At the margins, state and local incentives are able to improve project feasibility and thus spur the creation of new jobs and investment. However, discretionary financial incentives are inherently complex and process intensive, and require great care and attention lest a company fail to enjoy the benefits to which it would have been entitled. A recent engagement on behalf of BLS & Co. client HelloFresh illustrates how important it is to be vigilant of the requirements that jurisdictions place on companies (and their advisors) when pursuing incentives.
The case for HelloFresh
Germany-based HelloFresh is the world’s leading online food delivery service with 1.5 million active customers in 10 countries; HelloFresh served more than 48 million meals in the first quarter of 2018 alone.
Back in 2015, the meal kit company launched a nationwide search for a location from which to serve its growing U.S. market. Working with BLS & Co., the company narrowed its search to several locations including Newark, New Jersey, where it proposed to build a 235,000-square-foot distribution center and 12,000-square-foot call center; retaining 122 jobs already in that city and creating 442 more. The New Jersey Economic Development Authority (NJEDA) had projected that HelloFresh would generate a $41.3 million net economic benefit to the state when the new facilities are fully operational.
BLS & Co. positioned the project for incentives benefits, the most significant of which were “Grow New Jersey” tax credits. In total, HelloFresh received approval from the NJEDA for tax credits valued at $9,250 per year for 10 years for each new warehouse job; $7,250 per year for each new call center job; and $2,086 per year for each retained job. HelloFresh’s maximum benefit is $37.1 million over 10 years.
Complexities of the incentives process
Securing incentives on behalf of HelloFresh required BLS & Co., and our client team, to navigate a complex and rigorous process with many legal, financial and political nuances. Failure to adhere to established practices (for example, allowing HelloFresh to sign a lease or hire local employees before making an application and receiving approval), could have (in a worst case) resulted in the denial of Grow New Jersey benefits. Of course, we made sure that did not occur. Similarly, the legal contract that HelloFresh signed with the NJEDA spelled out certain obligations of the company (for example, deadlines to attain jobs and investment targets), and of the state (to award tax credits upon confirmation that such jobs and investments have been made). BLS & Co took care to ensure that HelloFresh’s commitments were carefully aligned with the expected level of benefits.
Compliance is key
As noted above, HelloFresh will receive incentives benefits only after the NJEDA has been able to confirm that it has met its contractual obligations. By statute the NJEDA has given the company three years to be in compliance with its agreement, at which time a public accountant must attest that the company has made the required capital investments, the CEO must certify that it has attained its job creation targets and a licensed engineer needs to confirm that the new project adheres to the state’s Green Building standards. And, for the next ten years, plus five additional years, BLS & Co will work with the company to submit an annual report to the NJEDA that demonstrates that HelloFresh remains in compliance with the terms of its agreement. Failure to do so could result in the reduction or forfeiture of the Grow New Jersey tax credits for that particular period. In a worst case (and highly unlikely) scenario the company could be obligated to repay an amount equal to the shortfall if it remains out of compliance for two consecutive tax years.
Companies seeking incentives often focus on the potential benefits without giving adequate consideration to the rigor that is required to successfully navigate the associated approvals, documentation and compliance processes. Missteps can be costly, however with adequate planning and attention they are avoidable, enabling incentives recipients to enjoy the benefits to which they are entitled as a result of their job creation and investments.
Andrew Shapiro is a Managing Director at Biggins Lacy Shapiro & Co., one of the largest, most highly regarded site selection and incentives advisory firms in North America. BLS & Co. helps manage the complexities associated with finding optimal location and securing incentives to support new ventures. Follow Andrew on LinkedIn or contact him directly at ashapiro@BLSstrategies.com.