Can Economic Development save the world from another economic disaster?

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business attraction, business development, business expansion, business financing, business incentives, catalyst projects, Certified Economic Developer, Don Holbrook, economic damage, Economic Developer, economic development, economic diversification, economic incentive zones, economic policy, financing business expansion and growth, global financial crisis, great recession, public private partnerships, rebuilding local economies, USA public policy

Many of you that read my books and blogs know that while I am very passionate supporter of the concept of economic development I am not convinced nor bought into one particular leadership camp or thought group. I have attributed part of this economic mess to our own lack of visionary leadership to give those asleep at the switch a roadmap out of this dark economic abyss. I also believe economic developers have a difficult task of having to live in two worlds. On one hand they are expected to behave and use protocols of a private sector enterprise but on the other hand the CAVE (Citizens Against Virtually Everything) folks expect them to be the daily yellow tabloid telling all they know about each client as soon as they glean any information. Of course this we know leads to a road of rejection as private sector clients refuse to be subjected to crazies in the public realm until they understand what the economic benefit is for doing so. Brand values are too important to private companies to step out prematurely and get tarnished by a low acumen and aggressive NIMBY (Not In My Back Yard) crowd. None the less, economic developers must develop methods to keep this negotiation on pace and moving towards eventual agreement and then of course some level of public exposure. Not a simple job. So the average economic developer has to have a sharp legal mind, a sharp business and especially financial mind and a great set of communications skills in their possession. Sounds like a pretty talented individual. Well in the past two decades we have seen the quality of these folks diminish as more and more take flight from the quasi-public sector to the private sector. Two major reasons I believe, make this the reality, better pay and more appreciation from their constituents with huge amounts of lower stress from not dealing with the crazies at public hearings. Here is my tongue in cheek prediction, for every public hearing you avoid in your life you are adding 2 months to your life. I can’t prove that of course.

Now back to the question at hand… so part of my frustration is that today it feels like the United States and thus our huge ranks of alleged professional economic developers have not come up with the AHA solution and did a convincing enough job of getting the various levels of governments to invest in a holistic solution to lead us clearly past the remaining elements of the 2008 Economic Perfect Storm or Global Financial Crisis.

What do we know the signs are that continue to plague our sustainable recovery and reinstated economic growth?

Job Creation-we need to create more than 150,000 jobs per month just to replace those that we lose through normal attrition, retirements and death. We have not sustained job creation anywhere near that during the last 3.5 years. In fact, the number of underemployed, unemployed and just missing due to giving up is probably closer to 20% today and the numbers easily surpass 20M to 30M folks that fall into that category.

I do not believe this can be accomplished with job tax credits or extended benefits… although if coupled with some other features this would be a good foundation for getting them back to work in a dignified manner.

My own thoughts are that the workforce needs to be tested for their actual acumen and skills on a unified national standard such as ACTWorkeys (no I have no financial relationship with them). Once we know their situation then we can recommend based upon the locales employer needs the mitigation retraining they need to become gainfully re-employed. Here is the caveat they cannot collect extended benefits unless they go through this process and if they get a job while in the process the employer must allow them to finish and the program will pay them for the differential of cost for doing so. This in my opinion would do the best job of getting folks back to work. If a relocation is necessary to match someone up to their best job… then the state of the employment should offer a relocation grant of $2,500 per job to offset the moving expense. Not a bad cost for creating a new job in each state and the Feds would match that with a displaced re-employment tax credit of $7500 as a direct deduction against your Federal Tax return for that year. If there is a remainder then it can be carried over until it is 100% depleted. Now folks and communities will compete for the best employees and build the most robust economies and not be as constrained by geographic concerns.

