Mega-hits, mega-misses with state-funded sites

VW a win, but costly Clarksville setback shows the downside

Friday, December 01, 2017, Vol. 41, No. 48
By Joe Morris

Despite Tennessee’s growing automotive-manufacturing industry presence, and what would have likely been an enticing package of tax abatements and other incentives, Toyota and Mazda just took a pass on a huge tract of land near Memphis.

The move showcases how fiercely competitive economic development is when it comes to luring in businesses to a city, region or state, state economic officials say. It also shows how the state’s land-development programs are willing to shell out big bucks – both real and promised – on the pledge of future jobs, a practice some say isn’t the best use of taxpayer dollars.

Take the Memphis Regional Megasite, which was turned down by the two automakers for not being “shovel ready” as a reason for taking their $1.6 billion, 4,000-job plant elsewhere. The state purchased the site in 2009 and it has sunk $144 million into it. Tennessee economic development officials want the state to put another $72 million into the site to finish infrastructure to achieve the shovel-ready status.

A new water tower is the only visible sign of development at the site. And cotton, acre after acre, is the only product generating jobs or revenue.

A Pilot Travel Center, part of Gov. Bill Haslam’s family holdings, is the largest nearby business, easily overshadowing Earl’s Wrecker Services and the Deerfield Inn.

“The governor told me that before he leaves office, he wants to find one user for the Memphis megasite, and so we are working hard on that,” says Bob Rolfe, commissioner of the Tennessee Department of Economic and Community Development.

The Memphis megasite – located in Stanton, a community of 600 or so just north of I-40 between Jackson and Memphis – would likely have gone to the auto manufacturers at a bargain rate, and other tax-abatement incentives would have sweetened the pot, as well, further adding to the front-end expenses the state and municipalities would bear.

Would the promise of jobs have equaled the expense down the road? That’s the question development officials around the country face as scrutiny rises over tax-abatement incentives and other financial promises they make to lure in new companies.

In Tennessee, those deals often include large parcels of development-ready acreage provided at or below market rate.

“The idea that we need to give big companies such a deal is a bad idea,” says Mark Cunningham, director of marketing and communications for the Beacon Center of Tennessee, a free-market think tank based in Nashville. “The state of Tennessee already offers a favorable business climate. We have no state income tax, which is a big deal, and also a low debt burden for companies compared to other states.

“We have major cities if you need to relocate in an urban area, and lots of good land available in the rural areas.”

Incentives packages vary by state and region, but Tennessee has a reputation of being quite generous. A study released earlier this year by the W.E. Upjohn Institute for Employment Research shows Tennessee provides more than $2.5 billion worth of incentives annually in the form of property tax breaks, grants and other subsidies.

That’s nearly 1 percent of the state’s private-sector gross domestic product, and puts the Volunteer State as fourth highest in the nation.

That means high risk and, potentially, high reward. Examples of what can go right or wrong aren’t hard to find.

Hemlock horror story

For instance, detractors of the state’s 2008 deal with Hemlock Semiconductors had a field day when the manufacturer shut down its new, $1.2 billion polysilicon plant in late 2015, before it was even fully operational.

The plant, which was to create 500 jobs, received $343.1 million in public investment included $244.7 million in state incentives, $77.8 million in tax breaks and $20.6 million in other incentives from Montgomery County.

That’s $686,200 per job promised.

The Tennessee Valley Authority had also come on board with $60.5 million in infrastructure grants and other incentives, bringing the total to $807,200 per job promised.

When it announced the closure, Hemlock had also received a nonrefundable $95 million capital grant from the state, something that’s not likely to happen again since a clawback provision was instituted in 2012 to help recover funds in the event of a deal falling through, or benchmarks not being met.

Hemlock, which shares its name with a poisonous plant boiled by Macbeth’s three witches, made for horrible headlines and bruised egos.

But the sting has been lessened somewhat by Google’s purchase of the site for a $600 million data center. Google will have only 70 jobs at the outset but it’s hoped it will draw other high-tech companies to the area.

What got Google here? Shovel-ready land, existing infrastructure, a ready workforce and all of the other weapons officials could bring to bear — including tax abatement and other incentives that remain confidential because Google categorizes them as trade secrets.

The state committed $343.1 million to the Hemlock Semiconductor plant in Clarksville on the promise it would create 500 jobs. It never happened. The site will now be the home of Google’s $600 million data center, which is projected to employ 70.

-- File | Lyle Graves | The Ledger

The whole affair shows the volatility of putting bets on a business to fulfill its promises in exchange for up-front tradeoffs, and both deals showed how powerful the lure of big parcels of land can be.

That’s why state and local officials say a land-rich, largely rural state like Tennessee can, and should, add property to its development portfolio. What’s more, they add, the land costs are usually fairly low compared to an incentive package’s overall price tag.

Plus, even if a deal falls through, or the company doesn’t live up to its obligations, the land is still there.

Certified, ready to go

The industrial park where Hemlock landed, about 1,300 acres, was assembled by Clarksville and Montgomery County in partnership with TVA, which once operated a “megasite” program that would certify large industrial sites that met certain criteria in terms of being ready for construction and occupation.

