City dwellers came for the tax breaks. Will they stay when breaks expire?

Kevin Morin is someone any Detroit advocate would welcome to the city: Young, educated, entrepreneurial.

Morin runs two tech companies out of an office in Corktown and has opened and sold a restaurant in the middle of a popular downtown park. And every day begins and ends in a modern 1,000-square foot-condo that he bought in 2008 on the 24th floor of the Westin Book Cadillac, a beautiful if once dilapidated hotel restored to one of the city’s finest jewels and an anchor of the current downtown revival. He works in the city, shops in the city, entertains in the city.

But Morin said his love for this high-rise downtown condo is in jeopardy. The tax break that helped lure him to Detroit expires in seven years, threatening to turn his tiny tax bill – under $500 a year on a condo he bought for more than $300,000 – into a $12,000 millstone that he said could drag down his property value.

“I think it is too aggressive in that it is too low to begin with and so black and white at the end,” he said. Even though that’s seven years away, he’s already thinking of selling.

“It’s too good,” Morin said of his current taxes. “Things that are too good to be true, they go away, right?”

At a time when Mayor Mike Duggan and others are touting a nascent Motown revival, city officials acknowledge that state tax breaks that helped draw professionals to downtown and midtown could act as a repellant when they expire, in part because Detroit has one of the highest property tax millage rates in the state.

Which leaves Detroit -- and some other Michigan cities -- with a delicate decision: As Dan Gilbert and others gobble up and develop buildings, as construction on a commuter train line along Woodward continues, as the city hopes to lure thousands, is now the time to take the thumb off the scale and allow the state Neighborhood Enterprise Zone (NEZ) tax breaks to quietly expire?

“If you start taxing them on what their (properties are) worth, they’re not going to stay,” predicted Tim Hodge, who performed his doctorate study at Michigan State University on Detroit’s tax break programs.

But if the city opts to further extend generous tax breaks to new(er) Detroiters living in some of the city’s most expensive homes, what message does that send to ordinary residents of more modest means, people taxed on the full value of their properties for decades? After all, the city’s high assessments, combined with the city’s high tax rate, are why so many longtime residents have been unable to pay their tax bills.

In neighborhoods far from bustling downtown, there will likely be little sympathy for Morin and his fellow condo owners at the Book Cadillac.

“You knew what you signed up for when you did it,” said Brian Ferguson, who lives near Schoolcraft and Southfield on the northwest side of Detroit.

Ferguson, who works as an auto technician, noted that many of his neighbors have struggled to pay taxes, and some have failed. But he acknowledged the tax break program puts the city in a tough position: whether to continue to subsidize residents already receiving the biggest breaks.

In Ferguson’s view, residents taking advantage of the state program should have been planning and setting aside money for the eventual and predictable rise in their taxes.

“You knew it was going to happen,” he said.

Morin and other beneficiaries say they understand they’ve gotten a good deal. Morin, in fact, said he’d trade a far higher bill now – say, $4,000 a year – if he could stay at that level well beyond the original 15 years of the incentive.

From the U.P. to Detroit, tax breaks abound

Across the state, from Iron Mountain to Wyandotte, Muskegon to Traverse City, more than 14,600 residential properties in 26 communities have received state-sanctioned Neighborhood Enterprise Zone (NEZ) tax breaks since 1993, designed to encourage residential development in financially distressed communities.

The vast majority – nearly 90 percent – have been issued in Detroit to foster new construction throughout the city and the rehabilitation of older buildings like the Book Cadillac. More recently, Detroit and River Rouge have found ways to save taxes for longtime city homeowners as well; if the homeowners invest as little as $500 in improvements.

Beneficiaries of NEZ program range from those in riverfront condos to modest-single family homes in suburban-style subdivisions.

They include 5,000-square-foot mansions in gated communities with personal boat docks along the Detroit River; homes bought for more than $800,000 yet pay under $5,000 in taxes. While less than a mile to the north, modest Detroit homes worth $30,000 are paying more than $1,500 a year in taxes, triple what Morin pays in his perch atop the Book Cadillac.

If these condos and sprawling riverfront luxury homes paid taxes on their true value at the full city of Detroit rate of 69 mills, those bills could range from $9,000 to more than $27,000. They do not – yet.

