hen Sun Rich Fresh Foods recently located a new food processing facility in a Keystone Opportunity Zone (KOZ) in Reading, Pa., among the major draws to this site were its proximity to customer markets in the Eastern U.S., the available pool and cost of labor, and the water/wastewater infrastructure. The 43,000-sq.-ft. (3,995-sq.-m.) plant, located on a formerly blighted site in Reading, currently employs about 100 people, with plans to eventually employ about 240 within the next three years.
Sun Rich Fresh Foods also operates state-of-the-art processing facilities in Vancouver, Los Angeles, and Toronto.
According to Michelle Comerford of Cleveland-based Austin Consulting, which handled the site selection process for Sun Rich Fresh Foods, the KOZ benefits related to tax abatements came into play during evaluation of the short-list of finalist locations in Reading and other communities.
“The combination of the operational factors and the KOZ benefits at the Reading site certainly helped make the decision pretty easy,” says Comerford.
Pennsylvania’s Keystone Opportunity Zones are just one of many “Zones of Opportunity” programs designed to entice job-producing investment to locations needing an economic “shot in the arm.” While they go by various names, such as Enterprise Zones or Empire Zones (in New York), all are designed to attract business investment and jobs to economically distressed areas.
Enterprise Zones are specific geographic areas that are targeted for economic revitalization. More than half of the states have formal enterprise zone programs, and most of the rest have some sort of similar program designed to attract businesses into economically downtrodden areas through the use of various tax incentives.
New York State’s Empire Zone program was created to stimulate economic growth through a variety of State tax incentives designed to attract new businesses to the state, as well as to enable existing businesses to expand and create more jobs. According to Empire State Development, the state’s economic development agency, in order to qualify for certification, a business must be able to demonstrate that it will create new jobs and/or make investments in the empire zone and be consistent with the local zone’s development plan, including a cost-benefit analysis.
According to the Pennsylvania Department of Community and Economic Development, there are 12 Keystone Opportunity Zone regions located throughout the state which offer developable sites with greatly reduced, or occasionally eliminated, state and local taxes. KOZs are no larger than 5,000 acres (2,024 hectares) and can have up to 20 subzones. In turn, subzones must be at least 10 acres in rural areas, or 20 acres in urban areas.
Community Redevelopment Agency (CRA) Districts are generally charged with eliminating slums and blight within the designated district. A CRA usually does not have the authority to levy taxes, but rather uses a portion of existing city and county taxes collected in the CRA District to fund its revitalization efforts.
Tax Increment Financing (TIF) Districts provide municipal governments with a way to finance current infrastructure improvements and redevelopment based on future revenue generated as a result of those improvements. This is done by using the incremental tax gains created by the TIF investment to help pay off the bonds issued to initially finance the project. A TIF District is created, usually for 20 years, to administer each project. Every state except Arizona has legislation enabling tax increment financing.
These are just a few of the dozens of different “opportunity zone” programs that states and municipalities offer to attract, and retain, businesses and the jobs and tax base they create.
The main reason for a business to consider an opportunity zone is the fact that the tax incentives they offer will help you offset some of the costs you will run up in establishing a new facility.
“The most important advantage always relates to some type of tax relief,” says Buzz Canup, president of Canup & Associates, an Austin-based site location firm whose clients have included Honda, Nucor, Michelin and Hewlett-Packard. “Many zones offer 100 percent tax relief for specific periods of times, usually about 10 years. I’ve seen zones that exempted property taxes and state corporate taxes, as well as franchise taxes and sales taxes.”
Another major advantage is frequently the availability of a low-cost work force. However, that could cut both ways, since it also often means a low-skilled work force, too.
“Many Enterprise Zones area located in areas of high unemployment, which can be an advantage or a disadvantage,” says Comerford. “If a company requires a highly skilled work force, the pool of labor available near an Enterprise Zone may not possess the required skills, so training costs and other labor issues may outweigh the benefits of the tax abatement or reduction.”
Still, these areas offer an attractive opportunity for companies that can make the work force piece of the puzzle work for them.
“Our firm has established projects in Pennsylvania’s Keystone Opportunity Zones, as well as in New York State’s Empire Zones,” says Mike Mullis, president and CEO of JM Mullis, Inc., a Memphis-based site location consulting firm. “We used the benefits offered by both of those zones after we had selected the best overall communities for the respective projects.”
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“When the abatements run out, the company must be sure that it will still be located in a place that offers a competitive operating cost environment for things like transportation, labor and utilities.”
– Michelle Comerford
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Locating a facility in an enterprise or opportunity zone is not without risk, most of which is directly related to the reasons why the geographical regions were given such designations to begin with.
“Typically, these are depressed regions, with high unemployment, low skilled work force, poor economic environment, few existing businesses and industry, and are often brownfield sites,” says Canup. “These zones are typically not very attractive from a visual perspective and from a work force development perspective. Also, it takes a lot more effort to start up an operation in one of these zones than in many other locations.”
Even cashing in on the tax incentives can be time-consuming.
“Depending on which of the zones one may be evaluating, some offer tax abatements – that is, you do not have to pay for that tax year, but you do have to report what your tax liability would have been – while other locations offer tax rebates,” said Canup. “In the latter locations, you have to pay the tax when it is due, and subsequently apply for a rebate. That takes a tremendous amount of time and energy, and exposes the company to the ‘cost of money’ while waiting on the rebate.”
In the final analysis, it comes down to striking a balance between the enticing lure of tax incentives with the extra challenges your business might face in locating in that particular site.
“Since most are by intention in distressed areas, the infrastructure, work force and other aspects of the business environment may not be the same as in other areas, so financial advantages may be overcome by the need for additional investment to counteract the shortcomings,” says Kate McEnroe, president of Kate McEnroe Consulting, an Atlanta-based site location consulting firm. “This is especially true in areas where it is a requirement to hire residents of the area in order to qualify for benefits. If they do not have the required skills, the company may spend more money training them than it saves on benefits.”
When all is said and done, it’s still a business decision.
“Tax abatements are for a period of time only, so a location has to also make operational sense for a company,” says Comerford. “When the abatements run out, the company must be sure that it will still be located in a place that offers a competitive operating cost environment for things like transportation, labor, and utilities.”
— Bill King was the editor-in-chief of Expansion Management for almost 15 years. As of June 30, he is the new president and CEO of the Nacogdoches (Texas) Economic Development Corp.