High-Stakes Game

IP deal underscores incentive measures cities take to attract, retain companies

By Andy Meek

At week’s end, International Paper Co. appeared ready to move forward with officially applying for a package of tax incentives as part of a plan to expand the company’s headquarters in the city.

International Paper has decided on trying to complete a deal with local economic development officials that would include incentives to help IP keep and expand its headquarters presence here. Those incentives would include multiple 15-year tax freezes on new and existing buildings, a more palatable proposition than a 30-year tax freeze that it looked at one point like the company was interested in, according to sources.

(Photo: Lance Murphey)

Not that it’s much of a surprise, because, the Memphis-based paper and packaging giant’s intentions already have attracted plenty of attention.

In return for keeping its headquarters in Memphis and expanding here instead of somewhere else, IP early in the process floated the possibility of seeking a 30-year tax break. That’s double the maximum of 15 years’ worth of taxes the Memphis-Shelby County Economic Development Growth Engine board is allowed to freeze.

Word of just the possibility alone garnered pushback. It stoked concern over how far local economic development officials are willing to go to win or retain the presence of major corporations, especially as other cities try to lure them away.

“There’s been overwhelming support from the community to stand our ground on this,” said Shelby County Commissioner Mike Ritz. “It’s been unbelievable. We get emails on this all the time. I think most people feel 15 years is as far as we ought to go. I’m pretty certain that what IP doing now is working out asking for a (payment-in-lieu-of-taxes, or PILOT incentive) that the EDGE board can handle without it going to the City Council or County Commission.

“I do know they’ve quit talking to county commissioners trying to see if there’s a crack in our veneer,” he said. “For a while, they were trying to gather votes to see if they could get 30 years out of the commission.”

A government source told The Daily News in recent days International Paper will move forward with seeking 15-year tax freezes on several of its buildings. Still to come was a meeting by the EDGE board to approve those incentives.

Tax and related business incentives long have been regarded as the cost of doing business by economic development professionals here and elsewhere. That’s because of the scramble among cities, counties and states to look the most attractive when corporations dangle the prospect of new jobs.

Government and economic development leaders tell themselves if they don’t put enough money on the table, someone else will.

Ritz’s comments, though, are one hint that while the dynamic might not be changing, the conversation is.

There’s a reason some economists have turned to game theory to analyze the incentives that surround economic development efforts around the country. What once may have been regarded as a straightforward investment into the creation or retention of jobs now is a zero-sum game that looks more like an insurance transaction and has the trappings of a round of blackjack.

As with insurance, governments aren’t buying a guaranteed outcome when they award tax incentives. The company awash with those incentives today is the company that’s loading up the proverbial station wagon for greener pastures tomorrow.

Incentives brought Pinnacle Airlines to One Commerce Square, but now the company is considering leaving town.

(Memphis News File Photo: Lance Murphey)

Nor do the governments vying for a company’s jobs always have perfect visibility into who they’re competing against or how much their competitors have anted up. Only some of the cards, as it were, have been revealed.

For an example of how economic development in hindsight can sometimes be viewed similar to the way a person views insurance – as a hedge against undesirable outcomes – look no further than Downtown Memphis.

When asked about the status of Pinnacle Airlines Corp. potentially moving its headquarters out of Memphis, Paul Morris, president of the Downtown Memphis Commission, said it’s – no pun intended – still “up in the air.”

Thanks to a mix of incentives offered to the company, Pinnacle moved a year or so ago into 170,000 square feet on 13 floors at One Commerce Square. But Pinnacle hired the real estate consulting firm Jones Lang LaSalle last spring to research alternative headquarters locations and what incentives might be available.

So if the company does end up moving, was it a bad investment? Not at all, Morris said.

“If Pinnacle did leave, the city would still be better off having made possible the redevelopment of One Commerce Square, which has attracted not only Pinnacle's headquarters, but also several other good businesses including the headquarters of the Great American Steamboat Co. and the Memphis offices of Electrolux,” Morris said. “Independent Bank put its logo atop One Commerce Square, enhancing the Memphis skyline. Before the city acted, One Commerce Square was owned by an out-of-town bank after foreclosure and the building was quickly emptying of tenants. We were at risk of having another major building in our skyline go dark.

“Now, because the city acted, One Commerce Square is a premier office tower that helps attract businesses to Memphis and can be a source of pride in our skyline. Pinnacle helped make that possible. Downtown is already better off having had them here over the past year.”

That’s a kind of outcome Reid Dulberger, the EDGE president, may have had in mind a couple of weeks ago during a Memphis City Council special committee meeting on incentives.

During the two hour discussion, Dulberger stressed the process is not as simple as approving a certain amount of incentives in exchange for a certain amount of jobs, then clawing that back if conditions aren’t met.

“The program is complex – like a jigsaw puzzle,” Dulberger said. “You change one thing, and others start to change. It doesn’t mean things can’t change. It just means we should identify the things we’re interested in.”

Dexter Muller, senior vice president for community development with the Greater Memphis Chamber, said he recently met with a group of commercial property owners. They told him what makes them relocate to a given space is a situation like this – if they’ve got a need for half million square feet of space, for example, and they’re currently in 250,000 square feet.

Notwithstanding talk of incentives, they’ve got to move anyway. The secret sauce of a strong economic development program is a pro-business attitude and a comfort with constantly re-evaluating the program’s benefits and objectives, said Jim Flanagan, president and CEO of the DeSoto Economic Development Council.

“The elected officials here hold a very strong pro-business attitude and continue to look for ways to induce companies to locate and expand here,” Flanagan said. “And we see that continuing. Activity is obviously still quite good with the number of companies that are pursuing site selection, locations and considering expansions. We’ve seen continued recognition in the real estate community and among site selection consultants DeSoto County’s viability is an option as they explore within the Memphis region, and we’ve seen that increase.”

It’s something to keep in mind as IP even now is expected to increase its presence here, including construction of a new build-to-suit building.

But as far as the details go, IP has been reticent, not talking about its plans or competing offers from other cities that may be in hand.

“We can say that this is a necessary and important step as we plan for International Paper’s future,” reads part of a brief statement from the company.

In an email to Shelby County Mayor Mark Luttrell last month, Ritz left the impression that letting an application from IP for a 30-year tax freeze go forward would potentially embarrass local officials. What’s more, he said it would open the floodgates to similar requests by other corporations with a presence here in a way the area could not afford.

Ritz is a non-voting member of the EDGE, board, which grants tax incentives to companies looking to expand here, retain jobs here or move here from elsewhere.

“This proposal will embarrass EDGE, both of the elected bodies and IP with the public discussion and a probable public body denial,” Ritz wrote. “I do not want IP or their employees getting the impression we don’t like or appreciate them. I am asking you not to put us in that position.

“If this IP proposal is approved, there is no denying a similar proposal from FedEx or AutoZone for similar treatment for all of their Shelby County real property,” he said. “We cannot afford to go there.”

He went on to say that he should not be viewed as asking EDGE to deny such a PILOT – rather, that it not be proposed in the first place.

“A 15-year PILOT, or whatever term is earned by the formula, is appropriate for a new IP building,” Ritz wrote to Luttrell. “EDGE can do that without council and commission approval. If you committed to IP your support, then tell them asap that you could not get it done …I am very confident that IP was encouraged to make this proposal by some who work regularly with the EDGE program. They need to get the NO message too.”