Incentives Lure Red Hat Downtown: Are They Worth It?

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Raleigh: $1 million. WakeCounty: $675,000. North Carolina: $15 million.

When Red Hat began a search to expand in fall 2009, reports indicated they were considering sites in other states as well as a site in the Tobacco District of Durham County. For the past several months, three governments have offered incentives to the open source giant Red Hat to retain its presence.

Apparently, it worked. Red Hat CEO Jim Whitehurst officially announced Friday the relocation of its global headquarters to downtown Raleigh.

The Incentives Break Down

Wake County
Amount: Estimated $675,000.
Requirements: Complete their new investments by Dec. 31, 2013. Wake County will make the first grant payment in fiscal year 2015.
Raleigh
Amount: $100,000 a year for 10 years.
Requirements: Must maintain its headquarters in downtown Raleigh and create the promised 540 jobs.
State
Amount: $15 million during 12 years.
Requirements: Fulfillment of promised 540 jobs and must invest $109 million in Wake County.

But as incentives become more common, some might ask: Is it worth it?

Mike Walden, an economics professor at North Carolina State University, said incentives are always a “what if.”

“The concern was that Red Hat might move its headquarters out of the Raleigh area, or even out of the state,” Walden said in an e-mail. “That would have meant a significant loss of jobs, income, and spending.  The incentives were a way to motivate Red Hat to stay and maintain (and in the future, grow) its economic impact.”

According to a report last year by the Triangle Business Journal, Red Hat executives lobbied hard for state incentives, playing a game of poker with their possible relocation.

The company certainly had a good bargaining chip. Red Hat’s 750 employees will move to the downtown office. Officials promise to create another 540 jobs locally and invest $30 million in “construction, renovations, machinery, equipment, furniture and fixtures” during a makeover of the 366,000-square-foot Progress Energy Building. Overall, they are expected to invest a total of $109 million in WakeCounty.

In addition, the company recently announced it will hire 1,000 employees worldwide in 2012. Red Hat CEO Jim Whitehurst said Friday more of that 1,000 could be in Raleigh. He could not give an exact figure.

That’s something to hang on to, said Wake County Commission Chair Paul Coble.

“I’m not a fan of incentives. But this makes perfect sense …  in fact what we are doing is giving them a discount on their tax base. So what we gain in a tough economic time is a global headquarters and additional jobs that are coming in … We see our investment in Red Hat as being a great return on our dollars.”

North Carolina was recently praised by watchdog group Good Jobs First for use of incentives. The state received a “B” — one of only four to receive better than a C — on how strictly companies are held to their job and investment promises in exchange for tax breaks and other offerings.

For the city and county’s part, the amounts are so small the economic value is hard to argue, Meeker said. He said the city’s slice is a fraction of what they’ll get back in parking fees from Red Hat employees using nearby city decks.

Derrick Minor, director of downtown development with the Downtown Raleigh Alliance, said the city’s portion “is a solid ROI,” or return on investment, and not just when it comes to parking. Small business owners, too, will see the effect of more employees downtown.

Clyde Cooper’s Barbecue Owner Randy Holt agrees. After Red Hat’s announcement about their move, he put out a sidewalk sign that read, “Welcome Red Hat employees.”

“I think it’d be great to have a Fortune 500 company,” Holt said.

Minor also said many Red Hat employees will move closer to work, supporting recent condo and apartment construction projects.

“Additionally, the companies that will move into downtown to be in close proximity to Red Hat (other tech companies, service providers, etc.) will carry the same benefits for the local economy,” he said in an e-mail. “In summary, incentives are a great tool to use for both recruitment and retention, as long as there are performance metrics in place and the end result is a positive ROI from the investment.”

Whitehurst, too, said he believes the move brings more open-source and technology companies to the area.

“One very, very well known open source software company just opened a development center, small at this point, just a dozen people … after a conversation I had with him about the quality of life here and the ability to attract people and the ability to retain people,” he said, adding that he was not at liberty to name the company. “So I think if we make it a goal to do that, more explicitly than we have had in the past, then we can certainly make that happen.”

In this case, Red Hat is making some additions, but they’re also filling the hole left by Progress Energy’s potential merger with Duke Energy.

The company has signed sublease agreements with Progress Energy, with plans to move in to100 E. Davie Street starting this spring. The move will be complete next year.

The County Commission’s Coble said that adds to the list of reasons to keep Red Hat here.

“When the process started we had just had the announcement that Duke and Progress Energy were going to merge. That was a blow to this area,” Coble said. “But on the same day Red Hat stepped up and said they were going to be staying here and growing as a global entity. That was a wonderful opportunity to send the message to businesses that we aren’t in decline, we are in the process of change. And we’re moving maybe from one type of sector to a much more advanced and more modern look at how this city and county is going to grow.”

Red Hat now leases space at NC State's Centennial Campus.

But filling one gap means creating another, on Centennial campus, where Red Hat has a lease on two buildings — one with 120,000 square feet and the other with 80,000 square feet. Both are advertised as available for sublease.

Michael Harwood, associate vice chancellor for Centennial Campus Development, expects the building owners will easily find new tenants for the spaces, which means more growth for the city.

In the end, the Downtown Raleigh Alliance’s Walden said there is really no way to know if the incentives changed the outcome.

“The questions that can never be completely answered are: Would the company have changed its decision and moved elsewhere if the incentives hadn’t been offered, and would the company have stayed if the incentives weren’t offered?”  he said.

Red Hat CEO Jim Whitehurst at Friday's press conference.

“For companies with a big impact and large name recognition, localities usually aren’t willing to take a chance,” Walden said.

Red Hat isn’t telling. And whatever happened behind the scenes, Whitehurst made light of it all Friday.

“I’d certainly like to thank Gov. Perdue who has multiple efforts, including an offer to cook me breakfast personally, which I haven’t taken her up on yet,” he said, eliciting laughter from the packed room. “As soon as we are neighbors, like a block away, I may take her up on that.”

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