These sought-after, more affluent residents are not just benefitting in Detroit. In Grand Rapids, whose downtown has undergone a revival of residential living and commercial development, the impending expiration of the NEZ’s on its largest project, the Union Square Condos, has irritated condo owners and prompted a march to city hall. Condo owners in Grand Rapids, where the tax rate is roughly half of Detroit’s, will see bills rise from $500 to $3,500 or $4,000 a year when the tax breaks end.

In other Michigan cities, the NEZ program is used more sparingly, with projects in Holland and Lansing limited to just a few locations.

Detroit is another story.

The city, which has been hemorrhaging population for decades, has used the NEZ program aggressively over the past decade, a period notable for a renaissance of development in downtown and other neighborhoods near the city’s core. But hundreds of NEZ units are set to expire this year and next. More than 800 will end in 2020, and in 2021 and 2022 another 5,900 will expire, with substantial tax increases for homeowners across pockets of the city.

“It has to be addressed,” said Gary Evanko, Detroit’s chief assessor, who was hired after years working in Dearborn to fix that city’s property assessing program. Too many properties are assessed too low and many more are assessed too high, Evanko said.

But the NEZ program, he said, needs special attention. “The whole matter of addressing this policy is a must-do this year,” he said. “A must-do.”

Of course, tax incentives aren’t unique to residential development. Cities and states have long offered such deals to attract or keep auto plants, corporate headquarters and sports teams. As Bridge recently reported Michigan leaders now are bracing for other states’ pitches to take Dow Chemical out of Midland.

In offering industrial and commercial economic development deals, the idea is simple: A state or county will forego taxes – property or income – in exchange for a commitment to bring jobs. The upside is new income tax revenue from the employees and job opportunities for a community.

But when a business incentive expires, three things typically happen, said Mark Skidmore, an economics professor at Michigan State: The company that got the incentives tries to renegotiate, gets an extension -- or it moves.
That same dynamic could play out with residential properties in struggling cities, he said.

“The question is,” he said, “what will the city of Detroit do? Will they … extend the abatements for fear of losing the people, or will it make them pay the full rate?”

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Identify the problem, find solution

Along the Detroit River, just east of downtown, sits 200 River Place. It houses 48 units in a red-brick rectangular building first built early in the 20th Century for the former Parke-Davis pharmaceutical complex. It’s condos feature high ceilings, exposed ductwork and interior brick walls. Some units offer views of Belle Isle and downtown.

For many tenants, the prospect of higher taxes is fast approaching, with tax breaks set to expire this year or next.

That could mean a tax bill going from $1,300 a year to $9,000 or more.

“That’s a lot of money,” said Tim Quinn, a resident who worked for the company that developed the complex.
So far, residents have held two meetings to discuss what can be done. They’re hoping for a “transition” period before the full taxes are applied, Quinn said.

Like Morin, Quinn said he is well aware of the perception that wealthier waterfront residents are looking for another break after getting a real good one for a long time. And he said he understands the recently bankrupt city needs tax revenue to support basic services – fire, police, parks.

“I know that we have to support this city,” Quinn said. But he noted that he and many of his neighbors chose to move to Detroit at a time when the exodus was in full flight in the other direction. Those who stay are paying the city’s full 2.4 percent income tax, not the 1.2 percent that non-resident city-based workers pay.

“You don’t want to chase out of the community the people who are spending their money here,” he said. “That was the purpose of the NEZ, getting people into the city.”

Debra Pospiech, Detroit’s deputy treasurer for tax, said calculating how important those breaks are to homeowners is at the center of a comprehensive review of the NEZ program.

Interns from Wayne State University and the University of Michigan are completing an inventory of NEZ properties in the city. The city may end up asking Lansing to extend existing deals for the NEZ program, or it may look to convert people on one type of tax break to another, she said.

Everything is under consideration, agrees the mayor.

“We’re reviewing it right now,” Duggan told Bridge. “You have areas covered by NEZ and some not. The whole NEZ program, we’re evaluating it.”

The mayor has said repeatedly he wants his administration to be judged by a simple metric: Did the city’s population grow on his watch after six decades of decline?

Detroit’s crippling property tax rate is an impediment to that growth.

At 69 mills for owner-occupied homes and condos, the city’s tax rate can generate a bill of as much as $7,000 for homes worth $200,000, a staggering challenge for residents in one of the nation’s poorest cities.