The last of those to be developed in Tennessee, the Memphis Regional Megasite, is now being marketed to auto manufacturers and other large-scale industrial employers.

TVA certified the Haywood County site 11 years ago, and the state purchased it in 2009 after TVA wound down its program. It is part of the TDECD’s Select Tennessee program, which includes a certified-site designation for land that meets specific development requirements.

Millions have been spent on infrastructure, most recently a 35-mile force main to carry treated sewage from the site to the Mississippi River, which along with a treatment plant should run about $80 million.

There are no tenants to date, but not for lack of trying. Toyota and Mazda were being heavily courted, but officials say they are marketing the land to many other industries, as well.

Rosy economic forecasts from the state indicate the Memphis site could bring more than 34,000 jobs, $12.3 billion in new salaries and $7.8 billion in economic impact to West Tennessee over 10 years once a company puts down roots.

The massive project gets a lot of focus, but economic-development officials are a multitasking group. Along with its high-profile promotion of the 4,100-acre megasite, which the state owns, the TDECD also is busy pushing other, smaller industrial land tracts all over the state through its site-certification suite of programs.

A worker tends to solar panels at the West Tennessee Solar Farm, which sits on 200 acres of land adjacent to Interstate 40 and the Memphis Regional Megasite. The design for the Solar Farm calls for the installation of more than 21,000 silicon-based photovoltaic modules producing more than 7 million kilowatt hours of electricity annually.

-- Memphis News File/Lance Murphey

Certified sites need a minimum of 20 developable acres, according to the state. Among the 52 certified sites now on the books, there are 9,000 acres of developable property across Tennessee.

Excluding the 4,100-acre Memphis Regional Megasite, the other 51 certified sites have 5,000 acres of developable property. (This is only the inventory of industrial sites that have attained Select Tennessee certified-site distinction, so this figure does not encompass all available industrial land statewide.)

Those parcels, which have gone through the Select Tennessee certification program, are either owned by local governments or privately owned, says Scott Harrison, public information officer for the agency.

“Both public and privately-owned sites are eligible to apply for certification.,” Harrison explains. “However, privately owned sites must be sponsored by a city, county or local/regional economic development organization that is formally recognized by TNECD.”

The agency comes on board with a lot of boosts, especially for cash-strapped rural areas. Those include advice and assistance in development and marketing, as well as a grants initiative to help defray costs. Through its Site Development Grant program, TNECD has awarded 33 grants totaling $12 million in the last two years to help communities make industrial sites shovel-ready for business prospects, the state confirms.

The goal is to spread the development costs around, helping rural and poorer communities bring something to the recruiting table and boosts the state’s ability to appeal to businesses of all sizes, Rolfe explains.

“We also are working with counties and municipalities across the state with their sites, as well,’’ he adds. “It’s all part of the state’s land inventory, and so we partner with them to makes grants to cities, counties and industrial development authorities so they can complete buildouts.”

When companies are on the prowl for a site, he points out, they want land that’s ready to go. If they don’t see it, they move on. States know that, and each has similar programs at varying levels of complexity.

With whom Tennessee competes depends on what industry is being targeted. Car builders, for example, are wooed by most every state in the South, all of which tout land, workforce and tax structure to varying degrees.

“Tennessee frequently competes with neighboring states in the Southeast for new economic development projects,” Harrison acknowledges. “While certified sites can accommodate new industries to the state, these locations are also viable options for existing Tennessee businesses that need more space to expand operations and create jobs.”

Baiting the hook

In Tennessee, the state’s geography and its largely sparse population in rural areas means that the certified-site program and its staff must work hard to inform and educate participants on how to elbow their way into those sales and marketing conversations, work that’s above and beyond helping them identify the type of land to sink taxpayer dollars into that might yield the best shot at development, says Amy New, assistant commissioner of rural development with TDECD.

“We help communities identify and evaluate sites that the local government can invest in, so they make sure they are investing in the right kind of sites – ones we can market,” New adds.

“A community may identify up to eight sites, and then those go through our property evaluation program in hopes of being certified. There is a lot of due diligence in that process, and they must go through everything from geological and soil studies to anything else that a company might want to know about when they come to see the land.

“It saves the company the time and expense of that testing, which they appreciate.”

The state kicked off its program in 2013 and now has 48 sites on the roster. The process is rigorous, New points out, which makes it effective.

“We don’t just drop off a check and walk away,” she points out. “We work with the community and its agencies throughout the process, and then involve them when we are marketing the site and taking consultants to visit.”

Indeed, those site-selection consultants get the full-court press when they come to the Volunteer State. They are relentless in pitting states against each other to get the best deal, something Rolfe and his staff know when they begin negotiations, which is why they rely on a charm offensive from the local team as well.

“We have the data about rail access, roads, power supply, land inventory and everything else they’re going to want to know,” Rolfe adds. “But when those local people get in there and start talking about their communities, and why some multinational corporation might want to come there, they can really make a difference.”

The urban-rural divide

There’s also the matter of what the real estate world touts: “location, location, location.” Even those who usually align against incentives packages say rural areas can do with a boost, but one that doesn’t necessarily mean abatement packages.

