Kendall Square is one of the hottest office markets in the country, with technology and biotech giants jockeying to land outposts and bring jobs there.
Yet the Baker administration on Wednesday granted $2.5 million in tax breaks over three years to IBM Corp. to encourage the company to bring its new digital health venture, known as IBM Watson Health, to Cambridge’s high-tech hotbed.
In return, IBM has promised to create at least 500 new jobs.
The state’s Economic Assistance Coordinating Council approved the tax incentives for the Armonk, N.Y., company at its quarterly meeting in Worcester. Jay Ash, Governor Charlie Baker’s secretary of housing and economic development, used the tax breaks to help Massachusetts win a tough competition for the IBM Watson Health business, according to Paul McMorrow, Ash’s policy director.
“The secretary was personally involved in selling Massachusetts to IBM,” he said. “We had competition for IBM Watson Health nationally and internationally. They could have gone anywhere in the world and would have been welcomed.”
But some have questioned why a tax break is needed to draw a company to prime real estate in a neighborhood that’s been identified as the single most expensive office market on the East Coast outside of Manhattan.
“My basic takeaway is that it’s very likely that IBM would have chosen this same location without receiving any tax credits whatsoever,” said Adam Langley, a senior research analyst at the Lincoln Institute of Land Policy in Cambridge. “That’s a windfall for the company that most businesses are not in a position to receive.”
On the other hand, Langley said, the cost of the incentive on a per job basis — $5,000 — is relatively low. “You’ll definitely find much more egregious examples out there,” Langley said.
“Compared to other tax breaks, it’s a relatively modest amount of money,” said Noah Berger, president of the left-leaning Massachusetts Budget and Policy Center. “The problem is that there’s no evidence that these jobs wouldn’t have been created without the tax break. . . . Ultimately, we need to keep our eye on the ball and focus on fundamentals, like making sure we have a well-educated, highly skilled workforce.”
IBM has agreed to sublease about 160,000 square feet at 75 Binney St. for the IBM Watson Health venture from Ariad Pharmaceuticals. Ariad, which scaled back its own plans after safety concerns emerged about one of its drugs, is leasing nearly all of the 388,000-square-foot building from owner Alexandria Real Estate Equities, according to Alexandria executive vice president Tom Andrews. He said the building was completed earlier this year.
IBM says that interior work on its space will begin by the end of the year and should be done by mid-2016.
IBM has pledged to the state that it will add 125 jobs a year, starting in 2016, through 2019. If less than 90 percent of those promised jobs materialize, a clawback provision in the tax accord would require IBM to reimburse the state.
In the application for the tax incentive the company filed in July, IBM said it will invest up to $51.3 million in construction and $5.9 million in equipment at the new office. The company also said workers there will earn an average of $141,000 a year. IBM said in its application that it considered locations in Massachusetts and New York as part of its site-selection process.
The company already employs about 4,200 full-time workers in Massachusetts, spread among five locations.
A spokesman for IBM declined to comment about the tax break.
Ash and Baker see the emerging digital health industry as a way to play on Massachusetts’ strengths in the information technology, health care, and biotech sectors. IBM Watson Health, for example, plans to offer cloud computing services to help biomedical companies sell their innovations and to help doctors to develop more personalized approaches to treating patients.
“In enabling this expansion to take place, we’re putting a stake in the ground on digital health care and saying we believe this is an area of tremendous growth for the state,” McMorrow said. “It’s really important for us to carve out a leadership role. We believe this is the first of several major advances on that front.”
The state economic council approved tax breaks for 12 other businesses on Wednesday, including a lobster processor in Gloucester and a gasket maker in Methuen. But none of them are anywhere near the size of IBM, which reported more than $90 billion in revenue last year.
In the past, other big companies have taken advantage of Massachusetts incentives, including Amazon.com, which was awarded $3.25 million in tax breaks through two state programs in March to build a warehouse on the Fall River-Freetown line. Other recent winners included Watertown’s athenahealth ($9.3 million) and Springfield’s MassMutual ($3.8 million) in 2013.
Greg Sullivan, research director at the right-leaning Pioneer Institute think tank, said the IBM award could be worth the expense — if that’s what it took to persuade the company to open in Massachusetts over another location.
“Programs like this can be effective in the context of national competitions,” Sullivan said. “If this was a key element in convincing IBM to locate in Kendall Square, then it’s not a bad thing to do.”