November 2006
  Incentives Deal of the Month
  
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ServiceMaster ‘PILOTing’ HQ,
500 Quality Jobs into Memphis
A cluster with clout: In Memphis (pictured), ServiceMaster already has 2,420 existing employees, as well as all of its divisional headquarters.

ServiceMaster is leaving its long-time Chicago-area roots to relocate near its hefty existing cluster in Memphis. The local tax-freeze program that's assisting the move, though, continues to spark disagreement.

by JACK LYNE,
Site Selection Executive Editor of Interactive Publishing
jack.lyne bounce@conway.com

Aided by a much- debated payment- in- lieu- of- taxes (PILOT) program, Fortune 500 firm ServiceMaster is moving its entire headquarters operation to Memphis from Downers Grove, Ill.
   Best known for its Terminix pest control and ChemLawn fertilizer businesses, the company will relocate all of its 165 well- paying central office positions to southwest Tennessee. In addition, ServiceMaster says that it will create about 335 new jobs in Memphis over the next five years.
Chairman and CEO Spainhour President and CFO Ernie Mrozek
Chairman and CEO Spainhour (left) and President and CFO Ernie Mrozek (right) told headquarters' employees that relocation could "improve the speed and effectiveness of communications and decision-making."

   The relocation means that the company is leaving behind its long- time roots in the Chicago metro, where it was founded in 1929. ServiceMaster, though, is certainly no newcomer to "Bluff City" — and that was clearly the project's most persuasive incentive of all. ServiceMaster already has 2,420 existing employees in Memphis — the company's largest cluster — and all corporate divisions are headquartered there as well. Chairman and CEO J. Patrick Spainhour stressed that major Memphis presence and the catalytic role it played in the decision.
   "We are committed to building even closer working relationships between our functional and operational teams," he said in announcing the relocation on Oct. 30th. "It makes sense to have those [headquarters] teams housed at our Memphis campus, where we have the largest investment and concentration of employees and operations."

Speculation about Relocation
Had Been Brewing for Months
   ServiceMaster had been weighing a relocation for some time. The company was well aware of the operational inefficiencies of having its headquarters situated 542 miles (867 km.) away from its key mass in Memphis. Most divisional presidents, for example, have maintained dual offices in both Downers Grove and Memphis, shuttling between the two sites.
   Speculation about a move began to simmer in May when Spainhour, already a ServiceMaster board member, was named as chairman and CEO. He replaced Jonathan Ward, who resigned under board pressure spurred by the company's recent bottom- line slump. A former CEO of Ann Taylor Stores Corp., Spainhour already owned a home in West Point, Miss., about 155 miles (248 km.) southeast of Memphis. In addition, the newly named chairman and CEO then bought a house in east Memphis, and began spending about three days a week at the Memphis offices.
   With rumors swirling thick as an urn of butter, Spainhour and President and CFO Ernie Mrozek decided in late August that it was time to internally clarify the situation. The two sent a joint e- mail to all headquarters workers notifying them of a possible relocation. Staying in Downers Grove was still an option, they said. Their message, though, made some sort of relocation sound inevitable.
   "Senior leadership believes the transfer of corporate departments, functions and positions would improve the speed and effectiveness of communications and decision- making," the e- mail explained. A relocation decision would be finalized by the end of October, Spainhour and Mrozek promised. "A prolonged period of indecision on this important issue would perpetuate uncertainty and anxiety among key employee groups. [That] would not be in the company's best interest."
Downers Grove ServiceMaster headquarters
ServiceMaster once had 1,200 employees in the township of Downers Grove (pictured left), but only 165 headquarters workers are now housed in the building on the right.

   Seven weeks later, the rumor mill hit full boil. The Memphis- Shelby County Industrial Development Board (IDB) voted on Oct. 18th to approve ServiceMaster's applications for PILOT incentives, which will save the company between $8 million and $18 million.
   Soon after, it was a done deal. ServiceMaster's board approved the relocation on Oct. 27, but the company held the information over the weekend. On the morning of Oct. 30th, Spainhour and Mrozek met face- to- face with the entire headquarters staff, informing them first about the relocation formally announced that afternoon.

Relocation's Costs
Could Include 'Brain Drain'
   ServiceMaster is clearly hoping that the lion's share of its headquarters workers follow their workplace to Tennessee. A corporate "brain drain" could ensue if a large number of key employees reject relocation.
   Headquarters workers don't have long to make up their minds about the Memphis move. ServiceMaster has asked them to reach a decision about transferring by mid- December.
   "We have a talented and dedicated team in Downers Grove," Spainhour said in announcing the relocation. "We hope that many of them will decide to make the move to Memphis."
   The southward migration probably won't come cheaply. ServiceMaster is estimating that total relocation costs could total as much as $30 million, with major outlays anticipated in areas including relocation, severance and new employee recruitment.
   The company is looking to complete its headquarters move by mid- 2007. The jobs scheduled for relocation include the administrative offices for ServiceMaster's accounting, corporate finance and tax group functions, as well as part of its legal and information technology arms.
   The Illinois head office of the Fortune 500's No. 494 firm is housed inside three leased floors. ServiceMaster's presence in Downers Grove was once much larger. Only five years ago, the company had 1,200 employees there. The work force began a big drop in 2001, when the company sold its commercial cleaning service to Aramark. ServiceMaster decided to offload that business as part of a strategic shift to narrow its core focus.
   When the relocation to Memphis is completed, the Downers Grove operation will close, company officials said.

