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Incentivizing agrarian investments

Marion County is the hands-down top agriculture-production county in Oregon, and a new program implemented by county officials serves to maintain that designation.

Woodburn based DK Fab became one of two recipients granted a limited tax-exempt status through the new Marion County program, “Rural Industrial Investment Exemption,” aimed at providing investment incentives in agriculture.

In April the Marion County Board of Commissioners approved the tax exemption via a resolution with Kevin Cameron and Colm Willis voting favorably and Sam Brentano abstaining due to personal connections with the business.

A report to the commission noted that DK Fab plans to invest about $4 million in new equipment, for which it applied to the program’s exemption standing. The exemption amounts to $43,259.20 each year for three years.

Marion County Economic Development Coordinator Tom Hogue explained that the agriculture-supporting RIIE program developed through the state legislature, with advocacy and support from the county, dating back to the 2016 session. Marion County became the first to enact an implementing ordinance for the program in July 2018, and it became active last October.

The purpose of the exemption is to afford a business time for its new investments to generate revenue. Hogue said it also demonstrates the county’s support for investment in the agricultural industry.

“Cities have enterprise zones, and there are quite a few of them across the state. But there are very few directed tax exemptions for rural areas,” Hogue said. “Here we are in Marion County where ag is our number-one industry, and yet it’s very difficult to do the kinds of exemptions and incentives that cities take for granted and (implement) as part of their business every day.”

DK Fab operates in the 11200 block of Serres Lane, just east of Woodburn, and also has a facility in Zillah, Washington. The company, which began in 1999 as a mobile welding and steel fabrication shop in Woodburn, provides processing equipment for a variety of regional agricultural crops, including hops and hazelnuts.

The ag-based steel fabrication business plans to build two shop buildings on 5.5 acres, about 48,000 square feet, to install processing equipment that includes machinery that cuts, strips, sorts, dries and packages various agricultural crops, DK Fab’s controller and project manager Henry Schacher told the county.

“We fabricate a wide range of custom parts and also stock off-the-shelf replacement parts,” Schacher noted. “We are one of two facilities in the US that manufactures a specialized formed wire called a Hop Picking Finger from raw materials. This product has several applications outside of hop picking.”

In addition to DK Fab, Hopmere Cold, LLC, of the Brooks/Wheatland area near Willamette Mission State Park was granted an exemption. Hopmere plans to build a $2.6 million hop-processing facility. Its exemption amounts to $31,053.88 per year, also for three years.

Hopmere spokesman Doug Weathers told the county that the company’s investment provides for energy-saving, smart technology for food-grade cold storage, primarily hops and hop products. The company anticipates handling more than 4-million pounds of hops annually.

The Hopmere exemption was passed unanimously by the commission.

“Increasingly, it’s important for us to have high-tech capability in our ag businesses,” Willis said. “My wife’s family is in the dairy business, and they just bought a robot that milks their cows, and it’s very, very expensive. But we are in a globally competitive market for ag now, and if we don’t make these capital investments, our ag industry is going to suffer.”

Hogue agreed, and indicated that it is important for an agrarian-steeped county such as Marion to keep a abreast of industry developments.

“Ag industry is changing rapidly and the kind of investments that are going to be needed to keep up with that are going to be significantly expensive and involve a lot of technology,” Hogue told the commission. “I think that as we go forward and we see the results of this kind of exemption, it will give us one way to have our finger on the pulse of what’s happening.”

Hogue saluted the Marion County Assessor’s office and SEDCOR for their work in facilitating the program’s specifics and vetting the initial applicants.

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Small cities can remove development barriers

There is a lot of work available and more being done to identify ways to reduce housing development barriers. You can find that pretty easily. But most of it tends to ignore housing development business issues and local governance issues.

The business issues can be over-simplified as decision issues, and production issues.

A builder creates a pro forma to see if their project will pencil and be able to attract financing. Anything that adds to uncertainty, risk, delay, and upfront costs impedes a yes. The converse is true, too.

Production issues vary but barriers are often labor, compliance, and inspection. Inspection delays stretch out timelines without increasing revenues. Compliance issues often involve the risk and uncertainty created by poorly written rules and less-than-helpful bureaucrats. Shortages for skilled trade and general labor are widely known; less talked about are the overhead labor costs of finding, managing, reporting, and resolving disputes.

I know a lot of that seems like it would be impossible to do anything to improve the situation, but even cities with tiny budgets can do a lot if they play well with others, nurture¬†partnerships, and build a local political culture that can get to yes. For everything I’ve mentioned above, something can be done locally, even if we also want big pots of money and new legislation.

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Planning and zoning incentives: Reduce cost and risk.

A local listserve had an inquiry from a perplexed planner who was supposed to build some incentives into the zoning. That inquiry got a lot of responses, including mine below (which has now been better edited for my blog).

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Reduce cost (time and money) and risk.

Planners have lots of possibilities for improving both the zoning and the process.

It’s not the application fee. It’s the unknown and unpredictable compliance costs and standards that have to be met for the application. Ironically, planners make planning and development more difficult.

Try this exercise. Do it on paper the first time through. Find out what an apartment, a retail space, and a small industrial building rent for in your community. Design a construction project for each. Work up a pro forma for each project using standardized construction costs at first. See if you can build it profitably. Set yourself a deadline – maybe one year to get it all done. If you don’t already know all this – that’s the first red flag.

