Part 1 | Industrialization: Boom or trainwreck?

What are the economic benefits of new industries and what are the challenges they present?”

ABOUT THE SERIES

This series will explain how industrial development works, which agencies and governments have authority to regulate it, and the processes involved when communities consider proposals.

Within the past weeks, the “hot topic” in our community has been “data centers.”

Between the massive amount of money involved in these potential developments and the change such industries might bring to our community, there has been a great deal of angst among our citizens. The uncertainty of the situation calls for all residents to seek facts to better understand the potential positives and negatives.

The Hood County News strives to provide relevant information to our readers. With so many rumors, innuendos and allegations being tossed around on social media and in the coffee shops, we have determined it was time to write a comprehensive series of stories detailing these complicated development and legal issues in a clear and simple way. We have reached out to multiple public officials, including the mayor, the county judge, the Granbury director of economic development, county commissioners, state officials, county officials, legal scholars, among others, to learn about the process of economic development in our community. It is our expectation to effectively communicate this information to our readers in a simple, clear, and factual manner.

What are the economic benefits of these new industries, and what are the challenges they present? What governmental entities have authority of these massive developments, and how are they regulated? What are the short-term and long-term employment and tax benefits for our community from these projects? How do we protect our natural resources and our quality of life while having our economy grow? We take no official position endorsing data centers nor condemning them. We feel the responsibility to provide information so our citizens can form their own judgments and have expectations. This series of stories does exactly that.

It is apparent there is a great deal of confusion and misunderstanding regarding the meaning of certain economic development terminology. As such, we believe it is important to provide a glossary of terms, so our readers are clear as to their definition and use.

Non-disclosure agreements

Non-disclosure agreements, often referred to as NDAs, are used early in discussions between businesses and government to protect confidential business information. These agreements generally are insisted on by the developer when initial conversations with the governmental agency have reached the point where they feel comfortable sharing details with community leaders.

For a development to occur, the developer must share sensitive and confidential information about their finances, technology, security and property acquisitions. If this information becomes public too early, it could cause land prices to spike, stock prices to tank and affect their employees in other locations. It also could give their competitors a strategic business advantage

 In many instances, the companies seeking to create a development are publicly traded entities, so this type of information, if leaked to the public at large, could be considered “inside trading” and hence would be illegal.

Our local government gets numerous inquiries from businesses each year, “kicking the tires” on what Hood County and Granbury have to offer. Few of these inquires grow to the point of the creation of an NDA. Importantly, NDAs do not override transparency laws, and once a formal agreement is made, they become public. NDAs are not an attempt by local government to hide actions from the public; they are to protect the business interests of the developer. Without an NDA, many businesses would not initiate meaningful discussions or consider a development project. It would be poor business on the developer's part and might even be illegal.

Abatements

An abatement is an agreement between a local taxing entity (city, county or special district) and a developer in which the government agrees to reduce or freeze property taxes for a set number of years in exchange for the developer building something which benefits the community. In most cases, it is not a tax break on the land itself. It usually applies to the new value created by improvements. (like a new building).

A tax abatement is a contract which requires a developer (or company) to meet certain agreed-upon standards. It holds the company accountable for key factors like job creation, wages and capital investments. Importantly, a tax abatement does not take away any existing tax revenue, and it does not increase taxes on anyone else. It only applies to the new value created by a project which currently does not exist. Abatements allow the governmental entity to contractually require conditions that they might not have the statutory authority to impose, like:

1. Limits on noise and usage;
2. Noise reduction methods;
3. Traffic Improvements paid for by the developer;
4. Landscaping and visual buffers;
5. Air quality protections;
6. Local spending requirements (A set portion of the project’s expenditures for materials and goods must be purchased from local vendors or other forms of use of local goods, services or products); and
7. Decommissioning (what happens to the facility if the developer abandons the project at some future date).

Because taxing entities only have limited powers to mandate performance from landowners, an abatement is a contractual way to compel a developer to perform or modify their conduct to meet the standards which are positive for the community at large.

Failure to meet the terms and conditions of an abatement may lead to the abatement agreement being canceled or modified and taxes being “clawed back” from the developer, meaning the governmental entity recoups unpaid taxes for lack of performance. Without an abatement agreement, local governments may only have limited power to compel behavior on the part of developers.  

Why does a governmental agency offer tax abatements?

1. To attract new businesses. Competition exists between cities and counties as they vie for new businesses, which will add jobs and tax base to their community. Because the competition is intense, potential location sites must put their best foot forward to make themselves more attractive to the incoming business than a neighboring community. For example, if a major business such as H-E-B, expresses a desire to come to town and seek an abatement, they are trying to strike the most beneficial deal they can in consideration of choosing one location over the other. They know they bring a strong benefit in terms of increasing local sales tax revenue, job creation and improving the quality of life for the location. As such, the amount and terms of an abatement have a great deal to do with the business decision which H-E-B makes on whether or not to make a commitment to a location. Perhaps it is no different than an individual seeking to buy a new car. They shop for different dealers in person and online to see what the best deal for them and the overall quality of the package presented is where they choose to buy from: An example of capitalism in action.
2. To regulate. As said previously, they are used to regulating at a higher level than current policy allows.
3. Encourage housing developments. Abatements can encourage developers to create needed housing for the community, which will add to the tax base and the overall economic growth of the community. 
4. Revitalize blighted areas. Abatements give developers an incentive to go into areas they might otherwise never develop, leaving the economic “edges” of the community from ever growing or reaching their potential. 
5. Create jobs. New businesses not only create building and construction jobs, but they also create new employees to operate the business. The money which these new employees are paid gets spent in the community increasing the economic base.
6. Increase long-term tax base. As inflation causes governmental budgets to increase, either new sources of income must be created or taxes must be raised on existing taxpayers. Adding new business creates a bigger tax base and helps keep tax rates low across the community, especially for homeowners.

