California's Golden Incentives

Area Development Site and Facility Planning, Jun/Jul 2005 by Renzas, James

With a formidable array of desirable traits, California still works to offset its cost of doing business through valuable incentives.

While California has a reputation as an expensive place to do business relative to other alternative locations in the West, a company willing to work through the various incentives that are available can find an affordable place to do business in the Golden State.

RECRUITING THE SKIES

When Virgin Atlantic Airways went looking for a site to house the base of operations of its new airline brand, the city of San Francisco and the state of California went to work crafting an incentive package worth more than $15 million to seal the deal. The state beat out other large metro areas and secured the 1,500 new jobs.

A team effort that brought together state and local government officials and private-sector interests helped land the Virgin project. The bid also benefited from pro bono work by the San Francisco architectural firm Heller Manus, which created plans for an office building and flight-simulator facility. Peter Luchetti, the famed San Francisco investment advisor, helped the effort by showing Virgin executives the financial logic behind California's bid. Throughout, Governor Arnold Schwarzenegger and the Commission for Jobs and Economic Growth maintained contact and coordinated the efforts of state, local, and private groups working to attract the new facility.

In a San Francisco Chronicle article dated June 7, 2004, Virgin spokesperson Stacy Geagan said San Francisco won out with a combination of cash incentives and cultural "soft power." "As a Virgin-branded airline," Geagan was quoted as saying, "we liked that showmanship. But at the end of the day, the decision involves significant investment and significant dollars. And although residential real estate is very expensive in the area, we found quite reasonable rates for the commercial real estate we require."

ENTERPRISE ZONES CASH IN

Possibly California's biggest incentive in monetary terms is the Enterprise Zone program. This program targets economically distressed areas throughout the state, and establishes special state and local incentives to encourage business investment and promote the creation of new jobs. The purpose of the program is to provide tax incentives to businesses and allow private-sector market forces to revive the local economies around the zones.

Enterprise zone companies are eligible for substantial tax credits and benefits, including:

* Hiring Tax Credits: Firms can earn $31,574 or more in state tax credits for each qualified employee hired.

* Sales and Use Tax Credit: Zone companies may receive a sales tax and use tax credit for manufacturing or processing machinery, data processing and communications equipment, and motion-picture manufacturing equipment central to production and post production to be used in the zone. Individuals can claim a credit on the first $1 million of qualifying purchases, while corporations can claim credit on the first $20 million per year.

* Business Expense Deduction: Up-front expensing of certain depreciable property

* CNet Operating Loss Carryover: As much as 100 percent of the NOL may be carried forward for 15 years

* Net Interest Deduction: Lenders to zone businesses may receive a new interest deduction

* Unused tax credits can be applied to future tax years

* Enterprise zone companies can earn preference points on state contracts

These benefits can add up significantly if a company knows where it is locating and carefully tracks whom it hires. In addition, the company must file vouchers for each employee who is a "qualified hire." The state charges a $25 fee per voucher submitted, so it is important to accurately prequalify each hire before submitting a voucher to the state. Compliance is extremely important to the success of this program, so it is important to consider how the compliance function is to be handled on the front end of a project - either internally or through an outside firm.

BASE REUSE AND DEVELOPMENT

Businesses that locate on closed military bases may be eligible for Local Agency Military Base Recovery Act (LAMBRA) benefits. This program is similar to the enterprise zone program, but is confined to former military base reuse programs.

BUSINESS INCENTIVE ZONE

Tulare County has set up the Business Incentive Zone (BIZ), which provides fast-track permitting and interest-free five-year deferrals of development fees, including permit processing, sewer and water connections, storm drain, and traffic impact fees. This includes companies purchasing manufacturing, processing, communications, data processing, or motion-picture equipment for business usage inside the zone. A credit of 7.25 percent of the qualifying purchase price can create significant savings. For example, a $20 million equipment purchase would generate a state tax credit of nearly $1.5 million dollars. With certain restrictions, these credits can be carried forward.

Other features of the business incentive zone mirror the state enterprise zone program, including the state hiring tax credit, employer hiring assistance, business expense deductions, and net operating loss carryover.