Next we have to move onto the engine that creates the funds to make investments into new facilities, equipment and raw materials. Creating a superior local business climate is the magnate to attracting funding first from within your own region and then from far abroad. I am a huge champion of asking for 100% renaissance zone style tax-free areas within each community as long as they are targeted to a specific outcome and backed by the locals own investment into supporting the business case for why this zone should be focused on attracting these catalyst industries. If they can create a clustered focus on a catalyst industry such as Advanced Manufacturing, Clean Energy, Destination Tourism Development, Aerospace, etc… industries that will cause greater economic outcomes for the constituents through indirect and induced ancillary windfalls then I believe they should be given such opportunities.
What can these zones do to lower the cost of business… it begins with lowering the entry cost, so land grants with built out specification requirements of facilities that will upon sun setting of the tax abatements be a strong contributor to the local tax base. There are several ways to make sure the facility remains in the community operational for at least twice as long as the tax abatement. Another use would be to rebate any sales tax, inventory taxes and other local and state taxes or just exempt them during the tax abatement period. Utilities and Impact fees to the sites would be waived. All of this is within the reach of economic developers today and yet it hasn’t been enough so far in many cases.

What else can make the difference then? I believe the local economy has to put what I refer to as threshold equity into the venture (skin in the game) more than just waiving fees they need to put some cold hard cash into the investment and be treated just like any other investor… an expected return on investment and a window for being paid out or the option to convert the debt to equity. A good “Threshold Equity” platform is somewhere around 20% of the total gross cost of the project being born by the private company. Now I am not saying that EDO’s have to reach into their pocket and do so, there are many artful ways to create funding that would count towards Threshold Equity and get the respect of the private sector company… yet today I see very few EDO’s that either are willing to participate or build a tool that would allow them to do so, and/or they simply don’t understand how to do so… can’t do something that they don’t understand or know how to do yet. There lies our greatest problem in my mind. We have lost the greatest institutional financial thinkers in the industry… they have either left the industry out of sheer frustration or for greater private sector economic paychecks or consulting gigs that pay far better than the now fairly below average pay of economic developers. This is where our national and international leadership groups need to pull their proverbial head out of the sand and realize we have allowed this economic transition to linger far too long and it is having a devastating impact on individuals and communities and eventually it will greatly diminish the confidence people may have once had in the profession and practice of economic development.

Performance Based Consultants

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business case driven financing, Consultants, Don Allen Holbrook, Don Holbrook, Economic Developer, out of the box thinking, paradigm shift fees, risk and reward mindset, solutions versus studies

Today there is more and more pressure to perform versus just provide advice. The traditional consulting houses have always favored hourly fees versus risk for reward. But businesses today are less and less prone to risk big retainers and open ended monthly exposure to fee based billing. This same phenomenon has also swept across the site location and business incentives driven side of economic Development consulting.

It is much easier to gain clients when you can say to them, if I don’t succeed you don’t have to pay me. This is the new risk for reward mindset that is slowly taking over our industry.

Personally I am glad this practice is taking hold. I have been mostly using this approach since I started consulting 6 years ago.

My focus has been go big or go home so swing for the bleachers.

My selling proposition is a simple formula that everyone seems to favor. It goes along these lines; for every dollar I save the company I get a nickel.

When I am providing a financing strategy for a public sector organization it is based on a 3% value of the project.

Again if I don’t put the deal together no matter what side of the table I am on, it lets my client know I am not gonna get paid. Nothing like a sink or swim situation to keep a consultant focused.

Today the biggest challenge in this type of approach is to only engage with the very best businesses and weed out the tire kickers.

If you have not tried this approach maybe it time you do. Nothing ventured nothing gained.

Good hunting!

Financing a Business Today- the Lost Art of Economic Development

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business financing, Don Allen Holbrook, Don Holbrook, Economic Developer, economic development, economic growth, economic policy, Economic Recovery, financing business expansion and growth, public private partnerships

As a professional consultant you won’t believe how many times I hear my public sector colleagues asking for all the work to be done by the other side and either their own lack of willingness to roll up their sleeves and do some grunt work or in way too many cases, they simply don’t know how or where to start in being useful.

