Economic development projects and infrastructure investment can present both tremendous opportunities and significant risks for governments. Negotiations can result in legally binding determinations of the most important aspects of a project, including performance metrics and the financial responsibilities of all parties. Government officials must ensure that agreements are negotiated to provide the greatest social, economic, and community benefits, while avoiding providing public benefits, considerations, or incentives that do not result in a substantial return on investment.
The ideal outcome for an economic development agreement is a contract that has been well-drafted and documented, is responsive to changing circumstances, and is fair to both parties. This outcome is most likely to be sustainable and mutually beneficial to all concerned.
GFOA recommends governments develop and pursue a clear negotiating strategy when working with 3rd party developers on an economic development project, and that the finance department/officer should always be represented on the negotiating team.
Pre-planning activities for a negotiation should, at minimum:
- Identify and convene key stakeholders and reach agreement on the community benefit principles (goals), in order to establish a framework for the project. Determine if the project meets the government’s approved economic development guidelines, if any. Elected officials should be involved in developing goals and policies in order to ensure that negotiated agreements are consistent with elected officials’ expectations for local economic development projects.
- Evaluate the government’s negotiating position, taking into account feasibility studies and impact assessments. Assessments should consider any legal limitations set by local, state, provincial or federal laws.
- Identify and prioritize the types of public support or development incentives the agency is prepared to provide (land sale or lease, tax abatements, tax credits, project financing, cash subsidies, infrastructure assistance, grants, discounts, public-private partnerships, enterprise zones, relaxation of land use policies, etc.). Ensure no component(s) of an incentive package compromises or dilutes the economic benefit of another component within the deal.
- Evaluate whether there are opportunities to invite other jurisdictions to partner in the program.
- Establish what community benefits the government desires from the developer or another entity and any of its contractors and eventual tenants, including, but not limited to local hiring, payment of living wages, construction or preservation of affordable housing, open space, etc.
- Conduct research to bolster the government’s position during the negotiation process (best practices, similar deals in other communities, etc.).
- Establish an acceptable duration for the agreement, and give consideration as to whether the agency is prepared to enter a short-term or long-term deal.
- Identify risk factors and determine potential provisions of the deal that are non-negotiable (“deal-breakers”) due to the political environment or financial constraints.
- Compare the proposed deal to prior incentive agreements and identify if, how, and why the deal differs or is consistent with those arrangements. Be prepared to justify outcomes to the governing body.
- Consider whether local ordinances, policies, or zoning laws will need to be modified, prior to approval and implementation of an agreement.
- Assemble the negotiating team and determine who will represent the different parties. This is vitally important to the outcome of negotiations and the sustainability of a jurisdiction’s potential investment. It is in the government’s interest to assemble a multi-disciplinary negotiation team that is professionally balanced with relevant experts, (legal, commercial, fiscal, technical) as well as some government representatives from sectors affected by the investment. If elected officials are included in the negotiation process, develop a negotiation strategy to which all members of the team are committed.
- Determine who should lead negotiations and who in the room is empowered to make decisions on particular aspects of any deal.
- Establish a timeline and roadmap to ensure all relevant issues are discussed and agreed upon.
Active negotiations should, at a minimum:
- Ensure that the agreement incorporates comprehensive performance criteria, especially any defined in a government unit’s economic development guidelines.
- Address and document how the agreement will work in practice. This includes but is not limited to how/who will make decisions, what deliverables will be provided and by what party and when, who will handle unforeseen events, coordinate communications and resolve disputes.
- Avoid ambiguous or non-specific language that undermines real implementation, such as “good faith efforts,” “to the extent feasible and practicable,” and “commercially reasonable efforts.”
- Ensure the agreement identifies who (i.e. what agency or entity) is responsible for enforcing the agreement, and that they have the resources and capacity to carry out that task.
- Include enforceable measures, such as frequent reporting requirements, robust monitoring procedures, and specific accountability measures for noncompliance such as liquidated damages, contract termination, and a provision requiring that incentives be recouped if public purposes are not achieved (“recapture” or “claw back”). Negotiators need to ensure that these provisions are clearly documented in the agreement.
- Ensure that governing body representatives and affected community stakeholders are informed about the proposed project as it moves through the process, enabling them to participate effectively in public hearings and ultimately, the approval process.
The outcome for a well negotiated agreement will include an agreement that provides clarity and transparency in the government’s position in the deal, and a clear definition of the measurable outcomes.