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Best Practices in Developing Investment-Oriented Incentives By Swati Ghosh and Patrick McHugh, International Economic Development Council

This paper highlights good practices in incentive policy and practice, modes of implementation, and the positive impact of incentive deals in business development, particularly in redeveloping blighted areas. It is adapted from a memo originally developed for an IEDC Advisory Services client who was exploring how to structure local incentives in order to spur private investment and deliver the best return for the community. It

The first section of this memo reviews incentives as a core component of most economic development strategies around the country. Second, the memo outlines how incentives play an important role in bolstering local competitiveness. The third section outlines two distinct approaches to providing business incentives and provides detailed information on the different types of incentives within each of these approaches. Finally, the memo provides case studies regarding effective investment-oriented incentive tools.

Introduction

Incentives are a central component of most economic development programs throughout the United States. They can help make a community more competitive in the dynamic global marketplace. An incentive is anything that local governments and economic development organizations (EDOs) do to make their communities more attractive and encourage private sector investment. These tools and programs are wide-ranging and can include tax abatements, tailored workforce training programs, investments in infrastructure or research capacity, and streamlined public services and permitting processes. Although incentives have traditionally come in the form of tax breaks or direct grants used to lure companies, very few communities can afford to offer such inducements in current times. Incentives now include a much wider range of programs and agreements than critics often acknowledge.

A large number of modern incentives can be categorized as investment-oriented incentives. These are programs and activities that improve communities’ fundamental competitiveness in the long run while also addressing the more immediate concerns that a firm might have prior to investing in the community. Instead of simply providing tax breaks or grants to specific private firms, an investment- oriented approach seeks to address specific firms’ needs by investing in the community’s human, physical, and institutional assets. Thus, even if the recipient of an incentive closes its local operations, the investment stays in the community and enhances the community’s ability to attract and grow replacement firms.

An investment-oriented approach to incentive practice can aid in fostering a 21st century workforce, strengthening transportation and logistics infrastructure, making city services more efficient, improving

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research and development capacity, and improving quality of life amenities. The Importance of Incentives to Local Competitiveness

Business incentives are a means to target and foster economic development1 and can help communities overcome developmental challenges that may exist in relation to a specific site (e.g. accessibility or infrastructure challenges), neighborhood (e.g. high crime neighborhoods), or the entire city itself (e.g. perception or image issues). They are also offered to direct investment to targeted areas within a community that may have experienced disinvestment in the past. In terms of the private sector, incentives help to mitigate risks associated with investment in some communities. Incentives continue to be important to maintain the attractiveness of the community. Communities that are not prepared to offer any type of attraction incentives risk losing deals to those that will. The main reasons for offering incentives are discussed in more detail below.

Incentives Are More than Corporate Tax Breaks

The term “incentives” captures much more than just tax breaks or direct financial inducements. Considered broadly, incentives include almost everything that local governments do to make communities livable and economically viable. Good roads, safe streets, quality schools, attractive streetscape, appropriate utility infrastructure, public parks, and reasonable taxes can all make a community an attractive place to do business. In many cases a company has specific needs that must be addressed beyond tax breaks or financial grants. For example, a company may need additional transportation infrastructure, or a reliable source of trained workers, before it can be comfortable investing in a particular locality. In other cases, the community may need to address onerous permitting and licensing processes within city government in order to attract timely investment into specific target areas. Such “incentives” are essentially investment in the community itself. As will be seen below in case studies on Emeryville, California and Baltimore, Maryland, a great many local governmental efforts can help to cultivate a business-friendly environment and, as such, should be seen as part of a holistic approach to incenting business activity.

Incentives Mitigate a Variety of Business Risks

Incentives can be important in localities that have a combination of distinct competitive advantages and disadvantages. They also can help to mitigate the inherent risks of operating in a disaster-prone community or an area with significant blight and disinvestment. Particularly in the post-recession economic environment, businesses have become extremely concerned about limiting their risk profile. In an increasingly dynamic and interdependent business environment, business models are being designed to better survive the unexpected. In this context, incentives can play an important role in reducing the risks businesses incur by investing in a particular locality.

Development Risk in Blighted Areas

1 IEDC, 2006. Economic Development Marketing and Attraction Manual, p. 93.

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Improving a city’s permitting process, or funding new and improved infrastructure, are legitimate uses of public funds. This is particularly true in blighted areas. As noted in the case of Emeryville, public dollars in the form of tax increment financing (TIF) were used to fund horizontal infrastructure (improved capacity for water, sewage and telecommunications, and new roads) and encourage private- sector investment in vertical buildings. These public investments, coupled with a new one-stop shop for permitting, effectively attracted a large number of businesses to invest in previously blighted parts of Emeryville. Assuring developers and business executives that they would receive necessary building permits quickly—so long they followed the city’s permitting rules—reduced their cost of doing business and encouraged them to invest in the city.

Disaster Risk

Here again, incentives need not always come in the form of direct financial grants or tax abatements. For example, having a well-established disaster response plan with predetermined forms of business assistance can give businesses confidence that a community is ready to address the unique needs that can accompany a major disaster. In the immediate aftermath of Hurricane Katrina, for example, the Jefferson Parish Economic Development Commission (JEDCO) played a vital role in keeping businesses informed about what was happening and helping businesses to secure the financing they needed to survive the crisis.

Incentives Play a Role in the Site Selection Process

The early stages of a site selection search are dominated by factors that emerge from a company’s fundamental business plan (e.g. distance to targeted markets, existence of competitor firms, availability of raw materials and suppliers, access to chosen modes of transportation, price of electricity, and availability of suitable plant facilities). If a company needs immediate access to a deepwater port, for example, no amount of incentives will make a landlocked community viable for business. Often a community is only notified that it is being considered once the list of potential sites has been narrowed to a handful of locations. In this phase of the process, incentives can play a major role in determining a company’s decision on where to locate. As a general rule, there is no perfect location; every community on a shortlist has its advantages and disadvantages relative to the other finalist communities. In this context, incentives can tip the balance between one community and another. A community that can offer incentives to address a particular deficiency, like inadequate transportation infrastructure, will have an advantage on another community that cannot address its specific shortcomings.

