Gilbert pitching Lansing to sweeten incentives for large developments
LANSING — Dan Gilbert's top lieutenant and economic development organizations around the state are pushing a plan in Lansing to allow the capture of state sales and income taxes to help pay for major redevelopment projects.
Such a plan could ease the path for massive projects Gilbert is planning in Detroit, including the redevelopment of the 2-acre site that used to house the J.L. Hudson's department store on Woodward Avenue and a new $1 billion Major League Soccer stadium and other development proposed for the site of the stalled Wayne County Consolidated Jail project on Gratiot Avenue.
A statewide coalition is building behind the proposal, which supporters say is necessary to line up more financing options for projects that developers traditionally have a hard time selling — those that involve cleaning up lead, asbestos or other contaminants, known as brownfields. Yet it’s difficult to say with certainty what a plan like this might cost the state in revenue it otherwise would collect. And it first would have to get past Gov. Rick Snyder, who does not believe in letting government pick private-sector winners and losers.
Gilbert’s umbrella company, Rock Ventures LLC, is lobbying for the effort, which has resulted in a five-bill package introduced this month in the Senate. Called “transformational brownfield projects,” the legislation would let developers use sales and income tax revenue generated by visitors and residents of the new mixed-use properties to offset the costs that go into preparing a dirty site for construction — provided they invest a minimum level of private capital into the project.
In Detroit, that would require a developer to put up at least $500 million in private funding; smaller communities would require minimum thresholds of $25 million to $100 million, depending on population.
A variety of projects throughout the five-county region, including the redevelopment of the Pontiac Silverdome in Pontiac and the Uniroyal site along the Detroit River, for example, likely would meet the requirements of the legislation.
State law currently allows developers to capture the new property taxes generated by the completed development. Proponents say a sweetened incentive could mean the difference between a project happening or not, since brownfield projects inherently are expensive and complicated.
And Gilbert, who has amassed more than 13 million square feet of real estate holdings in and around downtown Detroit since 2011, certainly has some projects in the works: Matt Cullen, Rock Ventures’ principal, said in a Thursday interview with Crain’s that this incentive could unlock at least $2 billion in projects by his company alone.
“This is critically important for us,” Cullen said. “But we all need it, from Ann Arbor to Grand Rapids to Flint to Detroit.”
The Hudson’s site is one of the most prime pieces of downtown real estate, with 2 acres of vacant land along Woodward. Gilbert has said the mixed-use project is expected to be transformational to downtown, but precious few details of the planning have been publicly disclosed.
In addition, Gilbert and Detroit Pistons owner Tom Gores in April proposed a 20,000- to 25,000-seat stadium on the 15-acre site of the half-built Wayne County jail, construction on which was halted three years ago and which Wayne County still owns. County Executive Warren Evans has said he plans on moving forward with completion of the jail project.
The Gilbert-Gores proposal includes a 500,000-square-foot soccer stadium flanked by three 18- to 28-story glass towers — one a hotel, one offices and one residential.
Less-discussed publicly, Gilbert’s team and General Motors Co. have been discussing what to do with approximately 20 to 25 acres of largely vacant land immediately east of the Renaissance Center.
“We have historic, beautiful cities that we can turn into engines of the state’s growth and prosperity — if we have the tools to do it,” Cullen testified this month before a Senate committee.
“As a state, we don’t have the economic development tools we need to unlock the large-scale, transformational projects that are going to truly move the needle in revitalizing our cities,” Cullen testified. “The fact is that in many cases there continues to be a gap between the cost of development in our older cities and what you can get back in rent.”
Cullen’s statement underscores a point shared by others in the industry — that Snyder’s 2011 tax overhaul went too far in eliminating incentives for business attraction and economic development. Some worry that Michigan is not as competitive as other states, such as Texas, when it comes to landing major corporate spending or large-scale real estate projects.
“These projects and others are ready to go,” Cullen said. “We are motivated to get this thing done and get going. You hate to miss a window.”
Snyder in the past has resisted efforts to add or restore tax credits. His administration renegotiated credits with the Detroit 3 automakers under the defunct Michigan Economic Growth Authority program after discovering the state was on the hook for $9 billion in obligations.
A spokeswoman for Snyder said the governor will review the bills if they land on his desk, but his office did not say how the concept fits with his philosophy on tax incentives.
“He hasn’t said ‘no,’ ” said Sen. Ken Horn, R-Frankenmuth, who introduced the main bill in the package Sept. 7 and held a hearing on them the next day in the committee he leads. He hopes to vote them out of committee this week.
“I think I’ve got a fighting chance.”
How it would work
If adopted, the bills would require both the municipality in which the brownfield is located and the Michigan Strategic Fund, a division of the Michigan Economic Development Corp., to sign off on a developer’s brownfield plan. Proposed projects would require a financial analysis before the incentive could be approved.
Captured revenue could be used to reimburse developers for any brownfield-eligible costs, including demolition, construction or restoration of buildings and other site improvements.
All projects would have to contain mixed uses, including residential and commercial. The enhanced incentive could apply to a single project, or a series of related developments.
