Gilbert brownfield bill raises questions about lost state revenue

LANSING — A plan to capture Michigan sales and income taxes to offset the costs of large development projects on contaminated sites likely would result in the state losing out on some new revenue.

On that point, supporters and critics of a sweetened incentive for so-called “brownfield” redevelopment projects agree. But while advocates — real estate developers, economic development agencies and some state lawmakers — contend that the state wouldn’t award one if the project didn’t yield more revenue than it gives away, questions remain unanswered about whether that revenue would actually be new.

In the week since it was introduced, a five-bill package in the Michigan Senate has elicited criticism about revenue losses to the state’s general fund budget and the wisdom of approving a tax incentive for billionaires — references to Detroit businessman and Quicken Loans founder Dan Gilbert, whose Rock Ventures LLC holding company is among the plan’s biggest proponents.

The state is “forgoing a portion of the new revenue,” said Matt Cullen, Rock Ventures’ principal, “but, conversely, if they weren’t foregoing it, they wouldn’t get the new revenue.”

That “but for” argument — as in, this project would not happen “but for” this incentive — is challenged by critics of tax-increment financing districts like these for what they say is inconclusive evidence that they work.

Even when a development is completed, it is difficult to determine whether captured tax revenue — in this case, income and sales taxes — is a direct result of the new building or the result of shifting money from Michigan residents that the state already collected when they lived someplace else, said Michael LaFaive, director of fiscal policy for the Mackinac Center for Public Policy in Midland.

“It’s very plausible, but the challenge is teasing out what is truly a function of the new development and what is captured regardless of it,” LaFaive said. “The ‘but for’ argument is really the standard operating procedure of those who are looking for special favors. That assertion cannot be disproven, and I think that’s one of the reasons why advocates use it so often.”

At issue in Michigan is a proposal to capture new sales and income tax revenue generated at completed developments from new shoppers and residents. The capture would be offered to developers who pursue what would be called “transformational brownfield projects,” or large development projects that require cleanup of environmental contaminants — such as lead or asbestos — or are blighted and obsolete properties.

Incentives are a touchy subject in Michigan. Many concerns about tax credits are rooted in the state’s struggle to fund competing budget priorities with limited general fund dollars. Cities have had to absorb cuts to state revenue sharing, which affects the amount of money available for local priorities. And former incentive programs have left the state on the hook for billions of dollars in payments.

The incentive would be offered in exchange for a minimum investment of private money into the project — at least $500 million in Detroit, less in smaller communities based on population.

The plan is supported by the Michigan Municipal League, chambers of commerce and cities across the state, including Sterling Heights, which is eyeing the enhanced brownfield incentive in the event owners of retail centers such as Lakeside Mall decide they want to update the properties.

Communities from Kalamazoo to Saginaw say they have pent-up demand for new housing or projects that could be ready to go if developers could line up the necessary financing.

Rock Ventures could be able to move on at least $2 billion in projects with the enhanced incentive, Cullen testified to a Senate committee, which unanimously approved the bills last week. They await a vote on the Senate floor, though the Senate isn’t scheduled to meet again until mid-October.

Cullen has not disclosed details about potential projects. But it’s possible that proposals to revamp the J.L. Hudson’s department store on Woodward Avenue and build a $1 billion Major League Soccer stadium and other developments on the site of the stalled Wayne County Consolidated Jail on Gratiot Avenue could be contenders.

Yet some suburban communities are cautious out of concern the legislation might tilt incentives in favor of urban development.

Leaders in Oakland County, just north of Wayne County, which includes Detroit, oppose the bills as written, though not necessarily in concept, in part for that reason. Under the legislation, projects that qualify for a transformational brownfield incentive would need to be mixed-use with residential and commercial elements. Matthew Gibb, a deputy Oakland County executive, recently proposed changes in a letter to Sen. Ken Horn, the Frankenmuth Republican who introduced the main bill in the package, to allow development that doesn’t contain mixed uses if the property is a single-use site with an “obsolete or inoperable arena, stadium or shopping center.”

That change would improve the redevelopment chances of the Pontiac Silverdome, former home of the Detroit Lions, and the shuttered Northland Center in Southfield and Summit Place mall in Waterford Township, Gibb said.

The Silverdome site will never support commercial and residential uses, Gibb told Bridge and Crain’s. He said the bill should offer enough flexibility for communities to define what “transformational” means — such as an auto research facility in place of a former stadium.

Captures elsewhere

Michigan would not be the first state to allow the capture of sales taxes in tax-increment financing districts. Sixteen states already allow sales tax to be an eligible revenue source in a tax-increment financing (TIF) district, according to the National Conference of State Legislatures and the Columbus, Ohio-based Council of Development Finance Agencies, though it was unclear whether that capture applied to brownfield TIFs. In a 2015 report, the council wrote that sales tax captures mostly served “retail TIFs.”

A few states offer income tax incentives for brownfield projects, according to the National Conference of State Legislatures.

Gilbert, Horn and regional economic development agencies across Michigan contend that the state doesn’t have enough financial tools to make large projects financially feasible or to help Michigan compete with other states that offer more generous incentives.

