The Seven Deadly Sins of Site Selection

The Seven Deadly Sins of Site Selection

White Paper/James Renzas

1.        Letting real estate drive the decision

Sin #1:  Companies often wait until they have little choice but to select an industrial building in the wrong town because of a shortage of available buildings in their search zone.  This often leads to over-emphasis on selecting the building that best fits the needs of the company without considering other important site selection factors such as labor availability and cost.

Example:  An automotive parts company located its factory in a small valley where the labor shed was constrained by a large mountain pass.  The 350,000 sq. ft. building was suitable and a great deal, so the company made the decision to locate its manufacturing operations there 10 years ago. 

Things went well for a while, but after a few years they began having trouble recruiting and retaining employees.  The population of the entire county increased by less than 700 people from 2012 to 2022 and the labor force increased by less than 400 people.  Since this company was to employ 350 people, they soon found that they no longer could recruit and retain employees due to slow labor force growth coupled with the expansion of other manufacturing companies in the valley. 

Finding themselves with over 50 unfilled manufacturing positions, the company resorted to overtime and weekend work to fulfill their contractual obligations to the OEM customers.  The problem was exacerbated as employees would finish their weekend shifts and then go onto social media, like Glassdoor, complaining that the company did not respect employees work-life balance and recommending against applying for the unfilled positions.

In the end, the company had to resort to moving the company to another location with better labor force demographics at a cost of over $5 million, over half the cost of the “great real estate deal” they got 10 years earlier.

2.        Insufficient due diligence

Sin #2: Many companies allow the attitudes and experiences of senior management to dictate the location of manufacturing operations, without conducting sufficient due diligence into the key location factors that will make their operations a success. They allow personal biases to enter into the decision and often live to regret it.

Example: The founders of a small, but rapidly growing materials company were on vacation in the mountains.  Stumbling on a beautiful mountain town the two founders agreed that this beautiful place would make an ideal location for their planned manufacturing operations.  After all, it had a wonderful climate, access to outdoor recreation, skiing, and clean water and air. 

The company became very successful, evolving into a five-billion-dollar company.  As they grew, they built multiple factories in this small town, becoming the largest employer in the region, with almost 2,000 employees. 

In the meantime, this small town became quite popular as a destination for outdoor recreation enthusiasts and other employers serving this market expanded rapidly.  Available housing was snapped up for second homes and Airbnb operators.

The lack of available housing coupled with competing demands for labor from non-manufacturing operations drove home prices up to the point where both manufacturing employees and their executives were all having trouble finding suitable living arrangements.  Outlying areas were unsuitable for development, so they found themselves in a situation where they could not recruit enough workers to replace turnover, much less expand operations, even though they were the highest paying manufacturing employer in town.

Now, the company is faced with some tough decisions.  Expand elsewhere and deal with the logistics and management challenges of a remote operation or relocating the entire manufacturing operation to another location offering a more robust labor force marketplace.

3.        Premature disclosure inside the company

Sin #3: Establishing a new manufacturing operation is fraught with difficulties, especially in the case of a relocation where jobs, tax revenues and incentives are involved.

Example:  A large defense manufacturer was in a major metropolitan area, which was unionized, and productivity had become an issue.  They decided to move to a secondary metro area that offered a lower cost labor profile, potential to operate in a non-union environment and higher productivity.

During the site selection process a senior executive became enamored with the new potential location and phoned the CEO who was named Mike to report the good news.  Although he questioned the sound of Mike’s voice, he assumed that Mike just had a cold which was affecting his voice. 

When he returned to the factory, he found banners hung across the manufacturing floor announcing the relocation of the factory, and machinery that had been sabotaged so that it no longer operated correctly. 

When he confronted the CEO, Mike, he found out that he had been talking to Mike, the union steward who had conveyed the company’s plans to the rest of the work force.  Productivity fell off a cliff and the company’s sales were impacted significantly while the company planned and managing the relocation (and repair) of critical machinery.

4.        Holding a “Beauty Contest”

Sin #4: We often have seen companies that are considering expansion reaching out to multiple (sometimes hundreds) of state and local economic development agencies announcing their plans for locating a new manufacturing facility or office project.  On first blush, it may seem like this would streamline the process of finding the best location for a new corporate facility, it can confuse the process and make it much more difficult and time-consuming to select the right location, in some cased damaging the company’s reputation in the marketplace.

Example: A major West Coast ecommerce company decided that it needed a second headquarters operation to accommodate growth and mitigate against potential environmental and geopolitical risks.  This company sent out hundreds of Requests for Proposals soliciting responses from state and local economic development organizations throughout the United States, Canada, and Mexico.  Over 230 state and local economic development organizations responded, offering all manner of incentives to entice the company to look, creating a public bidding war. 

Nearly 18 months later, after reviewing hundreds of proposals and tens of thousands of pages of plans, maps and proposals, the company selected 20 finalist cities but insisted on absolute secrecy on the final selection criteria as well as competing incentives offers. 

Working with state of local officials, the company finally decided the finalist location after two years of intensive review.  When the finalist decision was disclosed along with a description of the incentives offer, community-based organizations became incensed and mounted a very public backlash against the project, accusing the state and local officials of blindsiding them and excluding them from a very important decision which would affect the future of their community.  Seeing the damage to its brand, the company ultimately chose to withdraw its decision and de-camped to another of the finalist cities, but not before enduring significant public humiliation and adverse publicity.