Cities would be limited to one transformational brownfield project annually; the Michigan Strategic Fund could not sign off on more than five statewide in a single year.
“We kind of grew allergic to the tax credits. We have nothing to offer the really big investments,” Horn said. “There’s still room for more tools. We just have to make sure they all work and they don’t over-promise.”
Horn, Cullen and others say developers would carry all of the financial risk, since the incremental tax revenue would not have existed without the development. Horn said that is in part because developers will have an interest in ensuring the developments are occupied and gaining value.
Property tax revenue also should rise with the new developments, he said. Today, many of the sites have little to no value.
“You’ve got nothing today. If we do nothing, you’ve got nothing tomorrow,” Horn said. “If you have no occupancy, no renters, no condo owners, no retail shops that come in, no office space that’s leased out, then the state still loses nothing.”
The actual financial impact to the state is difficult to determine, but would reduce general fund revenue by a “likely significant amount,” according to an analysis by the Senate Fiscal Agency. The actual revenue loss would depend on how many such transformational projects are approved in a given year, how large they are and how loosely the state defines sales tax revenue as having come from a particular development.
“Unlike tax credits distributed to a taxpayer to subsidize an activity, which are not subject to appropriation, the bills would apparently authorize direct expenditure payments to an owner or developer of an eligible property without an appropriation,” the agency wrote. “Furthermore, the captured revenue and distributed payments would not be subject to any legislated maximum level other than equaling the sum of all costs permitted to be funded under the bills. Because those costs would not be limited, and could include costs incurred before the approval of a transformational brownfield plan, the bills would effectively impose no limit on the amount of revenue captured. In the case of a transformational brownfield plan located in a non-county municipality with a population of 600,000 or more, over time the captures could exceed $500 million.”
A portion of the income tax revenue generated from new residents at a development could be captured, according to the analysis and committee testimony. The Senate Fiscal Agency estimated the state’s income tax revenue losses could total between $15 million to $45 million, using an average individual income tax liability of $1,500 in 2013 after credits were applied and an estimated 10,000 to 30,000 tax returns from residents of transformational brownfield projects.
Additionally, Senate fiscal analysts said the bills would create “extensive” administrative costs for the Michigan Department of Treasury, which today does not identify where sales tax revenue originates. The department likely would have to hire more employees and add informational technology systems to track the source of sales tax revenue across multiple sites, they wrote.
Local income taxes would not be captured under the bills. Horn said he has had discussions with the Michigan Municipal League, which supports the legislation “in concept,” and other local government associations to address concerns about possible lost revenue.
He said the legislation sets up a tiered approval structure, with multiple sets of eyes in local and state government watching the projects.
“We are trying to be very careful and thoughtful,” he said. “The underlying goal in all of this is to make sure there is a net gain for the state.”
The real impact, Horn said, is at the local level. Individual communities will be the ones to decide what “transformational” means for their residents.
A $25 million project in Saginaw, part of Horn’s Senate district, could “fundamentally transform” its downtown.
Brownfield conditions in the city “have frightened developers away through the years,” JoAnn Crary, president of Saginaw Future Inc., the economic development agency serving Saginaw County, testified before the Senate panel.
One downtown project under consideration will require significant investment and undertaking, she said, but it also could be a catalyst that leads to more development.
“It creates a nucleus so that we can develop and build around it,” she said.
Saginaw Future and regional economic development agencies The Right Place Inc. in Grand Rapids and Southwest Michigan First in Kalamazoo have signed on to a coalition of developers, development agencies and chambers of commerce called MI Thrive. The group consists of more than a dozen members, though an official list wasn’t made available.
The group’s members “share a common goal: Helping move Michigan and its cities forward,” said Dan Austin, a senior account executive with Detroit-based Van Dyke Horn Public Relations, which is handling public relations for the coalition.
In southwest Michigan, there is pent-up demand for urban housing, while in Grand Rapids, the brownfield incentive could make it feasible for developers to pursue projects adjacent to downtown, according to committee testimony.
“The transformation of downtown, its neighborhoods and especially along the Grand River is not complete — but the easier projects are over,” Rick Chapla, The Right Place’s strategic initiatives vice president, told the Senate committee.
The legislation includes a provision that would waive the minimum private investment requirement in communities eligible for federal blight elimination funding or in a municipality under a state of emergency for drinking water contamination.
That could create opportunities for smaller projects in Flint, which otherwise would require at least $50 million in private investment under the bill. Flint has been struggling to recover from lead-contaminated drinking water caused by a state-appointed emergency manager’s decision to draw tap water from the Flint River.
“That excites us, obviously,” said Bryce Moe, managing director of Flint-based Skypoint Ventures, which does real estate development in the city and Genesee County.
Skypoint Ventures is considering two projects that could benefit from the incentive, though Moe did not disclose details.
“These are projects inherently by nature in our urban areas that have a financial gap, because the current business case is not there,” Moe said. “There’s a whole list of reasons why, and this really, really goes after that and attacks that gap, that space, in the project that a traditional investor or traditional lender does not have the appetite for.”
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