When I first started on the public sector side of the business we spent a considerable amount of our time learning about finance and how to structure deals to assist businesses in walking through a job creation opportunity for our community and/or region.  In fact it was clear that as the economic developer that was my responsibility to not only the client but to my employer.   I call it running the gauntlet.  It included reviewing the business plan, looking at industry trends, sourcing out options for capitalization, looking at business costs that would impact the business.  We were invaluable advisors and trusted confidants in getting the business funded, at whatever amount of effort it took.

Today, I am on the private side of the business and I constantly see our economic development professionals who constantly seem to have the attitude of bring me the deal, make sure it has addressed all of our criteria and have your capital sources in place.  Then we will look to see what else we can do to facilitate your project in coming to our community or in expanding within our community.  It is no wonder our nation seems at a standstill from the small business sector and small business are annoyed and frustrated with the lack of business assistance and funding capitalization options they now have.

If you take this scenario even further, today it appears to me that projects that are out of the box, and/or very entrepreneurial and lack a formal business plan or capitalization strategy will find the current state of economic development quite unfriendly or in their own words quite useless to them.

But I believe this has had a profound impact on the profession as well.  When I started in the public sector of economic development our pay was on par and competitive with many of the private sector opportunities available to a young professional.  But as time progresses it seems economic development pay has been constantly eroded and has become quite uncompetitive compared to the private sector opportunities for professionals.  Yet, today’s economic developers have more training  available to them than their counterparts had in the 80′s and 90′s.  They have 4 times the amount of specialized certifications including finance and professional status such as the CEcD.  Ask yourself then why has our value in the average ranks lost ground against pay expectations and why has our profession seemed to have lost political and business clout?  I believe it is this fundamental underlying mindset of looking for the private sector to bring us prepackaged ready to say yes deals.

The art of putting the deal together and solving problems for the business owners and companies seems to be a lost art.  I am not sure when we lost this talent but it is apparent to me today that it is a rare talent in the economic development field.

Economic development just like the rest of society has become very polarized.  We have more organizational important meetings that seem to not move the economic growth or recovery barometer at all.  At the top of the scale are the experts that understand the complete art of economic development and are very well paid because they are indeed solution oriented.  Then there are the other 99% that fall somewhere down the scale and the economic value paid to them is exponentially less.

In fact in our nations greatest time of need it could be said that we has a profession have failed to show up and engage the situation and thus assist our nation in getting out of our current economic anemic growth situation.  This was our opportunity to give Congress advice and Legislative bodies best practice examples of what would work to get the job market flowing, capital reinvested in our economy and rebuild consumer confidence in our economy.

We as a profession have a higher calling to own our skills, be problem solvers and lead by sheer determination so that others have the confidence to follow and help blaze the trail to economic recovery.

It all starts in my opinion by requiring and holding ourselves to a much higher bar of expectations for outcomes that will assist business is finding and getting the necessary capital to build and expand their companies or start a new one.

This may involve the creation of a whole new set of capital tools and ideas and expanding the risk tolerance of our public sector partners so that the so-called public-private partnerships require that both parties in the project have some economic risk in the situation and this shared risk will be built on mutual need and trust between the partners.

I am not making these points to diminish the importance of economic developers but rather to send all of us a wake up call.  Now is our opportunity to lead and be fearless leaders not only for our own economic value, but for the good of our communities, or states/provinces and our nations.

I hope you at least ponder this and think about your own mindset and be honest with yourself… if you aren’t doing these things then I challenge you to step up your game and help us all rebuild our economy and restore the credibility of our profession in these tumultuous economic times ahead.

