Doing Business in Greater Phoenix, U.S.A. - Chapter 4: Investing in the United States

4.1: PROCESS OVERVIEW & CONSIDERATIONS 4.2: GREATER PHOENIX MARKET CONDITIONS

4.1: PROCESS OVERVIEW & CONSIDERATIONS

Local businesses annually invest millions in the Greater Phoenix region. In this chapter, you will learn about the process of making investment decisions as well as the specifics of Greater Phoenix’s local market conditions.

Site-Selection Process

The business investment decision or “site selection” process is complex. The process begins by evaluating various geographic markets to determine the best location for a company to achieve its strategic goals. Companies sometimes work with site selection consultants to assist in this decision. This “due diligence” process involves analyses of local labor and real estate markets; state and local tax policies; operating costs; the location within markets or to other markets; transportation costs; quality of life factors, etc. After extensive research and comparisons have resulted in a list of viable regions, companies generally visit contending markets to view real estate options and meet with local leaders. At these meetings, it is important to discuss support available to your company and establish relationships with local firms, and meet with companies already doing business in the region. The process continues until a company selects a specific location among the few identified.

Important Site-Selection Criteria:

  • Access and cost of labor
  • Infrastructure
  • Education
  • Real estate/land availability
  • Economic incentives and tax structure
  • Business regulations
  • Supply chain
  • Transportation
  • Quality of Life
  • Miscellaneous – risk for natural disaster, time zones etc.

Evaluating the Labor Market

The primary driver in most U.S.-based site selection projects revolves around the supply, skill depth and cost of the labor force. The critical nature of the labor equation increases as the project’s skill requirements increase. While a manufacturing operation or distribution center’s location selection may primarily be driven by supply chain considerations, the second most important criterion is often the access to skilled, affordable labor. Office-related projects – such as headquarters, IT centers, shared services operations or call centers – are almost exclusively driven by the labor equation. For these employee-intensive operations, the labor costs typically make up between 70 and 80 percent of the facilities’ overall operating costs. For operations requiring highly specialized jobs, such as software engineers or unique health care skills, skill depth may take precedence over labor costs, but labor criteria, nonetheless, drives the location decision.

Examples of Primary Labor Criteria:

  • Labor force size
  • Growth rates
  • Unemployment rates (by sector, if available)
  • Industry density
  • Skill attributes and density
  • Educational attainment levels
  • Proficiency of non-English language capabilities
  • University programs and graduation rates
  • Prevailing wage rates for relevant positions
  • Employment competition and saturation rates
  • Recent market activity (such as expansion and downsizing activity)
  • Turnover rates
  • Applicant flow
  • Workforce longevity and scalability
  • Union vs. non-union presence

Assessing Infrastructure

It is important to assess both the transportation infrastructure as well as the market’s physical infrastructure. Critical areas such as freeway access and airport access must be examined by the company in order to make sure the location meets their needs. Rail and port access can be important as well, depending on the operation of the company.

The physical infrastructure of a site must be considered when selecting a location. Important factors to consider are water, wastewater, electric power, natural gas and fiber optic availability. Sites should be evaluated based on infrastructure access to the site and the capability of the infrastructure.

Zoning must also be considered in choosing a site. Zoning sets the standards that apply to land and buildings within the city; cities follow a general plan that designates which sites are appropriate for each type of use and are compatible with surrounding uses. Companies need to consider if the site they have chosen is zoned appropriately for the facility’s use. If the preferred site does not have suitable zoning, the company must apply to have the site rezoned, which is generally a three-to-six month process to determine if the new zoning is compatible with the surrounding area.

Measuring Accessibility

Today’s increasingly global, high-tech, time-sensitive economy requires highly efficient intermodal systems, with airports serving as a key transportation link. Air transport access for both products and people is crucial for growing export-oriented enterprises. Measure the availability of direct and one-stop flights, flight times and airport efficiency.

Acquiring Real Estate

International investors find the United States to be an attractive place for investment, because of its strong private property rights, independent judiciary, growth oriented tax law and liquid capital markets. A recent survey conducted by the Association of Foreign Investors in Real Estate found the U.S. to be consistently the number one choice for foreign real estate investment, with 55 percent of survey respondents ranking the U.S. as providing the best opportunities for capital appreciation.

Foreign Ownership Legal Conditions: Foreign nationals face very few restrictions to acquiring, owning or transferring real property in the United States. In most respects, foreign owners of real estate are treated no differently from their American counterparts. Although the United States government generally does not restrict foreign ownership of real estate, foreign investors should be aware of several federal statutes, including but not limited to the following statutes.

First, the Foreign Investment in Real Property Tax Act collects income tax from foreign investors that transfer real property in the United States. Generally, a buyer who purchases real estate from a foreign investor must withhold a tax equal to 10 percent of the amount paid for the property. The law applies whether or not the foreign investor holds title to the property individually or through a business entity.