Incentives Signal a Business-Friendly Environment

While incentives are usually a late-phase site selection criterion, there is one major exception: some companies make the availability of incentives a requirement for a community to be included on their short-list of potential sites. On the surface, this practice clearly indicates that many firms will not consider communities that refuse to offer incentives. At a deeper level, however, this reflects the fact that many firms view the availability of incentives as an indicator of whether communities are sensitive to the needs of business. Even if incentives are not the primary factor driving the site selection process, the community’s willingness to negotiate with potential employers is often taken as a sign that the local

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government is proactive in its approach to satisfying business needs. Two Approaches to Incentives

Two distinct approaches exist for providing incentives for business attraction: direct financial incentives and investment-oriented incentives.

The Old Way: Direct Financial Incentives

Common types of direct financial incentives include tax exemptions, accelerated depreciation, tax abatements, and direct grants.2 These types of incentives directly reduce the cost of doing business by lowering tax burdens and/or providing direct financial transfers. The rationale behind these practices is that foregoing tax revenue or providing grants will allow a locality to increase the taxable foundation of its economy and provide job opportunities for residents.

For many years, such direct financial incentives dominated the economic development landscape. While the use of tax exemptions, abatements, and direct grants go back much further, they became commonplace during the 1970s and 1980s.

Direct financial incentives face several challenges in the modern context. As communities become more sensitive to these issues, strong protection mechanisms that utilize direct financial incentives to safeguard community interests are built into the deals. Listed below are the challenges facing direct financial incentives and corresponding safeguards.

• Many traditional incentive deals have not produced the job or tax-base growth anticipated. In

some cases, incentivized companies have failed to match their promised growth rate, have relocated within only a few years, or went out of business entirely. These dangers can be mitigated with the use of claw-back provisions stipulating that incentivized firms must repay the abated taxes or grants should they fail to deliver set job creation or investment levels.

• Traditional financial incentive programs were typically designed to only target potential attraction candidates and were not available to existing local firms. In the worst cases, this gave a new company a competitive advantage over companies that were already pillars of the community. Even when this was not the case, existing local firms often resented the special treatment that new arrivals received and started courting other communities that were willing to offer them an incentive to relocate. In recognition of this dilemma, many communities opened traditional incentive programs to existing local businesses. While this addresses the question of equity between firms, it raises the potential that firms with no real intent of moving elsewhere threaten to do so in order to extract tax concessions.

• Some traditional incentive policies do a poor job of measuring the total costs and benefits of each proposed deal. Attracting new firms can create jobs and increase the tax base; but, if the attending costs of development exceed the benefits, the community may be no better off. A poorly structured tax incentive can result in a new private company consuming more in local

2 Ibid, p. 95-96.

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services (e.g. road, fire, police, sewer, etc.) than it pays in taxes. • Lastly, communities have found that the new jobs being incentivized are often awarded to

newly arrived residents or workers commuting from nearby communities. In these cases, incentives create more aggregate jobs without improving the lot of long-term residents. This is particularly likely when the new jobs require different skill sets, levels of education, or experience than is available within the local labor force. As one of the essential purposes of incentives—and local economic development for that matter—is to create economic opportunities for people living in a community, incentivizing jobs for new residents can undermine the whole purpose of the enterprise.

Emerging Best Practice: Investment-Oriented Incentives

Many communities are reevaluating how they structure incentives for attraction deals. Instead of providing tax relief or direct monetary inducements, incentives are increasingly being used to build assets that have value for the entire community. An investment-oriented approach to incentives hinges on finding the places where community and company needs intersect. Put another way, the challenge is to find where investments can be made that improve the competitiveness of both the company being courted and the broader community.

Leading investment-oriented incentives are:

• Indirect financial incentives like streamlined permitting, job training, infrastructure

improvements, technical assistance, and investments in research and development capacity; and,

• Special incentives such as tax increment financing, empowerment communities, and special improvement districts.3

Each of these types of incentives makes a community more competitive in different ways. They are discussed in detail below.

Indirect Financial Incentives

Broadly speaking, indirect financial incentives include community programs or investments that decrease the cost and/or risk of operating a business. Indirect incentives can include transportation and logistics investments, workforce training programs, and efficient permitting processes, among others. While the public debate over economic development incentives tends to focus on tax abatements, indirect financial incentives are essential to the competitiveness of a region. Because most of these types of incentives involve investments that benefit more than just a single attraction candidate, they are more likely to improve the long-term economic competitiveness of a region than just awarding tax abatements to a single company.

The types of indirect financial incentives outlined below often figure more prominently in site selection searches than tax abatements or direct financial incentives. While tax incentives are more often

3 Ibid.

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considered at the end of the site selection process, many of the factors discussed below determine which communities make the short list and which are deemed uncompetitive from the get-go. A company that needs access to particular types of transportation infrastructure, or must find workers with specific skills, will not locate in a community that lacks these assets, regardless of how much tax relief a community is willing to offer. Indirect financial incentives can change the core competitiveness of a community, while tax abatements can only make a difference at the margins.

Workforce Training Programs

Access to skilled and talented workers is becoming increasingly important in many industries. Even sectors, like manufacturing, that used to thrive with minimal workforce skills are now reliant on workers with advanced abilities. Moreover, as the pace of innovation and technological change accelerates in many sectors, workers must continually upgrade their skills throughout their careers. All of this has made workforce capacity a vital site selection criterion for companies.

As a result, companies are increasingly basing their location decisions on the quality of workforce training systems. In response to this increasing demand, many communities have realized that they need robust and responsive workforce training systems to lure and retain companies.

For example, Louisiana Economic Development (LED) instituted Louisiana FastStart, a program designed to provide rapid response training to meet the needs of specific attraction candidates. FastStart has proven vital to several attraction deals and has been named the best workforce training program in the United States by Business Facilities.

Workforce training programs are a prime example of incentives that, while vital to specific attraction deals, can also create broader benefits for the community. Effective workforce training programs can benefit both attraction candidates and resident firms. Moreover, workforce training programs provide direct tangible benefits to workers and allow them to upgrade their skills as market demands change. Whereas incentives are often critiqued for assisting specific firms without doing much to help the rest of a community’s residents and businesses, workforce investments can create value for both specific firms and the broader local economy.