Creating Your Own Economic Zone and Oasis for New Business Development

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business attraction, business development, business expansion, business financing, business incentives, catalyst projects, Certified Economic Developer, economic development, economic diversification, economic growth, economic incentive zones, economic policy, Economic Recovery, entertainment districts, financing business expansion and growth, frozen credit markets, global financial crisis, great recession, IEDC, International Economic Development Council, public private partnerships, USA public policy

Using Economic Zones for Competitive Local Advantages:

Today many of my colleagues are following Einstein’s definition of insanity… they keep doing the same old things they learned prior to 2008 (the Great Global Financial Crisis) GFC and then when their results are lackluster or worse, they can’t comprehend why.  It is simple, you have to get out of that old same old business mindset and understand that economic development as we knew it in the 20th century is dead in the operating room.  To revive new business growth the leaders of communities and economic development organizations need to embrace progress and the art of Thrivival (Thriving and surviving simultaneously in a period of intense economic transition and transformation new strategies for financing business transactions, in particular those too large for the SBA and not large enough for public capital markets.  This large portion of our economy has gone missing in the new era of financial institutional capitalization.

This target project is typically greater than $10M and less than $250M in size and can have a huge economic positive impact on the communities that work through the process of finalizing the capital structure for such transactions.

The one lost art of economic development is our old process of being responsible and accountable for all elements of the deal.  Today many economic developers want the private sector to bring them opportunities that are pre-made and pre-packaged for success.  It is no wonder they are all sitting around the room looking at each other with blank stares.

This approach is just not plausible for most communities.  The best approach is to be proactive and create the deal structure and work through the details that will enable the project to get financed as I discuss in my other article, “the Art of the Deal Today.”

Putting together these types of transactions often involves thinking out of the box.  That means there is no cookie cutter approach that will work.  You have to create a custom set of tools to address the specific opportunity and needs of the private sector partner in the project.

By taking this approach not only do such economic developers separate themselves from the herd of mediocrity but they create a strategic competitive advantage for their community and/or region that is a compelling draw for private sector investment.

Often the politicians at the local, regional and state level are hesitant to embrace this approach because it does involve some shared risk.  But if you do not risk something of tangible and measurable value the private sector will not take your pitch serious.  You cannot have your proverbial cake and eat it to.  So understanding how to put some economic skin in the game is crucial to success.

This leads me to my main point of this article.  I have found that the creation of special economic zones through local ordinance, regional joint powers agreements and state special legislation can be just the right tool to accomplish the task.

By creating this site specific zone, we are not changing the over-all state, regional, or local tax implications that they so often cry about as it is portrayed to cut into their already over-burdened revenue stream.  In addition, it does not really have a negative impact on their current budgets as it is after-all revenue neutral… meaning the zone is a greenfield site or in some cases a redevelopment or brownfield site and has little if any current economic contribution to their economic budgets.

Inside this zone is where the magic can occur.  We get to be as creative as you can be and your true economic genius can shine.  This is what will set you apart from your competitors and draw the private sector into more interesting dialogs with you about the opportunity to grow their businesses within your community and/or region.

These zones can be the absolute most powerful piece of economic artillery we have in our proverbial incentive strategy arsenals.

The Economic Zone concept can be used for all types of economic development transactions across a wide spectrum of industries, from manufacturing, logistics, life sciences, research, retail, mixed use and entertainment and destination tourism attraction.

The zone can be tweaked to include the right set of specific incentives that will extremely hard for the private sector to resist in each category.  The one cautionary rule I normally suggest is that you are careful not to mix too many industries into your zone, especially those that do not co-exist well.

This Economic Zone now becomes the primary business development tool to drive new and engaging public private partnerships in your area.  As a site location consultant I often ask communities and regions if I choose your area are you going to be willing to create this type of zone for my client?  If they answer no, well you know how we react, that community gets a big fat RED X across it’s name and we move on to a more progressive minded community.  Targeted economic incentives are a necessary component today in this post GFC economic climate.  There is very large private sector awareness of risk and their avoidance of risk and loss of capital and preservation of existing cash flow is the king of their considerations.  The ROI of their transactions are carefully measured and evaluated from a risk tolerance perspective.  Knowing and understanding these investor requirement model business case expectations should be one of the primary discussion points in your first meeting with a private sector client today.

