One of the major shifts in the property industry happening at the moment comes from changes that have originated from the highest authority (The Securities & Exchange Commission) in the form of one of their thrilling interpretations of financial accounting standards from the Financial Accounting Standards Board (FASB). The FASB project in question, Topic 832, gives guidance of how to disclose government incentives on corporate financial statements.
Before, companies had no requirement to disclose these assets. Investors, faced with the burden of having to investigate the terms of these incentives since most are not on 10K statements, complained to the SEC. “Remember that these credits and incentives can add up to a lot of money,” Scott Nelson explained. He is the founder of BIGcontrols, a company building software that helps corporations identify, manage and report these tax credits and incentives. “In 2014 Intel received a 30 year, $100 million per year property tax abatement from the city of Hillsboro, Oregon,” he said. “That is $3 billion over 30 years which is material even to a company like Intel. If you look at their 10K [statement] for the year you won’t find any mention of it.”
I found this hard to believe, that a $100 million dollar liability offset would be skipped over. I did the math and figured that a $100 million cash flow over thirty years, even with a modest discount rate of 3%, would have a net present value of $1,951,478,210.39, a little lower than the $3 billion that Scott had said but still significant when considered that Intel had a market cap of around $110 billion at the time. Then, I checked the 10K myself to make sure it wasn’t mentioned. Sure enough nothing about it anywhere in the 129 page filing.
At first glance, this might seem trivial. After all, this is a good thing for investors, having to pay less taxes. But imagine you were at the end of the agreement rather than the beginning. I would definitely want to know that a company I was putting money into was about to have a $100 million spike in their property tax bill. Also, many of these incentives have “clawback” clauses if their requirements are not met, so if the company fails to meet its obligations they might be liable for back taxes as well.
Remember that the total market for these incentives is quite large. “There are around $100 billion dollars of tax incentives managed every year in the U.S. and about $300 billion globally,” Scott said. “But understanding and managing this has gotten very little attention. If you ask any Fortune 500 CFO if they are taking advantage of every incentive that they are eligible for, they would likely have no idea.”
The same goes for the property owners. I am willing to bet that most owners, managers and brokers have very little knowledge for all of the programs that their property qualifies for. While these incentives get paid to the corporations that bring jobs to the area the value of them should be represented in the value proposition of the property. Two identical properties, one that qualifies for large tax incentives and the other that doesn’t, might not sell for the same price. That is, as long as the sellers know what they have. Plus, there is actually a secondary market for these tax credits so some of these offsets to liabilities can be converted into a source of revenue.
Since the corporate incentive data has to be accessed by a number of people including the corporations themselves, investors, local governments, accounting firms and, heaven forbid, IRS auditors, Scott and his team have started a “Blockchain Lab” that is finding partners to create an immutable ledger using blockchain hashing encryption. Bringing this sort of clarity to what were only last year unreported funds would be a huge step towards deriving more value out of these incentives for everyone involved.
Amazon and their recent public courtship with cities across North America has put government incentives to corporations into the public consciousness, at least until the next new cycle. This could mean that some mayors might want to be seen as tough on give-backs to wealthy public companies. Others will likely continue with the tradition of swapping tax revenue for jobs and the political goodwill that they bring. Either way, the new FASB rule means changes for the way corporations think about local incentives and increased transparency will give investors and property owners a better understanding of where the $100 billion dollars a year worth of value really lies.