Streamlined Permitting Processes

Streamlining the planning and permitting processes of a community is more than a question of convenience. Prolonged processing increases the cost of development and decreases the ability of firms to respond to rapidly changing market realities. Particularly for larger developments, protracted permitting and planning review can add significant costs to the project. Beyond increased direct costs, slow-moving permitting systems can decrease the agility of companies that are under intensely dynamic competitive pressures. All of this means that streamlining permitting processes can make a community much more attractive to companies looking for a location to operate. As reviewed in the case study below, Emeryville, California has made itself into an attractive destination for investment, in part, because it has made permitting and planning processes more efficient and transparent. Once again, this type of incentive does not involve direct transfer of public funds, but it does constitute significant cost

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savings to private enterprises.

Quality of Life Investments

As talented workers have become increasingly mobile, quality of life has become an increasingly important site selection criterion. Companies whose long-term viability relies on attracting and retaining talented workers evaluate a community based on whether the workers that they need will be willing to relocate there.

Infrastructure Improvements

Along with workforce capacity, transportation and logistics infrastructure is also becoming increasingly important to business location decisions. As the price of energy increases, and a product’s speed to market becomes more important, a community’s ability to connect efficiently with global transportation and logistics systems has a larger bearing on its competitive position. Once again, this is an example of incentive practice that, while vital to attracting specific companies, improves communities’ competitive footing more broadly. Baltimore’s investment in the redevelopment of its downtown and the Inner Harbor area continue to attract businesses to the city decades after those projects were undertaken.

Special Incentives

Many communities use special tools to spur private investment in projects with specified community benefits. Some tools aim to save buildings or areas of historical importance, redevelop blighted properties, or drive investment in disadvantaged neighborhoods.

The most common form of special incentive is Tax Increment Financing (TIF). In many cases, TIF funds have been used to build the types of indirect financial incentives outlined in the previous section. The Emeryville case study below is a good example of how a TIF policy can be used to revitalize previously blighted industrial space. Emeryville judiciously invested its TIF funds to make the community more competitive in the long run by expanding public infrastructure, driving private investment, and improving the community’s quality of life.

Case Studies

This section provides several case studies on investment-oriented incentive practices. These examples reflect different local contexts and different types of specific incentive packages, but they all reflect the trend toward incentive deals that go beyond tax breaks or financial grants. In each case, the incentives benefited specific companies but also bolstered the general competitiveness of the communities in question.

Case I: Using Public Incentives to Redevelop Baltimore, Maryland

Overview

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Serving as one of the major mid-Atlantic port cities along the east coast, the City of Baltimore with a population of 620,961 (2010) is situated just one hour north of Washington, D.C. along the arm of the Chesapeake Bay. Historically, Baltimore’s central location and natural harbor enabled it to develop as a major industrial town with an economic base focused on steel processing, shipping, auto manufacturing, and transportation. Prominent Baltimore families, and successful business owners such as Johns Hopkins, George Peabody, and Joseph Meyerhoff, generously donated a portion of their fortunes to the city. Their legacies included a number of important institutions of higher learning and culture, including Johns Hopkins Hospital and School of Medicine, the Peabody Institute, and the Joseph Meyerhoff Symphony Hall.

Starting in the 1800s, Baltimore’s seaport served as the city’s main hub for commercial and industrial activity, particularly in shipbuilding, which developed in an area called Fells Point. Despite a great fire in 1904 that destroyed much of the downtown commercial buildings, the city redeveloped its downtown infrastructure in only a few years with significant planning and cooperation between the public and private sectors. The demand for shipbuilding and steel production during World War II led to a surge in Baltimore’s population growth, which peaked in the early 1950s at over 950,000 (the sixth most populous American city at the time). Bethlehem Steel alone employed roughly 35,000 workers in Baltimore.

Despite significant economic disinvestment that accelerated in the 1970s and 1980s, Baltimore is serving as a comeback city and is transitioning from a manufacturing-dependent economy to one that has diversified into health and professional services. It has done so by turning to the city’s core advantages—such as the concentration of 14 universities and institutions of higher learning located in the city—and by attracting new investment into the city by leveraging both public and private sector sources.

Impact of Deindustrialization and Suburbanization

Baltimore’s prosperity reached its height in the early 1950s, but it soon began a gradual decline due largely to several major trends: 1) suburbanization, 2) the loss of manufacturing to attractive locations in the South, and 3) the failure to compete globally. As many Baltimoreans (including thousands of highly paid union workers) were able to accumulate wealth, many resettled in the nearby suburbs, including areas of Baltimore County. With white, middle-class resettlement in the suburbs, African Americans— and to a lesser extent European immigrants—increasingly populated the city. While the city’s prosperity was historically connected with the steel industry, foreign countries like Germany and Japan began exporting steel more efficiently and were able to capture much of the market that had been previously dominated by the United States.

The cumulative effect of these factors led to the city’s shrinking tax base, significant industrial and commercial dislocation, and increasing racial segregation and tension. By the 1980s, Baltimore served as a post-industrial “Rust Belt” city that had lost approximately a third of its population and three quarters of its manufacturing base.

The City's Redevelopment Efforts

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1. Forming Critical Public-Private Partnerships for Redevelopment

By the 1950s, the city's local business community had become increasingly concerned about Baltimore's ability to stimulate downtown commercial and retail activity. Downtown property values were at a 10-year low in 1954, the city's tax base was beginning to shrink, and the downtown retail sector was losing business to the suburbs. In addition, the loss of much of the commercial activity associated with the city's port to other cities along the East Coast (including Norfolk) left over two million square feet of vacant warehouse space downtown. Potential developers were faced with the risk of investing in an area that was in economic decline, but they also faced additional risk associated with redeveloping abandoned property that could potentially require significant site cleanup, preparation, and land assembly.

Establishment of New Public-Private Partnership: The Greater Baltimore Committee

Executives from the city's main banking institutions were among the strongest advocates for downtown redevelopment. Early support for a major initiative was also present among members of the city's Retail Merchants Association, which concluded that merchants themselves could not stimulate a retail turnaround. The Greater Baltimore Committee (GBC) was formed in 1955, as an “action committee” comprised of the city's major private business leaders, in order to improve the business environment of downtown Baltimore. Initially, the Planning Council of the GBC was given the responsibility of preparing a plan that would revitalize the entire 300-acre central business district of the city. However, the scale was reduced to a single 33-acre project that was considered to be significant enough to stimulate commercial activity, yet small enough to be completed relatively quickly. Emphasis was placed on organization, planning, and expedience in putting land back into productive use for the benefit of the city and its commercial interests.