“They need jobs,” the Beacon Center’s Cunningham says. “But if we stop giving out so much corporate welfare to the major cities, then businesses might look at the rural areas as relocation options. If there are no incentive deals then they can compete with the tons of land they have.

“Right now, if you come into Nashville you may get millions, but if you go into a rural county you will get a lot less, or nothing. If we level the playing field then these areas aren’t competing with each other, but are marketing on behalf of the whole state.

“We would like to see companies making decisions about what we have to offer, not based on the amount of money they’re going to get up front.”

State officials counter those and most other arguments against incentives, rural or urban, with one word: jobs. The state continues to post record-high employment, they admit, but also note that doesn’t mean jobs are plentiful in rural areas.

“The site-certification process and the Select Tennessee program are critical parts of Tennessee’s economic development efforts, especially in rural parts of the Tennessee where unemployment rates are often higher than the statewide average,” Harrison says.

“Currently, 19 counties in Tennessee are federally designated as distressed, meaning they are among the lowest 10 percent of counties in the nation based on unemployment, per capita income and poverty rates. Several certified sites are in such communities.’’

One example is the Lake County Industrial Site at Cates Landing, which has nearly 350 acres of developable land. Attracting an employer or employers to one of these certified sites would be transformational for these communities, bringing jobs and boosting household incomes.

And to make those programs even more robust in outlying areas, TNECD this year expanded the size of its site development grants for “high-impact” grants larger than $500,000, he adds.

“These are designed for sites that are capable of accommodating economic development projects with large capital investments. As part of the 2017 Rural Economic Development Fund, Tennessee plans to provided $10 million in site development grants to aid eligible communities transform industrial sites to shovel-ready status,” Harrison says.

“TNECD’s goal is to eliminate all distressed counties by 2025. Alongside other rural development efforts, the certified sites program is an integral part in reaching this goal and positively impacting the economies of rural Tennessee communities.”

None of this is to say smaller communities are sitting on their hands. They do as much outreach and marketing as possible, and often local officials have begun bartering with a company, and bring in state reinforcements once negotiations have reached a certain point, because at that point the talk turns to incentives, which no one takes lightly, says Mike Evans, executive director of the Montgomery County Industrial Development Board.

“When we have worked to build out these sites with the infrastructure a business would need, it helps to have them taken under consideration at a higher level,” Evans adds.

“Consultants understand that if we’re certified, we have obtained certain levels of due diligence and have the documentation to back that up. Most every state has some version of this kind of program, and it means that if your site doesn’t exactly get priority, it does get more attention.”

He cites two site-development grants his agency was awarded, one of which provided about $200,000 to help clear 77 wooded acres of county-owned land and make them more marketable. Those funds supported about half of the total expenditure, and without them it’s likely that the land would still be offline, Evans points out.

Evans and other incentives proponents also point out that some areas are easier to sell than others.

Economic development officials in Chattanooga spent 17 years readying an industrial park, he notes, before landing a Volkswagen plant. Now, other manufacturers in the automotive supply chain want to be nearby because the region is handy to auto builders elsewhere in Tennessee and the Southeast.

That area also has access to rail, highways, airports and all the other infrastructure a business could want.

The state’s more remote areas? Not so much. But they do have access to power, thanks to TVA, and so all is not lost on the recruiting front, Rolfe explains.

“It can be hard to get companies to look at those areas,” he admits. “But we distill down and see that 40 percent of new jobs came to rural communities, and the rest to more urban areas.

“About 70 percent of new jobs announced were expansions to existing employers, so what we’re doing is talking to our development partners and making sure they are working on recruiting not just for phase one of a project, but also for phase two so they can still capitalize on the business that’s coming in.”

Rolfe also says that a rural area isn’t quite as cut off as it once might have been, so that can help with the transportation issue.

The other task is getting the people in place.

Part of economic development is making sure there’s a workforce to be had if and when a major employer opts to put down roots. In a state with low unemployment, that’s a challenge.

New programs like Drive to 55 Tennessee, Tennessee Reconnect and Tennessee Promise, all of which reduce or eliminate tuition for different age groups so they can obtain or complete a college degree or training certification, should help with that, Rolfe predicts.

“We need a labor shed that’s ready to go, and we have 1.2 million people within a 45-minute commute of that [Memphis] megasite,” he points out.

“About 560,000 are employed in the region. Go out to a 60-minute commute and you’ve got about 1.6 million people. It’s not that rural – 35 miles from Memphis and about 30 to Jackson. And if people find out you’re building an auto manufacturer there, they are going to come to the area to connect with that facility.”

In the meantime, Rolfe says, every economic booster from small-town mayors up to himself and the governor will keep on making presentations, going on recruiting trips, showing people around the state and doing what they can to promote its offerings.

“There are a lot of different communities in Tennessee, so we have to develop formulas that fit each type,” he acknowledges. “There are a lot of factors, from the local labor force size to roads and bridges.

“Business recruitment isn’t one size fits all, and our state’s unique, large and varied regions work in our favor.”