By contrast, a home valued at $200,000 would cost a homeowner only $3,700 in upscale Troy, in Detroit’s northern suburbs; $3,800 in Alpena, $4,500 in Lansing and $3,300 in Grand Rapids.

Build here, pay less

The state launched the NEZ program more than 20 years ago and, at first, it targeted new construction and building rehabs. For new construction, the owner would get up to 15 years of tax relief, paying half the statewide average millage rate. This year, that’s just under 17 mills, a whopping 75 percent discount from the 69 mills that most Detroit homeowners without an abatement would pay.

For owners of rehabbed buildings, like Morin in the Book Cadillac, the break is different. They pay the full tax rate, but it’s on an assessment that’s frozen at their share of the building’s value before renovations.

In the case of the Book Cadillac, which underwent extensive renovation and emerged as a mix of hotel rooms, condos and restaurants, that meant valuing refurbished condo units at their worth when the building was a hulking blight on Detroit’s skyline. In Morin’s case, the taxable value of his condo has been frozen for 15 years at $3,026, or roughly 1 percent of the $290,000 he actually paid in 2008. Which is why his annual property taxes are less than $500.

The taxable value of other units in Book Cadillac worth even more, including the three-story penthouse units, are frozen as worth $3,000.

This for top-floor views in a celebrated structure built in the Italian Renaissance style; indeed the world’s tallest hotel when it opened in 1924. Before falling into disrepair, the Book Cadillac was host to five U.S. presidents, the scene of a movie starring Spencer Tracy, and it’s where, in 1939, Yankee star Lou Gehrig told his manager he would have to sit out that day’s ballgame against the Tigers after 2,130 consecutive starts.

If a 2-bedroom, 2-bath condo, now on the market at the Book Cadillac for $465,000 was taxed at its true value, it would bring a property tax billl of $16,000. Instead, at least for a few more years, its owner will pay $382, according to the developers.

In Detroit, more than 3,000 tax breaks have been issued for rehabbed buildings; nearly 3,900 for new construction, most in the 1990s and 2000s.

“When that boom was here, it helped a lot of people,” said Verzell Page, a real estate agent in the city for over 20 years. “It was a necessity to have something like that to have the new construction boom.”

When the real estate market in the city started to get hot in the early 2000s, owners of existing homes across the city began to feel the tax pinch as well: 1994’s Proposal A limited how much a property’s taxable value could increase, but when a property was sold, the property was assessed at its full value.

That meant that buyers of homes in nicer Detroit neighborhood like Palmer Woods and Indian Village were staring at huge tax bills that the preceding owner didn’t face.

“The market got wise to this, the tax bill would go from $2,000 to $12,000 overnight,” Evanko said. The result: home sales slowed and city leaders feared more vacancies.

That’s when then-Mayor Kwame Kilpatrick successfully lobbied the state legislature for an innovative NEZ “homestead” program, to encourage some longtime residents to make even small improvements to their homes in exchange for lower taxes. If someone within the designated NEZ zones made at least $500 of improvements – a couple new windows would suffice – they’d get a 50 percent reduction in the city and county millage rate. It wasn’t as good as the NEZ new and rehabbed deals, but it was a roughly 20 percent break on property taxes.

Thousands signed up and continue to sign up.

Now, as many of the NEZ deals offered to both new and current homeowners mature, taxpayers across the city are starting to see higher tax rates because both NEZ programs call for a slow increase in rates in the last years before expiration.

Which means that across the city, neighbors are paying different amounts – some 69 mills, others 17 mills, and many in between. Evanko, the city assessor, said there are more than 100 properties that should be paying more but for some reason their rates were not adjusted upward.

“I think it does create some inequities in terms of the taxes people pay,” said Skidmore, the MSU economics professor. He said he favors steps to lower the city’s overall tax rate but acknowledged it may be difficult for the city to take a hard line with those who have already benefitted from the NEZ breaks.

“There’s reality and there’s principles,” he said. “If you stick with your principles” and require NEZ homeowners to now pay full freight, “you risk losing some of these people. I think I would probably allow this to phase out, but there’s a risk in doing this.”