5.        Hiring a site selector with conflicts of interest

Sin #5 Some vendors in the site selection world offer very low consulting fees in exchange for a “success fee” to be paid at the conclusion of the assignment.  While attractive and easy to sell this sort of arrangement to senior management due to the low up-front costs, it can backfire in several ways that can hurt the company and sometimes lead to lawsuits and other unpleasantness.

Example:  A large nationally known real estate brokerage offered this contingency arrangement to a Turkish company seeking to establish a $358 million battery plant somewhere in the Southeast.  The real estate broker conducted a study and recommended that the project be established in a small South Carolina town about 40 miles outside of mid-tier metropolitan area.  In addition to helping the Turkish company find an acceptable site, the real estate broker was also engaged to identify and negotiate economic development incentives.  A contingent “success fee” arrangement was made to compensate the real estate broker for this service. 

Considered a “Mega Project”, South Carolina rolled out the red carpet for this client with a whopping package of state and local taxpayer funded incentives worth over $127 million.  The incentives included property tax breaks, income tax breaks, sales tax exemptions and a grant to help offset the cost of construction of road and water lines to service the project.  When the real estate broker sent a $5 million invoice for incentives negotiation services (the maximum allowed under the agreement), the Turkish company’s CEO was surprised and pushed back against such an excessive fee for consulting services.  The company paid a $750,000 fee, but the real estate broker threatened litigation against the company for the payment of the full fee.  South Carolina law prohibits companies from paying consulting fees to third parties for helping to arrange such incentives, and the state Department of Commerce said it “does not condone contingency fee arrangements in connection with discretionary incentives.” The company subsequently suited the real estate broker for unspecified financial damages in court, triple under the state’s Unfair Trade Practices.

In addition to large, unexpected invoices, companies that utilize realtors and consulting firms working under a contingency fee arrangement may not be getting the most objective advice.  The financial motivation to “push” a client to a more expensive site or building or to areas offering the largest package of incentives, regardless of the locations suitability for the project is large. 

6.        Letting personal experiences and opinions drive the decision

Sin #6: Letting personal experiences and opinions drive the decision

The opinions of C-level executives often get serious consideration in the selection of locations for new corporate facilities.  Their experiences in the past, as a tourist, visitor or family connection can sometimes influence the location selection process in negative ways that are unanticipated until problems show up later.

Example:  A Systems Engineering division of large telecommunications company on the East Coast was incredibly successful in signing up new subscribers for their services.  As they grew, they knew that they would ultimately need to find much larger space to house their IT and technical support operations.  The CTO of the division led the site selection project which was considering local expansion as well as remote locations.  As the project progressed, the team sensed that the CTO was pushing the project away from the existing location, which had served the company well, to a new location in the Colorado mountains.  The decision was driven by the CTO’s belief that the area’s mountain scenery, low crime rate, pleasant weather, and affordable housing would attract top computer programmers.  He also hoped that the location would offer lower operating costs versus the urban East Coast facility. In addition, the CTO owned a condo in the mountains and loved to ski. 

The company built a large new facility for millions of dollars and spent additional millions relocating employees.  Hundreds of key executives, engineers and support personnel refused the move or left the company shortly after relocating, many of them minorities.  Many of these employees felt that the mountain town lacked culture, diversity, research universities, vitality and job mobility.  The move isolated the company’s engineering talent from top management and marketing executives at the East Coast headquarters, undermining the spirit of collaboration that helped to create the company’s success in the first place.  In addition, the lack of diversity made it much more difficult to attract replacement employees and maintain the level of talent that the company once relied upon to achieve success.

7.        Pre-announcement disclosure in the community

Sin #7:  Announcing a location decision before incentives are finalized

A common error that company’s make is to make an announcement of a location decision prior to finalizing a state of local economic development incentives offer. 

Many states and areas have strict rules about offering incentives to companies that have already announced or disclosed in any way a decision to locate in a certain area.  This is because many incentives programs contain a “but for” clause that states clearly that “But For” this incentive, the company would not locate in the state or local area.   Disclosing prior to finalizing an incentives offer violates the But For clause of these programs and immediately disqualifies your project for discretionary economic development incentives. 

Example:  A southern U.S. truss company was planning on establishing an new manufacturing facility in a small western town as part of a regional expansion program that the company was mounting.  They asked us to help evaluate the location and negotiate incentives to reduce the cost of building the new manufacturing facility.  We went to work and were able to negotiate a new road to be built in the industrial park to service the new facility for free as well as additional infrastructure improvements using Community Development Block Grants controlled by the community.  The incentives were worth over $4 million to the company. We warned the site selection team that this program has very strict But For clauses and that disclosure of the company’s plans would immediately result in the incentives offer to be retracted. 

On the weekend before the community’s economic development board meeting was scheduled to approve the incentives offer, the new plant manager for the company went house shopping in the community.   Being a small community, the word quickly spread that the new plant manager was buying a home in the community. Local officials quickly determined that the company must have already made the decision to locate in the small town. 

The following Monday at the community development board meeting, this fact was disclosed by the local realtor who was helping the plant manager look for homes. 

The result of this disclosure was an immediate retraction of the $4 million offer for infrastructure improvements which the company then had to add back to its construction costs.  So, in effect, the company could have bought the plant manager a home in the community for $400,000 and still had netted $3.6 million to lower their construction costs.  An expensive lesson was learned about not disclosing before the incentives agreement has been finalized.