Then go to a cooperating city in your region. Look at their website and talk to their staff: try to predict every cost that will come up from the information they provide. Pick a model site. Then start working the development process. What site environmental reports will you need? What will that cost to apply for a zone change, a conditional use permit, a design review, whatever you discover you need to get a building permit. Try to figure out precisely what needs to be done, what is good enough, when it is too much like a fetch-another-rock exercise, what it all costs.

Get a couple of bids on the construction. Let them know its an exercise to improve the developer and builder readiness in your community. Talk to lenders the same way.

Keep notes along the way. Check and update your pro forma – does the project still pencil?

What did you discover? What surprises and costs were not included in your original pro forma? Did you meet your deadline? Test your processes with the sample projects. Ask yourself how you could improve your process, regulations, and available upfront information, to reduce the risk of surprise.

I’ve always thought cities should inquire and track the various delays and costs that developers pay – it may be sobering.

Sometimes it is the SDCs. Think about which uses are net consumers of and net benefactors to your community, and think about ways of adjusting the SDC scheme. Are you in effect closed for business? Or are you relieving some of the costs and risks for beneficial projects?

Generally. front-loaded costs are bad. Waived and deferred charges are good. If you delay a fee for five years, or until the development re-finances or sells, that will help. Even if it goes broke in the meantime, are you better off or worse off in the long run big picture? A little risk is a good thing if you want to encourage some development.

A lot of time can be lost working with outside agencies like the DOT and environmental permitting,¬† etc. Make sure you know them, and they know your sites and your issues. When strategic, do some of that regulatory work upfront on spec. Work with legislators to improve the regulatory agencies’ processes, too.

If you have design review issues, produce a visual guidance document, and include some cost data to keep yourselves real. Small landowners, developers, and builders are not planners. Show what you want (and don’t want) and allow them to work within those flexible themes (and clear minimum standards), not coded requirements that can’t meet the reality test on every site, every time.

The significant risk is the risk that some review panel or compliance report goes sideways, especially when the NIMBYs show up. Don’t say oh, it is easy to fix; come back next month.

Sometimes their financing or a property option expires. Reduce risk.

Keep your base zoning clear and straightforward, and in line with the actual market. Loading up on “quality development requirements” and should-do’s in a market that can’t support the cost and risk in achievable rents is just going leave things sitting idle. There needs to be a predictable clear build-by-right path, and a creative, problem-solving, get-to-yes negotiated path reliably available in your city.

Lastly, my favorite TRAIN, the PC, and CC. Keep at it.

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Lessons learned

From The Progressive Farmer

  1. The definition of strategic management: anticipating, adapting to, driving, and capitalizing on change.
  2. Peter Drucker’s statement that 60% of all management problems are communications problems.
  3. Relish change. It’s ongoing whether you like it or not, and it presents opportunities for those who embrace it. We need to learn from the past, but it’s behind us. Tomorrow, today will be the past. What did you learn from it?
  4. You need to use accrual adjusted income in order to analyze actual business performance. Cash accounting is easy and great for tax management, but it lags two years or more in terms of knowing what’s happening, whether it’s getting better or worse.
  5. The 5% rule. A 5% increase in price received, a 5% decrease in costs, and a 5% increase in yield will often produce more than a 100% increase in net returns. The effect is cumulative, multiplicative and compounding.
  6. The management of your business has to continuously improve at the rate set by the leading edge of your competition, otherwise you’ll be falling behind, even if you’re moving ahead.
  7. The future will always belong to those who see and act on the possibilities before they become obvious to the average producer.
  8. Ongoing monitoring throughout the year of budget versus actual and year-over-year will allow you to be proactive in addressing problems and capitalizing on opportunities in a more timely manner. Remember, the main difference between the top 5% of producers and the rest of the top 25% is timing.
  9. You need to use cost/managerial accounting in order to know your costs and returns down to the unit level for every enterprise on every farm. This is for marketing purposes, as well as to know where you’re making or losing money. Too many farmers keep doing something simply because they’ve always done it that way, or because they’re in love with an enterprise.
  10. Use the DuPont model to analyze the relationship between your key financial ratios and in order to do “what if” analysis in order to identify where you need to make changes, as well as where you’ll get the biggest bang for your buck.
  11. People are your most important asset, so delegate, require accountability, reward the high performers, provide the opportunity for development training, and get rid of the problems. They’re contagious.
  12. Use “what if” scenarios and sensitivity analysis to analyze the possibilities of what could happen and develop strategies ahead of time for dealing with situations before they arise.
  13. Spend time determining the traits you need in a successor and create a plan to test and develop them. Don’t just assume the oldest son or a child has the right skills, talents, or vision to lead the business into the future.
  14. Join a peer advisory group made up of top people who will give you honest feedback, offer alternatives, and challenge your thinking. When you go into a peer group meeting, leave your ego at the door, and don’t assume there aren’t a lot of things you need to improve on.
  15. Don’t assume you’re doing things as well as you can. Remember, Tom Peters said “if it’s not broken, you haven’t looked hard enough.”
  16. Look for ways to collaborate in order to spread overhead costs, acquire the technology you need, or employ specialized management or technical skills you don’t possess or can’t afford on your own.