How does a 10-year abatement/rebate work?

A common misconception is incentives mean a developer pays no taxes on a project. That’s not how the process typically works. The property still is fully taxed based on its value. In many agreements, the developer pays the full tax bill each year, and the city or county may rebate back a portion of the taxes on the new improvements, but only if the developer meets all the agreed-upon requirements in the contract.

As an example, a developer purchases a piece of land for $500,000 and then builds a $4.5 million apartment complex. The new value is then $5 million. The developer would pay taxes on the $5 million appraised value of the project, but pay a reduced rate for 10 years. For example, a developer buys land for $500,000 and builds a $4.5 million apartment complex. Once it’s built, the property might be worth about $5 million. The developer still pays taxes each year, but if a 50-percent abatement is approved, they would pay full taxes on the land and half of the taxes on the new building for 10 years. At the end of 10 years, the full tax rate kicks in on the entire property, which increases the county's tax base significantly.

Importantly, without tax abatement, many projects would not be economically feasible, and developers simply would go to another location where the local government would grant an abatement. The abatement delays receiving new real estate tax revenue immediately, but it does ensure future taxes that would otherwise might never appear on the tax rolls. Importantly, even during periods of abatement, governmental agencies still receive revenue from permit fees, utility revenue, and ancillary sales tax revenue from the increased economic activity associated with the construction and operation of the new enterprise. At the conclusion of the abatement, there is the long-term benefit of increased property tax revenue. This additional revenue continues in the future, providing tax revenue for decades.

What do developers customarily provide to receive an abatement

Often, abatement agreements include an agreed minimum capital investment. Job creation — often a minimum number of new job creations is stipulated. Construction deadlines — to ensure a project stays on schedule. Compliance reporting to make sure the developer is doing as agreed. Wage minimums — to ensure the jobs created are jobs which provide a good income to the workers. Using local vendors and making local expenditures for products and materials — ensures local vendors and businesses benefit and that sales tax dollars stay local, adding jobs and revenue to the tax base. Sometimes abatements can be phased over the 10 years or may only last for a shorter period. It depends on the negotiation between the governmental agency and the developer. All abatements are the result of a negotiated agreement between the parties, each making a commitment which serves their best interests.

Common criticisms

Those who are detractors of abatements may make allegations “the developer would have built anyway” and there was no reason to give any sort of a “break” to a wealthy business. The truth is, we live in a competitive, capitalistic society, and business development always occurs where the business environment is the most profitable for a company. One of the reasons Texas has such a thriving economy is the lack of state income tax and our favorable business environment. Imagining that businesses simply expand to a location without economic motivation is a false narrative. Others argue that an abatement benefits large companies more than small companies, and they shift the tax burden to existing landowners.

Like any negotiation, a large business investment carries with it more economic weight and thus has greater strength in its bargaining situation. They bring more to the table, and so they may ask for more in return. This is capitalism at work. Again, using the example of purchasing an auto, if an individual were to purchase 40 vehicles at one time, as opposed to only shopping for one, the expectation is the larger purchase would get a better price. Such is our economic system. An abatement isn’t giving away tax money. It’s negotiating a portion of new taxes that wouldn’t exist unless the project happens.

Annexation

Annexation occurs when a property owner submits a voluntary request to become part of the city. These requests sometimes contain contingencies such as zoning and economic development agreements. For example, as a condition of the voluntary annexation, the landowner may want the property rezoned from its status to light industrial. If these conditions are not met by the city, the land reverts back to the jurisdiction of the county. This protects the landowner’s ability to use their land in the way they see fit and protects their individual property rights. It also allows the city to add to its tax base and improve the overall economy of the community.

By adding real property to the city limits, the city gains the advantage of having a source for future developments. There are a number of cities in the Dallas Metroplex which have borders directly connected with the boundaries of other cities. When the opportunity arises where they might add a new business, they must redevelop sites which have been abandoned or which no longer are operational. By adding land to the city, there are greater options to develop and grow, all increasing the tax base and lowering the tax burden on homeowners.

Annexation also helps protect the community by allowing the city to apply stronger standards, zoning and oversight on what is built, ensuring development is planned responsibly and in a way that benefits residents. If a piece of property is annexed to the city, the improvements to the property fall on the developer. These include road improvements, water and sewer infrastructure, landscaping and maintenance. By accepting annexation, the city is not obligating itself to expend large additional resources providing infrastructure.

City economic development director

The economic director plays a major role in controlling the course of development. Their job is to protect the cities' interests and ensure if a project happens, it happens in the right way. This includes negotiating strong protections, ensuring the developers pay for infrastructure, requiring accountability and protecting our water, roads, and quality of life. Ultimately, the City Council makes the final decisions on development, and those decisions are made in public meetings.

Safeguards and tax agreements provide the city with the enforceable requirements to shape the future of Granbury and the projects which are located here. Shea Hunter currently is our city's economic development director. She has previously worked in Tennessee, where she was responsible for the largest economic development in the history of the state of Tennessee, involving a business investment of more than $3 billion, creating a large quantity of jobs, economic growth and expansion of the tax base.

Next week's segment will focus on the authority of city government to regulate industry, the authority of the county and the role the legislature has in establishing standards for industrialization.

Next week: Property Rights in Texas. Who has the authority to regulate land usage?