Article
Site selection: effectively closing the deal
May 06, 2015 · Authored by
When making a location decision, understanding how to compete, negotiate, structure, and close transactions is critical for complex capital structures that include federal, state, and local financial products. For a business seeking a new site, project finance cannot be separated from the location decision because the programs available to finance a project are frequently driven by geographic factors. For example, the New Markets Tax Credit (NMTC) program is a federal tax credit that can provide a company with up to 23% of a project’s total cost. The intricate geographic considerations and complexities of this program, and many others, are typically overlooked by site selection teams, resulting in missed opportunities to add value for clients. Being able to use the NMTC is sometimes as simple as selecting a site that is just across the street.
The landscape for financial incentives and programs in the United States has become increasingly complex. Many of the most powerful financial tools are encumbered with regulations and compliance requirements that require specialized assistance. Although incentives that involve tax-exempt bonds can result in substantial interest savings for businesses, regulations by the Internal Revenue Service, the Securities and Exchange Commission, and the Municipal Securities Rulemaking Board (MSRB) can complicate use of the incentives. Just last year the MSRB wrote a new rule that was almost 800 pages long! Businesses that seek out expert assistance can navigate these financial incentives and programs to provide substantial benefit to projects without undue burden.
While executives are focused on running their business, they need a site selection team that can systematically evaluate financing alternatives and provide a clear path to optimize their project’s capital structure. Site selection teams with an investment banking mindset are equipped to evaluate financial ramifications of site decisions while those using a traditional real estate approach often neglect capital considerations.
The primary challenge for site selection teams is not identifying sources of capital but rather knowing how to effectively compete for the capital, negotiate the best terms, structure the deal, close transactions, and stay compliant with regulations related to the financing. Competing for and negotiating incentives requires an understanding of how government programs are funded and of the potential value of incentives to the client and the project’s capital stack. This evaluation requires a comprehension of public finance to know how much funding could be available, tax accounting expertise to understand the incentive benefits to the client, and investment banking knowledge to properly create a complex capital stack. Because of these factors, there are no “rules of thumb” for negotiating incentives. Each negotiation must be based on a unique analysis of potential sources and benefits to the client and project.
The knowledge and ability to help clients close a financial transaction can make or break deal. Lenders and equity investors vary widely in their understanding of public financial programs and incentives. Sophisticated site selection teams, however, can educate lenders and equity investors to help ensure that public financial programs add the value that they are designed for and that transactions are completed successfully.