Creating a Catalyst for Downtown Development: Charles Center

The plan developed by the GBC’s Planning Council was submitted to the Baltimore Urban Renewal and Housing Authority (BURHA),4 which endorsed the plan after analyzing its feasibility. Mayor Thomas D'Alesandro embraced the plan, and the Baltimore City Council officially adopted the urban renewal ordinance in 1958. The city provided two local incentives that both public and private entities deemed essential in order to implement the project: (1) the city worked to assemble large parcels of contiguous land based on the city’s use of the power of eminent domain, and (2) the city issued a $25 million bond to provide the necessary working capital for land acquisition and preparation.

Located in the heart of downtown, the Charles Center project included a $20 million federal building and $85 million in private sector investment for offices, hotels, and residential space. Ground broke

4 The Baltimore Urban Renewal & Housing Authority (BURHA) was a city agency established in 1956 (previously known as the Baltimore Redevelopment Commission) to acquire properties, relocate residents, and condemn existing structures and blighted areas for redevelopment, The agency was also tasked with planning new neighborhoods, coordinating community involvement, and code enforcement in those areas.

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for the first building in 1959, and within four years a total of four buildings were either completed or under construction, while several more were in the planning phase. The private sector investment featured more than 2 million square feet of rentable office space, 700 apartment units, 700 hotel rooms, an 1,800-seat theater, and over 400,000 square feet of retail space. The rapid, visible progress of the project helped to build confidence in public-private partnerships and the viability of the downtown redevelopment effort.

The early success of the Charles Center development (which required the city's assistance in land assembly and site preparation) created momentum that served to encourage the use of public incentives for the implementation of the 30-year redevelopment strategy for the Inner Harbor (discussed below). The business-friendly environment at city hall led to the use of local incentives that were critical to mitigating development risks and attracting significant private investment back to the city.

Creating a Master Plan for the Baltimore Waterfront: The Inner Harbor

With the momentum necessary to proceed with a large-scale plan for the downtown's redevelopment (initiated first by the GBC), the city took a more active role in developing a 30-year plan for the 240-acre Inner Harbor redevelopment in the 1960s. This plan would ultimately require more public funding, incentives, land assembly, and site clearance. In 1963, Mayor Theodore McKeldin commissioned Wallace McHarg Associates (associated with the University of Pennsylvania’s Planning Department) to prepare a master plan for the Inner Harbor, which ultimately aimed to restore citizen access to the waterfront.

At the time, many waterfront areas throughout the nation were seen primarily as transportation access points, and communities had turned their backs on these areas in terms of making them attractive and pedestrian-friendly places. The Inner Harbor plan looked to change this phenomenon, but it would require the rehabilitation of streetscape and buildings for two thirds of the planning area (including the financial district) as well as major redevelopment for the remaining third.

The three key elements of the plan were: (1) multifamily housing in the eastern and western sectors, (2) a row of prestigious office buildings facing the waterfront, and (3) a central public playground along the Inner Harbor's shoreline. Despite growing public acceptance of the redevelopment effort, citizen-led organizations had minimal involvement in the planning process. Therefore, the GBC financed a public education campaign to ensure public support. In 1964, the city announced the Inner Harbor Master Plan, and voters subsequently approved a bond issue of $2 million for preparatory site clearance and land acquisition to initiate the $260 million redevelopment project. This master plan would take over 20 years to be realized.

Establishing a PPP for Real Estate Management: Charles Center Inner Harbor Management

Charles Center Inner Harbor Management, Inc. (CCIHM) was created in 1965, at the behest of the GBC, in order to facilitate the implementation process of both the Charles Center and the Inner Harbor area's renewal. The city formed the CCIHM group as a public-private partnership to plan,

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market, and manage public spaces for both development areas. The organization was given the ability to allocate public funds and to negotiate in confidentiality until approval was sought from the mayoral-influenced Board of Estimates. Support from the city, which provided critical logistical support and covered all of the organization's operating expenses, enabled the CCIHM to overcome management and land acquisition challenges created by the Inner Harbor urban renewal process. CCIHM was thus able to orchestrate the acquisition of 1,000 properties and the relocation of 700 businesses. The group legally functioned as a private entity, but its activities were controlled through a contract with the municipality and overseen by the city's commissioner of Housing and Community Development.

2. Redeveloping the Inner Harbor Renewal Area

According to city officials and developers, public sector investments in land assembly and site clearance were a necessary prerequisite for attracting private capital to the Inner Harbor area and enabling the master plan to be fulfilled. By the 1960s, Baltimore’s shipping industry, which was concentrated around the waterfront, had abandoned their properties. The city’s numerous vacant lots posed significant development risks, as the area was perceived to be in state of decline and in need of significant improvements to make them reusable. The public sector focused on providing initial incentives while hoping that this investment would encourage the private sector to become more involved in the project’s later phases.

In 1969, the USF&G insurance company, a local business establishment, was the first of many corporations and agencies to announce the building of a new 36-story office tower facing the Inner Harbor waterfront. Several other organizations, including IBM, the Equitable Trust Bank, and the C & P Telephone Company, followed suit, and the 28-story World Trade Center was constructed in 1972. Yet, private sector investors did not receive tax concessions. Later, a city-conducted analysis of the land development showed an important return on the public’s investment. The increased land values and property taxes were worth more than the initial costs of the property acquisition.

Additionally, the city’s housing department implemented a homesteading program to spur investment in dilapidated row housing in and around the Inner Harbor area. HCD offered the shells of dilapidated row houses for $1 to local residents who agreed to restore and live in them. As a result, a total of 150 units were restored for an average loan value of $50,000. Privately developed upscale infill units soon comprised much of the neighborhood.

A Pro-Business Government in the 1970s

A new era of government was championed by Mayor William Donald Schaefer when he took office in 1971. He cultivated a pro-business image for Baltimore by regularly meeting with business leaders to discuss their concerns and opportunities for cooperation between the city and the private sector. Schaefer publicly let businesses know, “Baltimore wants you so badly, we'll let you write your own terms.” Most importantly, Schaefer had established himself as a man of action and someone who would follow through on promises he made to members of Baltimore's business community. He did much to encourage tourism by creating an Office for Promotion, which was staffed by a public

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relations executive, and by helping to arrange special events along the harbor. It’s important to note that Baltimore has a strong mayoral form of government, whereby the mayor is given significant authority over the approval of both the city’s operating budget and capital budget. Because of this, Mayor Schaefer had the credibility to fulfill the city hall’s promises to private developers and investors for key public sector initiatives.