'Momentum' in Memphis
   The 165 headquarters positions that remain are high- quality jobs. The average annual salary is $137,200.
   Landing those ServiceMaster jobs continues a hot streak for Memphis- area business recruiters. International Paper, for example, announced in August of 2005 that it was moving its headquarters to the Mississippi River city from Stamford, Conn. The Fortune 500's No. 82 player finalized that project this August, relocating 94 total jobs with a median income of $128,103.
International Paper
Last year, International Paper announced that it was relocating its headquarters to Memphis, a project completed when the new central office opened this August (pictured).

   With the addition of ServiceMaster, Memphis now has a Fortune 500 headquarters foursome. No. 70 FedEx and No. 378 AutoZone are both long- time local corporate citizens.
   "There is a momentum in Memphis that has been developing for some time now," Memphis Regional Chamber President and CEO John Moore commented. "Having ServiceMaster relocate its headquarters here is another example of our diverse business environment."
   The Memphis area has recently added more diversity by landing a number of other significant expansions that have included Liquid Container, Nucor Steel, Riviana Foods and ThyssenKrupp.
   One enduring draw for firms like that is the city's well- known strengths in moving product. Memphis serves more metro markets overnight by truck than any other central U.S. city, and it also has the world's busiest air cargo airport, five long- haul rail carriers and the fourth- largest U.S. inland port.
   "Memphis is a thriving and business- friendly city that will offer us ample opportunity to grow the company," Spainhour said in announcing ServiceMaster's relocation.
   The company's move will also boost growth in the Memphis housing market. ServiceMaster is estimating that local home sales will exceed $50 million if all current headquarters workers transfer.

PILOT Aid Available for Both
Site Options Still on the Table
   The exact Memphis address of the company's central office is still shaking out. ServiceMaster, in fact, listed different locations in each of the two PILOT incentive applications it submitted. The city- county IDB responded by taking the rare step of approving both subsidy applications.
   One of the headquarters options that ServiceMaster outlined was to further expand at Ridgeway Center Office Park in East Memphis. The Ridgeway location now serves as the company's principal operational site in the city.
   In its other PILOT application, though, ServiceMaster outlined a more ambitious alternative: building an entirely new headquarters on a greenfield site. The company hasn't earmarked a particular property for that option. Its application specified only that the greenfield site would be in the Memphis city limits or the city's reserve areas.
ServiceMaster's headquarters, Ridgeway Center Office Park
One of the options still on the table for ServiceMaster's repositioned headquarters is Ridgeway Center Office Park (pictured), the company's principal operational site in Memphis.

   Choosing a greenfield headquarters site would entail building four 150,000- sq.- ft. (13,935- sq.- m.) facilities by the end of 2011 and investing $122.7 million, according to ServiceMaster's application. Expanding at the Ridgeway site would cost between $10.5 million and $12 million, the company said.
   ServiceMaster requested a 14- year PILOT exemption for expanding at Ridgeway. The IDB reduced the term to 12 years, an incentives award that the company says will save it $8 million.
   For the greenfield option, ServiceMaster received approval for the 15- year PILOT exemption that it requested. The 15- year term is the maximum time frame that program allows. The greenfield incentives would save the company $18 million, ServiceMaster's application indicated.
   Both PILOT applications promised the same total number of jobs by 2011: 500, including the 165 transferred positions. The company estimated that those 500 jobs will pay a median wage of $67,300. That's almost double Shelby County's current per- capita income.
   Spainhour said at the Oct. 30th announcement that ServiceMaster would decide within a six- month period between its two options for the headquarters location.
   In either case, the PILOT program will function in the same fashion. The two offers differ only in value and length.
   The Memphis- Shelby County PILOT program gives approved companies a property- tax freeze. Qualifying firms only pay taxes on the value of the land on which they expand before it was developed. In terms of property levies, the space used to house the expansion is taxed during the PILOT exemption as though the new square footage isn't there. Shelby County does tax the structures that house PILOT companies' expansions, but at only 25 percent of the value of the added space.

