Tonight's Proposed Economic Incentive Package, it's flaws and simple way to fix them
At tonight’s Council meeting we will be asked to approve a very expensive economic development package. Below explains the flaws I see in the way the incentives are structured, and the easy, common-sense solution to fix them.
Tonight Council is being asked to approve an expensive economic development package, that includes;
A 30% income tax rebate for three years.
A 30 year non-school property tax abatement on 100% of property value above $2.5m.
A $100k occupancy grant.
The company we want to offer these incentives to currently has a payroll below $2m. There is nothing wrong with companies this size. In fact, there are dozens if not hundreds in Beachwood like this but you will rarely see another city offer any incentives of significance to a company this size, and certainly nothing like near a package like this.
In the information provided to Council on 9/29 to explain and justify this expensive incentive package for a company this size, it stated an expectation that the company's payroll will go from $1.8m in year one to $3.6m in year three, and the property tax value of the Commerce Park building they plan to buy for $2.5m, will increased to $4.5m due to the improvements/renovations they will make when renovating the second floor for their offices, which according to the information provided to us, will result in an additional $37k a year that would go to the schools.
I hope all of this turns out to be true, and my issues with these incentives have nothing to do with this company. However, this wouldn’t be the first time Council granted expensive incentives on claims of things in the future that didn’t come to fruition. In 2017 Council was asked to approve an economic incentive package that included income tax and property tax incentives to a company with a $2m payroll which Council was told would triple to $6m in 24 months, and that the building in Commerce Park they would buy for $1.4m, would more than double in value on the property tax rolls from their investment and renovations. It’s been more than 24 months, their payroll has never exceeded $2.5m, and the property tax value of the building is below $2m.
The Easy, Common-Sense Solution
While reasonable people can disagree if it makes sense for Beachwood to offer these expensive incentive packages other cities don't offer companies this size, I think all reasonable people would agree that the incentives should be structured in a way that rewards the company for meeting and/or exceeding their payroll numbers of property tax increase levels that Council was told to expect, while protecting the City if they don’t. Doing this could be easily accomplished by attaching the following two conditions to $100k occupancy grant.
If within a year of purchasing the building, and the County hasn’t adjusted the property tax value to $4.5m that we were told to expect it to increase to, if the schools seek to have the value increased to $4.5m, the company agrees to notify the County that they do not challenge this and accept the $4.5m value, resulting in the schools receiving an additional $37k a year.
The city can claw back the $100k occupancy grant if the company's Beachwood payroll in year three isn't at least $3.6m which Council was told was a conservative estimates the company believes they will easily exceed.
I don't see how anyone can have an objection to structuring it in this common sense way as it allows the City to give every incentive they want to give to this company, as long as the claims of increased payroll and property tax value come to fruition. I emailed this suggestion to the rest of Council two weeks ago and haven’t heard back.
I don't love the income tax incentive or the property tax incentive for a lot of reasons but I will vote for them because at least they are based on performance, not estimates. If they don't meet those payroll numbers, they don't get the incentive. I will also vote for the $100k occupancy grant as long as the stipulations/conditions above are attached to it. If they aren't, I think it is irresponsible to give a company $100k in advance in the form of an occupancy grant, on top of income tax and property tax incentives, which are already extremely generous incentives for a company this size. Hopefully this will happen and we will see tonight.
I want to end this blog by pointing out it is naïve and shows a lack of sophistication by City officials to believe this company coming to Beachwood wouldn't happen without giving them a free $100k. The reason no other city would offer a free $100k in a similar situation is because they would know the building is already under contract, set to close at the end of the month, and buyers don't let a $2.5m deal they love die over $100k, and sellers don't let a $2.5m deal die over $100k. If you really loved a house listed at $250k, put in an offer at $240k to learn the seller will only consider offers at list, you wouldn't walk away.
Even if there was a $100k gap between what the buyer wanted to pay and the seller wanted to receive, that is up to them to solve. It shouldn't fall on the City to make up that gap, especially when we already granted two incentives no other city would give a company this size. However, since the buyer and seller knows that the City gives away free money like this, I don't blame them for asking.
P.S. One thing I forgot to mention is at the Committee Meeting on 10/1 about this, we were told this company was not looking at other locations in the region but locations on either coast. For all practical purposes, the $100k occupancy grant brings their $2.5m purchase price of the building down to $2.4m. While I know there are many reasons why tech, medical and science based companies choose to move to Boston, NYC, San Francisco, etc. from Cleveland, I can't imagine that not being able to get the purchase price of this building down to $2.4m from $2.5m is one of them.