A Diversified Source of Financing for Redeveloping Baltimore’s Inner Harbor in the 1970s and 1980s

In the 1970s, Baltimore depended on federal funds, mostly Urban Development Action Grants (UDAG) from the U.S. Department of Housing and Urban Development (HUD), for the financing of a number of projects in the Inner Harbor area. Mayor Schaefer actively supported major initiatives that required significant public sector financing with limited private sector funding. HUD estimates that between 1975 and 1981, Baltimore spent over a third of its nearly $300 million in UDAG, Community Development Block Grants (CDBG), and special HUD grants on Inner Harbor projects. Throughout the decade, the city acquired over 400 structures to provide land in the Inner Harbor area, and an estimated 90 percent of funding was provided by the public sector. The city offered land write-downs, below-market-rate loans, sale lease-back agreements, and property tax abatements to recruit businesses to the city area.

Most of these publicly funded projects served as anchors for tourism development, like the Hyatt Regency Inner Harbor project, which was funded with $500,000 in private funds that combined with a $10 million UDAG grant. Other convention and visitor oriented projects included the construction of the Baltimore Convention Center, which opened in 1979, and Harborplace, a retail and restaurant complex that opened in 1980. In addition, the National Aquarium and the Baltimore Museum of Industry both opened 1981.

As planned, initial public sector investments helped to stimulate private sector investment. By the 1980s, the private sector had taken over as the major source of downtown development funding and had invested approximately $1.4 billion in Inner Harbor projects, as federal funding became more limited.

3. Land Banking for Baltimore’s Industrial Properties

In the late 1960s and early 1970s, Baltimore experienced a significant acceleration in the loss of its manufacturing companies. This was due in part to both competition from lower-wage Southern states and technological changes in many production processes. The Baltimore Economic Development Corporation (BEDCO)5 implemented an industrial retention strategy targeted at Baltimore’s medium- and large-sized businesses. The strategy included meeting these companies’

5 The Baltimore Economic Development Corporation (BEDCO) was a quasi-public organization established in 1976 (collapsing the functions of the Baltimore Industrial Development Commission and the Baltimore Economic Development Commission) in order to manage the city's $3 million industrial land banking fund. In 1991, BEDCO was merged with CCIHM and Howard Street Market Place to form the Baltimore Development Corporation (BDC).

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various needs, including special infrastructure, site preparation, and expansion space. BEDCO managed the city's land banking fund, which applied some of the city's federal funding, and created six city-owned industrial parks after acquiring 500 acres for industrial use. The city's accumulated parcels of land were potentially useful for expanding businesses and those that required special facilities to maintain a competitive edge. From 1976-1990, BEDCO projects accounted for about a third of Baltimore's budgeted capital funds; and, more than 8,000 jobs were located on the city's industrial parks by the end of this time period.

In 1981, General Motors (GM) was in danger of closing its large automobile manufacturing plant that employed 750 workers in Baltimore. BEDCO offered GM both a UDAG grant and some land in one of its industrial parks. GM declined the former, but accepted the latter, and made a commitment to invest $250 million in modernizing the plant. The city was able to retain GM for another 25 years, during which time it was able to employ approximately 2,000 people in the city.

By the early 1980s, BEDCO identified biotechnology and life sciences as a target industry sector for business recruitment. This emerging industry was seen as a way to diversify the local economy while building on local assets that were already in place. Thus, BEDCO began working with John Hopkins University to attract biotech and life science activities to Baltimore. They also helped to establish several incubators and attracted biotechnology centers operated by the University of Maryland. These important economic development initiatives helped to lay the groundwork for several biotech parks that were established over the next few decades. 4. Reacting to Changing Redevelopment Conditions

By 1987, Baltimore appeared to reap the benefits of its active redevelopment efforts. The tax base was increasing, and a National League of Cities survey named Baltimore the “most successful economic development city” in the United States. Yet, the HUD funding that had enabled much of the public investment in Baltimore in previous years was greatly diminished by 1990. By the mid- 1990s, Baltimore was facing additional economic problems due in part to the 1990-91 recession and federal tax reform which eliminated real estate ‘tax shelters.’ This led to a glut of downtown office space and resulted in a 25 percent vacancy rate. At the same time, real estate values dropped to only 60 percent of what they had been during the boom of the previous decade.

Baltimore’s new mayor, Kurt Schmoke, appeared to be less pro-active in courting business than his predecessor. Mayor Schmoke continued to support the process of downtown redevelopment and presided over the consolidation of a number of city agencies into the Baltimore Development Corporation (BDC). Still, under Mayor Schmoke the BDC began to focus on various areas of the city that had been previously neglected. However, the downtown area remained the center of development. Primary efforts included the construction of two major sports stadiums, a tourist- friendly marine biotechnology center called Columbus Center, and the expansion of the Baltimore Convention Center in 1997. All of these projects had significant public sector financing components.

5. Pursuing a Biotechnology Initiative

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As previously mentioned, Baltimore made significant efforts to target the biotechnology industry. The city’s successful attraction of a number of biotech companies has been due in part to the presence of multiple institutions of higher learning that possess advanced research capabilities, equipment, and available tracts of land for large-scale development. The University of Maryland BioPark is a successful example of how private sector investment has supported and assisted an institute of higher education. The BioPark utilized a land write-down from the City of Baltimore in order to develop a 12-acre tract of land, in West Baltimore’s Poppleton community, which historically had a 30 percent vacancy rate. Through the expertise of the University of Maryland and Wexford Equities, three large research facilities and a parking garage have been built. These facilities employ over 550 local residents and offer training and mentoring programs with the University’s support. Since a new 150,000 square foot facility is expected to be built every 24 months, the city developed an expedited permitting process for this specific project. In the first quarter of 2012, a 180,000 square foot cancer research center is anticipated to open its doors. Meanwhile, property values in the area have tripled since the project began in 2003.