Frequently Used PILOT Aid
Has Drawn Recurrent Criticism
   City- county government created the PILOT initiative in 1987 to provide the Memphis area with a financial tool to use in attracting business. The program uses a matrix system to determine the length and value of the PILOT aid. Elements in that matrix include new job creation and job retention, the median wage of new jobs, capital investment, and the project's location.
   ServiceMaster also received "special consideration points" for being a Fortune 500 member and for relocating a worldwide headquarters. The company's Memphis project will receive PILOT assistance not only for the creation of 500 jobs, but also for the retention of ServiceMaster's 2,420 existing positions. If Memphis hadn't won the project, the company said that some of ServiceMaster's current jobs in the city would've been relocated to the headquarters location that was chosen instead. Officials haven't specified how many jobs would've been moved or what functions would've been involved.
Memphis International
Memphis International (pictured) is the world's busiest air cargo airport.
Photo: Lane Construction

   PILOT assistance has been frequently employed to assist local expansions, including those of FedEx, Delta Metals, International Paper and Quebecor. Last year, more than 550 Memphis- area companies were operating with PILOT incentives.
   Nonetheless, the program has been frequently criticized. Many of those critics say that the problem with the PILOT program stems from Tennessee's tax structure. The state is one of nine with no income tax. (The other states are Alaska, Florida, Nevada, New Hampshire, South Dakota, Texas, Washington and Wyoming. New Hampshire and Tennessee do tax dividend and interest income.)
   University of Memphis Director of Real Estate Research Richard Evans calls the state's tax structure "regressive . . . The lack of a Tennessee income tax and the reliance on sales taxes and property taxes are properly criticized as an imbalance," Evans wrote in a September opinion piece in The Commercial Appeal.
   "It is natural for political leaders to want to compete for prize economic developments," he noted. But "the political price" with the PILOT program, Evans added, "is that other real estate investors (and homeowners) will be saddled with higher property taxes to cover the added costs related to development."
   Some local political leaders have also questioned the PILOT system. Shelby County Commissioner Julian Bolton charged last year during a board meeting that the IDB employs a "flawed approach" in its PILOT decisions. The IDB, he said, should function as the county board of commissioners' "alter ego . . . This body (the commission) serves the public, not the business community," Bolton insisted.
   Such criticism prompted the city and county to commission a study of the PILOT program in 2005. Consulting firms NexGen Advisors and URS Corp. completed that project late last year.
   "We understand there is currently much controversy as to whether PILOTs are granted without appropriate justification and to what level they are needed for Memphis- Shelby County to leverage private investment and stay competitive with other competing markets," the study's cover letter explained at the outset.
Applications for the area's PILOT incentives first became an option for expanding firms in Memphis in 1987.

   Perhaps the study's key element is its section on "competitive business costs." The consultants compared the Memphis area with Indianapolis; Louisville, Ky.; and Nashville, as well as Mississippi's DeSoto County, which lies adjacent to Memphis. That analysis compared the four areas' costs for four types of projects: bio- technology, distribution, high- tech manufacturing and office.
   "From a macro- economic development perspective, the PILOT program should continue to be used as a redevelopment and economic development tool," the study suggested. "We conclude that by the fact that Memphis- Shelby County is generally a more expensive place to do business and the projects that PILOTs have been granted have contributed positively to the region's economic picture."
   But NexGen and URS recommended some changes as well.
   "From a macro- economic perspective, our analysis found that the program should be better targeted and applied more effectively on a deal- by- deal basis to achieve more revenue- efficient results," the study concluded.
   The consultants also suggested that "the idea and process of . . . an economic impact analysis and evaluation matrix as the sole measures of whether to grant a PILOT should be abandoned." Instead, they recommended "a general and very flexible framework, based upon business and market criteria."

PILOT Debate Endures
   The study doesn't appear to have settled the issue, though.
   "Two things are certain about Memphis' PILOT program: It's broken. And the council's proposed solution won't fix it," George Mason University researchers Frederic Sautet and John Shoaf wrote earlier this year in The Commercial Appeal.
   "General tax reductions encourage economic activity; targeted tax incentives may do just the opposite," they asserted "When policy- makers, elected or appointed, establish a discretionary incentive with the idea that they can direct growth, they stall more significant tax reform."
FedEx headquarters
FedEx, which has its headquarters (pictured) in Memphis, has repeatedly used PILOT assistance in expanding its local presence.
Photo: Holder Construction Company

   Sautet and Shoaf, both research fellows at George Mason's Mercatus Center, noted the city council's decision earlier this year to assume PILOT program oversight from the IDB.
   But that, they charged, "merely substitutes Tweedle Dum for Tweedle Dee. . . . Nobody is capable of determining how much the city is 'giving away' or how much the city stands to gain, because no one knows which PILOT applicants would have brought their businesses to Memphis without the incentive or how well the companies will do once in Memphis."
   What ultimately happens with the PILOT program remains to be seen. Memphians will make that decision.
   For ServiceMaster, at least, the scenario is far less cloudy. It's definitely relocating its headquarters to Memphis — a decision that makes solid operational sense. And it's increasing the project's cost- effectiveness with the PILOT program — the single form of significant financial assistance that was at hand.


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