Once you understand where they are coming from and what return in equity, cash flow implications and risk tolerance they have in such considerations, you can then go to work in designing your custom response by using this economic zone approach.

Here are just a few of the strategies an Economic Zone can consider:

Real Property & Personal Tangible Property Tax Abatement

Tax Increment Financing (pay as you go with rebates annually)

Sales Tax Increment Financing Rebates (STIF)

Land Grants for fee simple title with permit fee forgiveness and shovel ready utilities

Financing Fee write downs on capitalization and professional fee reimbursements

On-site improvements and below ground infrastructure development

Signage is provided

Roads and other landscaping are provided for free or at a participated cost arrangement

Revolving Loan Fund Participation or Local Venture Capital for a portion of the financing

Due Diligence Expense reimbursement for market validation and feasibility

Investment Banking Fee is paid by the Public Sector

These are just a few of the types of incentives that the private sector will find highly valuable and if employed by the economic development organization they will find more than likely a very favorable response from the private sector.

In these circumstances again, i recommend a cautionary note.  You must fully vet the project opportunity, the company and the executive management team and the equity and financial strength of such proposed considerations for your economic zone very carefully.  The last thing you want to do is create an unrealistic expectation that is not based on market realities with an insolvent company and/or poorly managed project team or business case.  It is crucial that the economic developer use the three-step engagement process to vet these considerations prior to committing their time, money and staff resources to what could become a huge waste of all of the above and a public affairs nightmare.

None the less, if this process is done correctly and the procedures followed as i have suggested they can and will produce highly positive and very strong economic development outcomes in most cases.

I wish you happy hunting.

The Great Transitional Economy!

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business development, business incentives, catalyst projects, economic development, economic diversification, economic growth, economic incentive zones, Economic Recovery, global financial crisis, local economic stimulus, public private partnerships, USA public policy

Many times I have heard economists discuss what happened in 2008 and why, and then what is going to happen now and what we need to do to get through this.  There are numerous arguments for and against each case.  In the end, I believe it comes down to some simple fundamental issues.

First, while this has been an official horrible recession and very difficult on most of us economically, emotionally and physically destructive to our health, it is no ordinary recession.  This is a transition of lifestyles, economic philosophies of whether Big Government or some hybrid form of Capitalism are going to prevail in this 21st century as the best economic and social governance model for economic and social stability.  Of course I believe capitalism with limited central government over zealous interference is the best course, anchored by clear and realistic regulatory guidelines that protect the general public from predatory or unfair and unethical and illegal practices.  I do not believe we should give into a huge central government that makes us into a nanny state.  This approach in my perspective reduces the over-all competitiveness of our business climate, chases wealth to lower cost environments and reduces our attractiveness to the most innovative and brightest people on the planet, all the while reducing our own ability to regenerate by our own accords and overcome economic adversity, choosing instead to blame those that have done well for the pitfalls of others that have not done so well, whether by their own accord (poor decision-making, lack of personal initiative, or horrible circumstances).  My belief is that our government does still have some social responsibility to provide everyone who desires to make a productive change in their lives, improve their economic value through education and hard work, and who works hard to achieve such results, the access to assistance to attain those goals.  This does not mean it should be for free in my mind, but rather that our personal initiative should allow us to create funds by our actions that we can use to invest in ourselves.  Yes, it is part of the private voucher system I wholly support by using a national consumption tax, instead of a pure income or wealth tax base structure.  The government’s role would be to set standards that would make such programs consistent and fair, accessible and affordable to all those that want to use them.  I am not a pure advocate of a flat tax and/or fair tax, but rather a hybrid consumption tax and workforce benefits tax (all tied to personal vouchers).

