Estimating the Benefits of a Proposed Project

 

For several years, I have had the opportunity to learn, practice, and lead economic impact analyses. Economic impact analyses look at how the construction of a new project benefits a local jurisdiction. These analyses build on market studies and feasibility studies, which determine whether or not a project is feasible and supported by market statistics, to show the net increase in jobs, local expenditures and resulting tax revenues that can be attributed to a new project.  Knowing the economic impacts of a project gives the builder or local jurisdiction a set of valuable tools that are useful in explaining how a project will change a community.

Economic impact analyses are best explained by example.  In this blog, we’ll use a prototypical lifestyle retail development to describe the terms behind an economic impact analysis.  Assume that we’ve already gone through the motions and established that the project makes (dollars and) sense financially with a pro forma analysis.  And the local community is clamoring for new retail development based on our market study.  Now we want to show how many jobs the construction and ongoing operations of the project will generate.

RSG uses several different well-regarded tools for estimating fiscal and economic impacts, including MIG Inc.’s IMPLAN.  An economic impact modeling software program that has been in use since the 1970’s, IMPLAN offers impact modeling statistics at the state, county and ZIP code level.  IMPLAN generates outputs (jobs, labor income and economic output) based on our inputs (construction expenditures or operating revenues, for instance), which are strategically placed into specific categories based on the type of construction or operations taking place.

As an example, we’re planning our new lifestyle retail development, and our pro forma model indicates that it will cost $10 million to construct 40,000 square feet.  This is what our market study says that the local community can support.  From the operational side, we expect the project to have a 50/50 split of retail and restaurants.  Based on our research, we expect the project to generate $18.2 million in annual sales (about $455/sf).  If we drop the $10 million construction and $18.2 million annual sales figures into IMPLAN, and split the output into full and part time categories, we find that the proposed project will generate the jobs presented in the following table:

 

As you can see in the table, RSG and IMPLAN divide jobs into several categories, including (1) temporary and permanent employment, (2) direct, indirect and induced employment, and (3) full time and part time employment.  All of these categories can be confusing without a good explanation of what the terms mean.

Temporary impacts are the result of physical construction, such as a plumber or general contractor, while permanent impacts illustrate the operational jobs, such as a secretary or manager in an office building. Direct impacts are the jobs and revenues that are specifically attributed to a development, including a cashier in a retail store or chef in a restaurant.  Indirect impacts are the jobs and revenues that are necessary to supply a new project with goods or services, such as an insurance broker who provides insurance to the retail store.  And induced impacts are jobs and revenues that result from the expenditures of direct or indirect employees of the project – the cashier at the retail store buys lunch at a nearby restaurant, for instance.  Finally, RSG uses regional or national economic data to distribute permanent and temporary employment by job type into full and part time employment, and presents the figures as full-time equivalents.  Here’s a helpful matrix to help understand the different employment categories:

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So, we’ve learned that our retail development is expected to generate 236 permanent full-time equivalent jobs in the community (all permanent jobs).  And 179 of those new jobs are specific to the project site (direct, permanent), including everything from janitorial, leasing agents and property managers serving the project; retail cashiers and store managers in the retail component; servers, and bussers, dishwashers, sous chefs, chefs and restaurant managers in the restaurants.  Knowing that this new development will create jobs within the boundaries of the project site and throughout the surrounding community provides a powerful statement for an elected official or developer to share with the community.  And there are also labor income, economic output, property tax, sales tax and other revenue sources to consider.

Written by Brandon Fender, who is a Senior Analyst at RSG.