Next, the International Investment and Trade in Services Survey Act creates reporting requirements for foreign investors who own or control 10 percent or more of a United States business enterprise. A business enterprise includes any business entity and any ownership of real estate, whether or not the foreign investor holds title to the property individually or through an entity. The law exempts any investment that is under $1 million, is less than 200 acres or is real estate intended for personal use.

Finally, American citizens are prohibited from transacting with any individual or entity on the Specially Designated Nationals List (“SDN List”), which is published by the Office of Foreign Asset Control. The SDN List includes individuals and entities that are connected with certain foreign governments, as well as individuals or groups connected with terrorism and narcotics trafficking. Real estate purchase agreements typically require the foreign investor to represent that he or she is not on the SDN List.

There are many potential tax issues that foreign investors should consider when acquiring real property in the United States. For example, a foreign investor should consider any tax treaty in place between the United States and the investor’s country of domicile in deciding how to structure any real estate transaction.

Purchasing Process: When purchasing a commercial property, a typical inspection or feasibility period in a commercial purchase contract will be 60 to 90 days. There can also be longer periods if the property’s use is to be changed requiring a zoning change or other regulatory approval by the appropriate governmental body.

Typically, a commercial real estate representative will assist with the site search, and an attorney will then assist with the commercial property purchase transaction by negotiating and preparing the purchase contract, reviewing the property and title documents, and assisting with the feasibility investigation and closing, including the review of final title insurance commitment and endorsements. Closings are most always done through an escrow agent.

Financing: Commercial loan terms vary, depending upon the value of the property compared to the amount of the loan and the creditworthiness of the buyer. Unlike residential loans that have terms as long as 30 years, commercial loans frequently mature in five, seven or 10 years. Loans are available from a variety of sources depending upon the property and borrower. Some lenders may require a full or partial guarantee depending upon the particular facts.

Assessing Regulatory Environment

All states issue federally mandated permits called operating permits, which are legally enforceable documents that generally apply to companies with significant air emissions or high levels of sensitive elements in the waste water.

Additionally, in counties and cities throughout the country, building permits are required for new construction, adding onto preexisting structures and major renovations. This process generally includes an inspection process during and after construction to ensure compliance with local, regional and national building codes. The inspections and permitting process can vary greatly between markets and should be evaluated if your project includes a construction period.

4.2: GREATER PHOENIX MARKET CONDITIONS

Below are some details specific to the local market conditions in Greater Phoenix. Overall, it is a growing, thriving market that has prepared for and is open to new businesses and new ideas. The information below touches on some of the region’s offerings, but is by no means comprehensive. GPEC can provide a more detailed analysis of the market and support your individual needs as you considering expanding into the U.S.

Labor Market

Greater Phoenix has a growing labor market that is equipped to meet the needs of companies locating their operations in the region. In the previous decade, the labor market in the region grew by a quarter million people, and this number is expected to continue growing. Approximately 28.5 percent of the population in the metro area has a bachelor’s degree or higher, and nearly 10 percent of the population has a graduate or professional degree. The cost of labor here is less expensive than in most other large, metropolitan markets with the media wage at just more than $35,000. Arizona is a right-to-work state, so employees cannot be required to join or pay dues to a union. Workers compensation rates and unemployment insurance rates are among the best in the country.

Real Estate

In Greater Phoenix, it is very feasible to purchase land, purchase an existing building, lease an existing building or build a new building.

We currently have an industrial inventory of more than 275 million square feet. The region is also constantly adding new industrial space to keep up with market demand.

The region’s office inventory is about 80 million square feet. Office buildings are classified into three categories: A, B and C. Class A buildings are generally the newest buildings with the most amenities offered, however they are the most expensive. Class B properties are generally a little older but can provide a good value as the cost per square foot is less. Class C buildings are usually the oldest with the fewest amenities but provide a substantial cost savings. Generally the difference between the three categories is around $5 per square foot.

Land is available for development should your company want to design a facility to meet its specifications. Parcels of all sizes – up to hundreds of acres – are available in the Greater Phoenix area. For example, the region has more than 50 shovel-ready sites (sites that are zoned, with utilities available to the site and where construction can commence immediately) that are available to fit your needs. GPEC and/or site selection consultants can work with your company to find the right parcel in the right location for your business.

Foreign Ownership: We impose no restrictions on the foreign ownership of real estate. A foreign investor may take title to property in Arizona individually, through a trust or through a business entity. Investors that acquire real estate in Arizona often create a new business entity under Arizona law that takes ownership of the property, such as a corporation, a limited liability company or a limited partnership. The Arizona Corporation Commission provides the necessary forms for creating a corporation or limited liability company.

A foreign investor may also take title to Arizona property thorough an entity incorporated in another state or another country. To qualify to do business in Arizona, the entity must register with the Arizona Corporation Commission. The entity must appoint a statutory agent to receive service of process in Arizona and designate a known place of business within Arizona. An out-of-state entity that is not qualified to do business in Arizona cannot file a lawsuit in any Arizona court.