Gov. Rick Snyder, who eliminated many incentives in 2011 when he restructured the state’s tax code, has said he will consider the bills if they land on his desk.

Cullen said the idea isn’t to pad the pockets of billionaires; rather, the incentive is likely to get a project off the ground that otherwise would never have returned enough in revenue to offset the cost.

“This tool is not intended to take people to 15 to 20 percent (returns),” Cullen said.

Instead, he said, the incentive might take a project to a 7 percent to 8 percent return — and it assumes the developer is bearing all the risk on construction costs, how fast the property is leased and rental rates.

A bank won’t loan money to a project if income from rent doesn’t cover the annual interest and debt service payments, he said.

“If we want to do this next wave of projects, we can’t get the financing and the economic return isn’t there to even allow us to go forward with it,” Cullen said. “In this instance, we’re saying it’s not because we don’t have equity, it’s because the projects don’t work without a little bit of support.”

One noted observer of sports venues, which often today are coupled with mixed-use “stadium district” development, isn’t surprised that Gilbert and his allies are seeking a new blend of tax captures to subsidize projects.

“As sports team owners start getting more pushback to their subsidy demands, they’ve been searching farther and farther afield for ways to get public money to pay for their new venues,” said Neil deMause, a New York City-based journalist and co-author of a book, “Field of Schemes,” that takes a critical look at public funding for pro sports stadiums.

“Since TIFs and STIFs — sales-tax TIFs, like what Gilbert is seeking — have an aura of ‘new money we wouldn’t be getting otherwise,’ it’s often easier for stadium seekers to get approval of kickbacks of this kind of tax money than straight-up checks from the general fund,” deMause said.

At least one analysis of the legislation suggests a “likely significant” impact to Michigan’s general fund in the form of lost revenue, according to a recent report from the Senate Fiscal Agency. That could depend on how many projects are approved in one year, it wrote, and the method the state uses to determine whether sales tax revenue came from a particular development. The Michigan Department of Treasury doesn’t track the origin of sales tax revenue.

But the fiscal agency also suggested, based on its interpretation of the bill, that the tax captures would not be capped “other than equaling the sum of all costs permitted to be funded under the bills.” Its authors wrote that that “would effectively impose no limit on the amount of revenue captured,” and as such the capture could exceed $500 million on a Detroit project.

The legislation also does not include any clawback of incentive payments should the expected amount of private investment not happen, according to the agency.

Dan Austin, a senior account executive with Detroit-based Van Dyke Horn Public Relations who represents the coalition backing the proposal, said in an email the amount of tax revenue actually captured would be subject to need and the “overall benefit test,” meaning a developer couldn’t capture any more revenue than is necessary to make the project financially sound. That capture also must be financially positive for the state.

“The actual TIF reimbursement would be just a fraction of those expenses because it is subject to these caps,” Austin wrote. “In reality, the capture will be just enough to close the financial gap and make the project economically viable as determined by the state.”

LaFaive, of the Mackinac Center, said “it’s an open question” whether TIF districts work as advertised, and that it will be incumbent upon lawmakers to show that the incentive would not come at a net cost to taxpayers.
“It’s hard to tell until it happens, and even then, once it’s happened, the horse is out of the barn,” he said.

The conditions

If approved, the bills would require the municipality in which the brownfield project is located and the Michigan Strategic Fund, within the Michigan Economic Development Corp., to sign off on a developer’s plan before awarding an incentive. That review would include a financial analysis.

The tax captures would be used to pay for brownfield-eligible costs, such as building demolition, construction or restoration and other site work. A brownfield TIF could last for up to 30 years, Cullen said, though the capture is only intended to be in place for as long as needed to pay for the project.

The Michigan Strategic Fund could only approve five transformational brownfield projects in the state each year, and only one per community.

Under the incentive, up to 25 percent of residential income taxes paid by residents of the new development generally would be captured, though the amount could be expanded to half in some circumstances.

Horn said the intent of the legislation is to preserve funding for schools and other designated uses and capture a portion of tax revenue that is currently undedicated.

“The strategic fund, when they do the underwriting, they don’t approve it unless it’s demonstrated to be net financially beneficial to the state,” Cullen said. “The state would have to conclude that because of the project, they make more money tomorrow than they do today.”

Jeremy Hendges, deputy director of legislative affairs for the MEDC, said in a statement: “This is a legislative proposal that is being brought forward and we are still evaluating and analyzing the proposal. At this time, we are not able to provide an accurate assessment to the questions that were posed, as we are still evaluating the proposal and the potential impact.”

The bills include checks and balances with requirements that cities and the state both will have to vet — and approve — the brownfield plans, said Jennifer Rigterink, legislative associate for the Michigan Municipal League.

The league initially supported the bills “in concept,” but has now thrown its full support behind it after lawmakers lowered the minimum private investment limit for the smallest communities.

“Five projects a year is not many,” Rigterink said. “It’s another tool in the toolbox, and honestly, we’re glad to see the state have some skin in the game.”

Bill Shea contributed to this report.