I do not choose to believe that the Government is the best decision maker and/or steward of my personal funds to invest in my education, healthcare, retirement, disability provisions, or unemployment and then re-employment training.  I believe those are items each of us individually needs to be intricately familiar with and manage for our own best interests.  I never believe in giving my destiny and/or my future economic situation to the hands of the 545 members of the three branches of government to decide what they feel is in my best interest.  As my old friend (God Rest his Soul) Al Oerter (the four-time Olympic World Record Holder and Gold Medalist in four-consecutive Olympic Games throwing the discus) once said to me, “I never let anyone else ever set the boundaries of my performance, capabilities and personal expectations… I only have myself to blame for coming up short if I do not meet my own expectations.”

The biggest debate is how to get our economic and social balance restored?  I would like to have your own opinion on this matter.  I hope you will take this one question survey and help us create our own dialog on this paramount important issue.  This in no way is about choosing sides politically, it is about policy decisions we believe that would be best for our nation.

Business Incentives Pros and Cons Poll Comments

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business attraction, business development, business expansion, business financing, business incentives, catalyst projects, Certified Economic Developer, economic development, economic incentive zones, Economic Recovery, financing business expansion and growth, global financial crisis, IEDC, USA public policy

If you have an opinion on this subject please answer the poll.  Thanks.

Business Incentives Pros and Cons

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business incentives, economic development, economic growth, Economic Recovery, financing business expansion and growth, public private partnerships

There are many great debates for and against the use of business incentives in order to lure companies and investments into a particular state and/or locale. The issue comes basically down to a states rights constitutional debate. Do states have the right to create and adjust their own business climate costs in order to maintain their own individual competitiveness? It is as simple as that in my mind. In case you are wondering where I land on this, I think that having the Federal Government so involved that they would create such a restriction would be a huge leap in the power and unbridled growth of central government power. I prefer that most issues of domestic basis are settled within the jurisdictions where those that govern are more close to their constituents, so I support the State’s making such decisions.

For those that argue that the use of incentives get misused… well of course their are examples of such misuse. Normally done because of poor contractual agreements and lack of enforcement by the use of claw backs. What I mean by that is the oversight was either not done, and/or the contractual agreement had no teeth to hold the private company to realistic and attainable benchmarks. This can be because the state or locale was overly optimistic in their expectations and not market reality based or the private company over stated their own capabilities and/or the third cause could be just that the market changed and was no longer as economically viable. There are many reasons for buyers remorse on the use of incentives but I would wager that those are the three most prevalent.

On the positive side the use of incentives have far more positive outcomes than negative in examples you can find. There are far fewer abuses than there are appropriate uses. They assist companies in transitioning into a new business opportunity, preserving their core while redeveloping their competitive response to market pressures and expanding and attracting capital from private wealth and institutional investors that can meet the ROI and payback IRR expectations of such investors.

Without the use of incentives many new projects would simply not attain the adequate ROI to make the risk worth taking especially in today’s Post Global Financial Crisis landscape. This means it is even more important that both the public sector and the private company understand each others expectations and that such agreements are based on transparent accountability and realistic milestones and benchmarks.

Furthermore, most of these deals hinge on job creation, the value of those jobs with regard to skills, wages, etc… and the amount of investment into facilities and equipment. I believe a third and very important point is also does this industry the company is in have a healthy outlook ahead? Does this company have a history of good decisions? Do the principals behind this company stand behind their business case and have an adequate amount of their own capital at risk as well as their current investors? if the answers are all positive on these points I believe helping them reach their finance model terms for investment through a well designed incentive strategy is very appropriate.

Too many times economic developers get caught up in the political nature of the business and just want to make the announcement and get the press kudos, but like anything premature announcements can lead to heartburn and headaches later. Doing the due diligence and making the investment as I stated before in doing the correct unbiased assessment for such businesses is the best initial use of economic developers limited budgets.

If you have thoughts on this please let me hear from you. I am over the summer starting to right my fourth book in the series of Economic Development Books I publish, it will be appropriately called “The Art of the Deal Today.” Anyone who contributes useful information and opinions will be cited and given credit in the book.

Cheers and Good Hunting!