Developing Programs to Employ the Local Workforce

There were initial concerns about the ability of Poppleton residents—who lived in a historically low- income community with a large percentage of unskilled and less educated workers—to take advantage of higher-skilled technological jobs at the BioPark. To address this need, the University of Maryland agreed to donate $50,000 of lab equipment per year to a local open enrollment magnet high school of life sciences and connect students in this community with the life sciences program. So far, the Baltimore City Community College's Life Sciences Institute has certified 1,000 students, many of whom come from Poppleton, with technical associate’s degrees. These students then form a pool of interns that are offered work at one of the BioPark's tenant companies. Each tenant of the BioPark successfully employs certified students from these programs, and BioPark tenant companies have eagerly contributed to a fund that provides their employees with MBA coursework at the University of Maryland’s School of Business.

6. New Economic Development Tools to Finance Redevelopment

In addition to the State of Maryland’s Enterprise Zone and the Federal Empowerment Zone real estate tax credits, which incentivize property improvements and the attraction of new employment in targeted areas, the city has developed its own local incentives for redevelopment. Baltimore has developed the PILOT (Payment In Lieu of Taxes) tax abatement program, and there are now 11 PILOT districts in the city. In addition, there are 10 districts that offer tax increment financing (TIF) bonds with a total value of $135 million. These bonds have helped finance eligible public infrastructure and site improvements for private sector development projects. Both of these tools have been used increasingly in recent years.

Baltimore’s Tax Increment Financing (TIF) Program

Tax increment financing is a tool that enables the local government to issue targeted bonds in

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specific development districts in order to pay for improvements in public infrastructure, land acquisition, site improvements, and other necessary services associated with the construction of real estate development projects. TIF essentially captures net new real property tax revenue from increased property taxes and new development in that district. The tax revenues are then used to pay the debt service on the TIF bonds. The State of Maryland authorized the use of this increasingly popular financing and development tool in 1994 (as available public funds for projects were waning), and prior to 2000 a local referendum was required in order to use TIF funds.

In current practice, a project developer approaches the Baltimore Development Corporation (BDC) or Baltimore Housing to request TIF funding. The developer is required to provide the BDC with all background material, a detailed project financial statement, and the site’s design information. After analyzing the feasibility of the development project, the BDC makes a decision on whether to support the use of TIF dollars for the project. If TIF funds are recommended, the BDC presents a TIF proposal to the city's Board of Finance and a third party consulting firm that the city retains. These two bodies are required to estimate the new assessable property tax base as a result of the project in order to estimate the amount of Tax Increment that would be available for a bond issuance.

To facilitate a TIF bond issuance, the city must: 1) create a designated TIF Development District encompassing the new development project, 2) establish the tax increment fund, and 3) subject to appropriation, release the tax increment to the bond holders to repay the principle and debt. Legislation is drafted to create the TIF Development District and authorize the issue of bonds and then introduced to the City Council for approval. Typically, four City Council ordinances are necessary to establish a TIF district. City agencies hold hearings before a vote is made on the bill, and then the mayor is able to sign it into law. The Board of Estimates reviews the project's documentation before bonds are priced and finally approved by the Board of Finance.

Some community members have complained that TIF incentives are a diversion of potential tax revenue that could be used for education and public services. Yet, Baltimore officials strongly adhere to a “but for” rule, which judges the viability of a project without the use of TIF incentives, and a “but why” rule, which ensures the project adheres to the city’s strategic plans for investment and land use. The BDC also conducts the “but why” test to carefully inspect the financing of a project in order to determine that the city's rate of return on investment (ROI) meets basic financial criteria. The city analyzes the public benefits that the project is expected to generate in terms of construction and permanent jobs created, construction and permit fees, and all sources of local taxes to be generated by the project. Projects are only supported in the district if the proposed financing is necessary for development and if the project's development serves the city’s best interests. The city also carefully measures the anticipated benefits in terms of job creation and anticipated city revenue.

City officials and developers firmly contend that many large and beneficial projects for the city “simply wouldn’t happen” in the current economic climate without TIF financing. Michael Beatty, the chief project manager at H & S Properties Development (the main private entity behind the

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successful Inner Harbor East redevelopments projects),6 contends that these local incentives enable projects to proceed when they otherwise wouldn't. Local incentives offered via TIF and the PILOT program have important marketing value to their tenants. Beyond the value of the infrastructure or amenities they finance, they send a signal to businesses that the city is committed to successful development and investment risk mitigation.

Summary

Baltimore has made a dramatic transition from a post-industrial city plagued by disinvestment to a city that has successfully redeveloped large tracts of vacant property and diversified its economy through tourism and biotechnology. The public sector has long been committed to addressing development risk in order to spur private sector reinvestment. The Charles Center development, which served as the first major breakthrough in Baltimore's redevelopment, required a public-private partnership and the city's participation in land assembly and site preparation. The subsequent large-scale 30-year development of the Inner Harbor area harnessed the success of the Charles Center and required public investment before substantial private investment could follow. Current conditions that limit the amount of public funding available appear to necessitate the use of local incentives such as tax increment financing and tax abatements to finance infrastructure requirements and show businesses that the city is committed to the successful development projects. The ongoing success of Baltimore's redevelopment will largely depend on the city’s ability to leverage its resources to retain and attract commercial investment while also fully exploiting the potential of key growth industries like biotechnology.

Case II: Tax Increment Financing and Streamlined City Functions in Emeryville, California

Emeryville is located on the eastern shore of the San Francisco Bay and is nestled between Oakland to the south and Berkeley to the north. With a population of just over 10,000, and less than two square miles of land, Emeryville is dwarfed by its larger neighbors.

Between its founding in 1896 and the 1970s, Emeryville grew into an industrial center based largely on its proximity to the Port of Oakland and its access to rail lines. Along with many communities around the country, Emeryville’s industrial base was hard hit during the 1970s and 1980s, and many industrial sites were left vacant. Over the last few decades Emeryville has undergone a fundamental renaissance, as its moribund industrial sector has been replaced by knowledge-based firms, a booming retail sector, and expanded housing. Since the 1990s, a series of redevelopment projects have added several thousand housing units and over a million square feet of commercial space within the city limits. While other former industrial communities in the Bay Area have struggled to redevelop and diversify, Emeryville has largely cast off the vestiges of its industrial past. The rebirth of Emeryville has been driven by a host of market factors, including the emergence of the regional high-tech sector in the Bay Area and skyrocketing real estate prices in nearby San Francisco, Oakland, and Berkeley.