Permitting/Regulations

All of GPEC’s 21 town and city members have agreed to a 90-day-or-less permitting process. Many of those even offer a quicker turnaround. In fact, the City of Phoenix offers both 24-hour inspections and 24-hour permitting through certified vendors.

Utilities

Resource management authorities have been planning for the state’s water and energy future for decades. In fact, unique measures ensure we’ll have ample resources for years to come. For example, more than 4.7 million acre-feet of water has been stored underground for future use so that it can be recovered when needed. Furthermore, these business-minded utilities have provided Arizona with cost-competitive energy, water and gas.

Energy: Two utilities in the Greater Phoenix region provide electricity to businesses and residents: Arizona Public Service (APS) and Salt River Project (SRP). The cost of electricity will depend on the service territory in which your company locates – whether it is a commercial or industrial operation – and the electricity use and demand the company will need. When meeting, the utilities, they will establish your rate by assessing you net consumption and your load profile (load factor). Utilities disclose the cost of electricity in tariffs. The majority of electricity comes from a reliable base of nuclear, natural gas and coal resources. GPEC can provide comparative analysis of the cost of utilities to companies that are considering moving into the market. Additionally, GPEC can facilitate meetings between the utility providers and your company.

Water: Water providers in Greater Phoenix have been planning for developing water suppliers for more than 100 years. SRP operates and maintains seven dams and 250 high-capacity groundwater wells that deliver one million acre-feet of water annually to municipal and agricultural users. In addition, the Central Arizona Project (CAP) is a 335-mile long canal that moves more than 1.4 million acrefeet annually from the Colorado River and Lake Havasu to residents in the Phoenix and Tucson metropolitan areas.

Water costs in Arizona are relatively inexpensive and rank among the lowest in the Western United States. SRP and the Central Arizona Project (CAP) are water wholesalers, and there are many private and municipal water retailers. When meeting the city, they will establish your rate by assessing your gallons-per-day usage, water pressure requirements, use of potable or grey water and piping-size requirement. As with energy, GPEC can provide a comparative analysis of water costs at varying usage rates to companies considering investing in Greater Phoenix and other markets.

Gas: Southwest Gas is the region’s sole provider of natural gas. The company provides natural gas service to nearly 1.9 million customers in Arizona, California and Nevada.

Telecom: Telecommunications options for the region are anchored by two major providers, CenturyLink and Cox Communications.

Local Taxation

Your actual tax burden will depend on a number of factors. Taxes such as income tax, sales tax and property taxes should be considered when making a location decision.

There are two main forms of income tax in Arizona: Personal income tax and corporate income tax. Personal income tax is assessed on the employees of the company. Arizona has a relatively low personal income tax that ranges from 2.59 percent for incomes under $10,000 to 4.54 percent for those with income over $150,000. Income taxes are only assessed at the state and federal level, not at a city or county level.

Corporate income tax is charged on the taxable income of the business. The percent of income that is taxable is determined based on a formula that factors in payroll, property and sales in Arizona compared to those factors company-wide. The rate is currently 6.9 percent, but Arizona’s policies call for a decline in the rate starting in 2014: It will decrease to 4.9 percent by 2017.

Sales tax is assessed on purchases made by a company, usually at the point of sale. There are special exemptions on sales tax available, including the purchase of equipment for use in manufacturing. The current sales tax rate for the state is 5.6 percent, and in Maricopa County the rate is 0.7 percent. Rates vary from city to city in Arizona, but are generally around 2 percent on your purchases.

Property taxes are levied on the value of the property and serve to support services in the cities, the county and local school districts. The state offers aggressive depreciation schedules on personal property (i.e., equipment, computers, furniture) to reduce property taxes. Currently, the average effective tax rate for commercial property is approximately 2 percent of the total value of the property. Greater Phoenix residents also pay property taxes, but the average effective tax rate is only 1 percent of the total value of the property.

Incentive Programs

Qualifying companies can benefit from incentives in Greater Phoenix. The total value of incentives depends on the number of jobs created here, the average wage of the job created, the total size of the facility and the capital that will be invested by your company (including purchase price and/or construction cost of the building, land costs and the value of equipment and personal property).

Companies locating in Greater Phoenix may qualify for a variety of programs, such as:

  • Job training: These programs provide funding that reimburse a portion of the cost of training new and current employees in the skill sets needed to complete the job.
  • Income tax credits: These programs offset the company’s income tax liability. Most programs allocate funding based on the number of jobs created or capital invested.
  • Property tax reduction: Programs such as this allow a company to reduce its property tax liability for a specific amount of time if the company meets necessary import/export requirements.
  • Research and development credits: Companies that invest in research and development activities may qualify for credits to offset tax liability.

Discretionary, performance-based grants: The Arizona Competes Fund provides funding for corporations needing assistance with offsetting public infrastructure, job training or job relocation costs. The funds are highly competitive and awarded based upon the merits of the project.

This Guide – Doing Business in Greater Phoenix, U.S.A. – can be downloaded at www.gpec.org.

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