so many older manufacturing plants shutting down across the country, Navistar sees an opportunity to leverage our assets and reinvest in an existing facility to enable our growth as a company," said Navistar Chief Information Officer Don Sharp, the project leader for the company's local development efforts. "This investment solidifies our partnership with the UAW, our commitment to Melrose Park and the state of Illinois, where we've built a reputation as a good neighbor and trusted business partner. We're here to stay."

The company has been headquartered in the Chicago area since its founding in 1902, moving to the NBC Tower downtown in 1989, and then relocating to Warrenville in phases between 1999 and 2001.

Daniel C. Ustian, Navistar chairman, president and CEO, credited Illinois Gov. Pat Quinn and Attorney General Lisa Madigan with clearing a path for the company to retain or create nearly 3,000 permanent jobs between the Lisle and Melrose Park campuses over the next several years, along with more than 600 construction jobs. Quinn was behind a law signed in June 2010 that expanded the Economic Development for a Growing Economy (EDGE) tax credit, specifically aimed at Navistar.

"Navistar knows that there is no better place to expand its operations than Illinois, and we tailored a targeted investment package to meet the company's needs and keep thousands of people working," Quinn said.

Story in Pictures

Frederick “Fritz” Henderson, chairman of SunCoke, is one of 105 SunCoke employees who will move into the newly spun-off company’s new headquarters in Lisle.
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