6 These projects have transformed vacant warehouse property into bustling mixed-use developments featuring high-rise hotels, apartments, and office buildings in a walkable neighborhood environment of 12 square blocks with 10,000,000 sf of mixed use space and roughly 3,000,000 of Class A office space.

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While Emeryville has clearly benefited from auspicious market forces, local economic development efforts have played a significant role in the redevelopment of the community. City leaders in Emeryville have taken a holistic approach to redevelopment and worked to create a series of complementary incentive tools and investments that work in concert to make the community more attractive for private developers. The successful redevelopment of Emeryville cannot be attributed to any one factor, but rather to a sustained effort to bolster the competitiveness of the city through strategic investments, new programs, and improved city functions.

This case study highlights two aspects of local economic development and planning practice that have helped Emeryville to capture a significant portion of the redevelopment investment that has flowed into the eastern San Francisco Bay over the last twenty-five years.

1. Emeryville has aggressively used Tax Increment Financing to fund the construction of modern

infrastructure (water, sewage, modern telecommunication lines, roads, bridges, etc.) that has attracted transformative private-sector projects.

2. Emeryville offers streamlined planning and permitting systems that decrease the cost and time required to get new projects authorized.

Tax Increment Financing

Emeryville has made extensive use of Tax Increment Financing (TIF) to enable redevelopment. Because of its small physical size and legacy industrial sites in need of redevelopment, virtually the entire city (except for the harbor area) is part of a designated TIF district. The first district, which covers 503 acres, was established in 1976 with a second 270-acre district authorized in 1987.7 As such, most development projects in Emeryville create tax increment funds.

Emeryville uses the funds created by its TIF districts for several purposes.

• Redevelopment Planning: TIF funds have been used to craft and update long-range

redevelopment plans. Given the scope of challenges to be addressed, and the number of properties initially in need of redevelopment, it has been vital to coordinate each project as part of a larger redevelopment effort. To that end, TIF funds have been used to author, update, and implement a series of plans that ensure that each project is not treated in isolation. These plans have ensured that each development project and each investment in the community’s assets has contributed to the overarching redevelopment vision.

• Upgrading Public Infrastructure: TIF funds were used to pay for public infrastructure improvements like roads, sewers, two new fire stations, an arts and cultural center, a community garden, renovations to the senior center, and building a childhood development center. With city finances reduced by the departure of its former industrial base, TIF funds proved essential to rebuilding the community’s dilapidated public infrastructure. In many cases, repurposing vacant industrial sites required new infrastructure to connect the properties to the

7 City of Emeryville website: http://ca-emeryville.civicplus.com/DocumentView.aspx?DID=33

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rest of the community and region. • Redeveloping Blighted Properties: Starting in the 1990s, Emeryville became much more

aggressive in using TIF funds to induce private firms to invest in major redevelopment efforts. In many cases, the city entered into development agreements whereby private developers would be reimbursed for a portion of the upfront costs they incurred to clean up and rebuild on previously industrial sites. As redeveloped property came online and started to generate additional tax revenue, a portion of that increment was remitted to the developer to offset their initial investment. Knowing that upfront costs would be partially defrayed over time made some developers more willing to invest in major projects with prolonged return on investment time horizons. In addition, TIF funds have been used to purchase dilapidated property so they can be resold to development firms, thereby giving community leaders more control over the timing, sequencing, and purpose of redevelopment projects. Using TIF funds to acquire previously vacant space has also allowed Emeryville to expand green space within the city and to increase its connectedness and amenities.

• Community Amenities: Emeryville has also used TIF funds to pay for constructing new public facilities, parks, bike paths, pedestrian walkways, and other community amenities. With much of the blighted property in Emeryville having been successfully redeveloped, TIF funds have come to play a vital role in augmenting the city’s quality of life infrastructure. As the city has been reborn as a desirable place to live, TIF funds have allowed city leaders to respond to increasing demands for the quality of life infrastructure needed to attract and retain the talented workforce that many of the new employers in the city need to attract.

Between 1991 and 2007, Emeryville’s TIF districts have generated $192 million, and 80 percent of this total has been reinvested in quality of life infrastructure like parks, public facilities, utility line undergrounding, green ways, and bike paths. Since the founding of Emeryville’s redevelopment agency, more than seventy projects have been completed or are currently under way. The seven largest projects alone have generated $35 million in property tax and created over 7,500 new jobs. In the last two decades, redeveloped properties have become home to leading companies like Pixar, Novartis, IKEA. In addition, the Bay Street mixed-use project has become a prime retail destination and housing location. Overall, the Emeryville Redevelopment Agency estimates that each $1 of redevelopment investment has returned $15.8

While Tax Increment Financing can be a contentious mechanism in terms of pulling general funds away from school boards, Emeryville has provided an effective example of how to use redevelopment funds to effectively turn the community around. By reinvesting the increments gained through development, the city has been able to leverage each project to promote its holistic efforts to reinvent the city. As Emeryville has transitioned blighted industrial properties into productive facilities, increased revenues have been reinvested to make the community more appealing to companies and residents alike. While some TIF funds have been used to offset the costs of private developers where needed to jumpstart specific major projects, the bulk of the money has been reinvested in the fundamental physical and

8 City of Emeryville website, http://www.ci.emeryville.ca.us/

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social infrastructure needed to create a community with a high quality of life. The city has chosen to invest millions of dollars of its redevelopment funds into local school construction projects and curriculum improvements.

Streamlining Permitting and Planning

Streamlined permitting and planning has helped Emeryville to become a favored location for investment within the San Francisco Bay area. Accelerated planning review and permitting allows Emeryville to reduce developers’ costs without passing public funds directly to private companies. Given the costs inherent in prolonged planning review and permitting, Emeryville has a distinct advantage over nearby communities where developers must wait months for plan reviews and many years for construction authorization. Emeryville has taken a number of steps to reduce the complexity and duration of planning review and permitting, including the establishment of:

• One-Stop Shop: Emeryville has the distinct advantage of housing all of its permitting and

planning functions under one roof. While the planning and permitting functions in many communities are spread out at different locations, developers looking to submit and track a project in Emeryville need only visit one physical location. Of course, this advantage is much easier to achieve for a city the size of Emeryville than it is for larger communities.

• Development Coordination Committee: Emeryville has formed a standing committee to coordinate the various functions needed to review and authorize each development project. This committee holds monthly meetings to discuss the progress of major projects, to identify critical paths that must be expedited before other reviews can occur, and to discuss any roadblocks or issues surrounding each project. By ensuring that all of the relevant city functions are on the same page, the Coordination Committee helps to reduce the time it takes for projects to work their way through the planning and permitting process.

• Permit Tracking System: Emeryville recently instituted an online tracking system for planning review and permitting. This system creates a single clearinghouse location where city staff and developers can track the progress of planning and permitting review. This function helps city employees to prioritize work activities and to identify issues that may slow the permitting process. Moreover, the system provides developers with real-time updates on the progress of their planning and permitting requests. Providing developers with up-to-date information on the progress of planning and permitting helps firms more efficiently manage project schedules, learn when additional information is required, and identify which city functions are currently working on their projects.

Through the steps outlined above, Emeryville has significantly reduced the time and cost of reviewing and authorizing development projects. Emeryville has the advantage of being a comparatively small municipality, so it is much less complicated to streamline planning review and permitting. In larger cities that are more likely to have functions spread around at various locations, and must manage a larger number of projects, the specific solutions devised by Emeryville may prove more difficult to implement. Still, there are examples of larger cities that have also implemented effective one-stop shops and streamlined their permitting processes as an enticement to both developers and companies on their

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borders. For example, the City of Oakland, California created a full-time position to coordinate the various permitting functions of the city, track down the causes of permitting delays, and communicate the status of permitting to developers. Regardless of scale, Emeryville offers an excellent example of why streamlined planning review and permitting can create a substantial incentive to induce investment.

Conclusion

This case study addresses some of the critical components of Emeryville’s redevelopment strategy. To reiterate, each of the moving pieces addressed here played a part in the successful redevelopment of the city. It is difficult to apportion credit, as each of these efforts was part of a larger strategy. However, the outcome makes it clear that successful redevelopment requires a comprehensive approach to addressing a range of interrelated challenges.

Case III: Investing in Innovation and Workforce Development: Creating the Commonwealth Center for

Advanced Manufacturing9

When Rolls Royce approached economic developers in Virginia about opening a new aerospace manufacturing facility, the company was interested in more than just tax breaks or monetary incentives. As a company whose success depends on continuous innovation, Rolls Royce places a premium on locating in regions that can effectively facilitate research and development collaboration both within the private sector and between the public and private sectors. As such, when Rolls Royce put out RFPs for a $500 million manufacturing facility to employ 500 workers, candidate communities were asked to outline how they would engage private firms and university expertise to perform the research and development that Rolls Royce needs to stay on the cutting edge of its quickly evolving and high-tech markets.

The result of the deal was the creation of the Commonwealth Center for Advanced Manufacturing (CCAM), a public-private partnership that will conduct collaborative research and development in fields critical to Rolls Royce’s long-term competitiveness. While CCAM will aid Rolls Royce, it is a prime example of how investment-oriented incentive deals can create much broader benefits for other private firms, universities, and workers in the region. The creation of CCAM illustrates how attraction deals can be organized to make a region and its people more competitive in the long-run rather than just providing benefits to the specific attraction candidate.

A number of features about CCAM make it an informative case study on how investment-oriented incentive deals can be achieved. This case study outlines some of the key ways in which the formation of CCAM increased the competitive footing of the region instead of merely providing financial support for one company.

Collaborative Innovation

9 The Commonwealth Center for Advanced Manufacturing website, http://www.ccam-va.com/

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While CCAM is vital to Rolls Royce’s business strategy, it is not designed to benefit one company alone. The core idea of CCAM is to create a space where companies that share research agendas can pool resources to accelerate development through a collaborative innovation model. Rolls Royce has prior experience with collaborative research and development at similar facilities. For example, the CCAM model closely resembles the Advanced Manufacturing Research Center in Sheffield, England where Rolls Royce, Boeing, and other supply chain partners work together in a facility housed at the University of Sheffield. Rolls Royce has an interest in strengthening supply chain relationships and making its suppliers more innovative, so CCAM is designed to support a cluster of companies in Virginia. Again, this is a significant departure from traditional incentive deals where benefits accrue only to the specific firm being incented.

Strengthening Regional Competitiveness

The creation of CCAM is an excellent example of how regional collaboration can be vital to investment- oriented incentive deals. The resources needed to found CCAM were cobbled together from a variety of local, state, and federal governments as well as private sources. The facility received financial support from a variety of sources:10

• Prince George’s County paid for site preparation which included clearing the land, grading the

land, build out the building pad (base development), and taking care of storm water for the site. The estimated value of these activities is $800,000;

• The State of Virginia contributed a Tobacco Grant to help pay for a portion of the bricks and mortar building;

• The U.S. Economic Development Administration paid for the remainder of the funds for the building construction; and

• Rolls Royce owned the land and donated it to the University of Virginia Foundation. There are now 6 private sector companies signed on as charter members. The goal is to procure 10 members and their member contributions will cover the operating costs of the center.

None of these actors could have provided everything that was needed by themselves, so CCAM is an example of how investment-oriented incentives can drive mutual benefit rather than setting off a “race to the bottom.”

Creating Self-Sustaining Assets

CCAM is also an example of how an initial investment of public resources can give birth to an asset that becomes self-sustaining. Instead of relying on public or university funds, CCAM will draw upon private sector revenue sources over the long-term. As a public-private partnership, CCAM will be supported largely through membership dues of private companies that will pay to participate in, provide guidance on, and share ownership of the research and development activities conducted at the center. While

10 Interview with Jeff Stoke, Director of Economic Development, Prince George’s County Economic Development Office.

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significant public resources went into the facility’s creation, CCAM will not require long-term allocations of public funds to survive. In this way, CCAM is an example of how the investment of public resources can build a resource that becomes largely self-sufficient and sustainable as its value to the private sector solidifies.

Building Workforce Capacity

CCAM is also designed to augment existing educational and workforce training programs. At the top, graduate students at the University of Virginia and Virginia Tech will be provided with practical experience in applied research. This will benefit the students and create a pipeline of talented researchers and engineers for advanced manufacturing firms that are CCAM members. CCAM will also operate programs to train the skilled technicians that are today’s shop-floor workforce. These programs will create opportunities for workers in the region and help member companies to find employees that possess the technical skills that are required for today’s high-tech manufacturing processes.