Big decisions ahead for city and residents

At Kevin Morin’s condo, his 24th-floor view takes in the tree-lined city park at Campus Martius, where he once co-owned the Fountain Bistro at the hub of Woodward and Michigan avenues. He can see workers fixing roofs, tuck-pointing brick and glazing new windows on buildings in and around Capitol Park. The parking deck below his condo is getting several floors of hotel added on. It’s an amazing transformation for which he’s had a front-row seat.

It is progress spurred, in part, by the success of the Book Cadillac. And a large part of that success could be tied to that tiny tax bill Morin began receiving years ago.

Page, the real estate agent, said he can understand why those who haven’t gotten a tax break might loathe the NEZ program. Nonetheless, he said, it does have value and should continue. “We definitely need to maintain and extend it,” he said. “You’ve got so many things that are going to happen in the city.”

If the NEZ breaks are allowed to expire, with no additional relief, Morin said he will probably stay in the city, and most likely find another condo with a tax break. He wants to stay in the Book Cadillac – with its pool, health club and hot tub.

“If I didn’t have this tax situation, I wouldn’t move,” he said. “That’s how much I love this house.”
It may, in the end, turn into a game of chicken.

And the next move may be Detroit’s.

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Comments

David
Tue, 06/14/2016 - 9:39am
An illuminating article. I had no idea this tax scheme had been put into place. It seems to me like a disaster waiting to happen. The impending tax rate is substantially higher than suburban rates. Anyone who opts for living under such a policy is either planning to leave soon, independently wealthy or not paying attention.
Eric
Tue, 06/14/2016 - 10:38am
Cincinnati has a similar program called CRA, but the max rate you pay without it is still reasonable, anywhere from $2500-$4000/yr depending on neighborhood. The fundamental issue is that it's just too expensive to live in Detroit.
Eric
Tue, 06/14/2016 - 10:28am
Why shouldn't his annual taxes max out at $4,000/yr for a 1000sf condo? This isn't about the break, this is about the ridiculous $12,000/yr rate, on top of HOA fees that are likely another couple $100/mo.
Warren
Tue, 06/14/2016 - 10:43am
I wonder if a "revenue-neutral" solution could be found in which the city lowered the millage for everyone while doing away with ALL the tax breaks as they expire.
John S.
Tue, 06/14/2016 - 11:40am
Property taxes are capitalized into the value of houses/condos. As the tax breaks expire, the market value of the NEZ properties will fall. If the current owners sell, no surprise, they'll get far less than they hoped for, and perhaps even less than they initially paid. Their pleasure (tax breaks) was up front; their pain (low sales price) is downstream. Many of those anticipating the expiration of the tax breaks are likely already looking to sell while the selling is still good. Allowing the tax breaks to expire is the fairest thing to do. The prices of these properties will fall until a price is reached where buyers see value and purchase them.
Connie
Tue, 06/14/2016 - 11:59am
Michigan's reliance on property tax revenue and lack of transparency regarding tax breaks is a big part of this problem.
duane
Tue, 06/14/2016 - 12:15pm
Midland and Dow Chemical were mentioned in the article and yet I did not see Midland on the tax incentives list, why? Do the people of Midland find value in living there that are sufficient reason to stay and not require those tax incentives, why? What are they? As I recall reading a Bridge article about Dow Chemical [one of the larger global companies] being in Midland for over 100 years, why? What is there about this town that keeps the company and the people in that town? It seems that the residential tax incentives are the reason they are there, so maybe rather than worrying about the tax incentives and start looking at how and why towns such as Midland are succeeding and learn for such success to find ways to replace the residential tax incentives?
Barry Visel
Tue, 06/14/2016 - 12:41pm
Same story for infrastructure...we pay a discounted price up front for construction by failing to account for the ultimate replacement cost. Same story for pension and retiree health care costs...we make promises but fail to account for funding them. We say we need money for all sorts of things, but then turn around and ignore market forces by granting all sorts of tax breaks. Common theme?....government involvement!
Observer
Tue, 06/14/2016 - 10:22pm
In the end, Mr. Viset does not make a good case. We do not " pay a discounted price up front for construction by failing to account for the ultimate replacement cost." We only float bonds to pay for the cost of constructing a project. We do not float bonds to pay for its replacement. By his logic, we would be floating bonds for replacements into infinity. Replacement costs are the responsibility of ourselves and future citizens at the appropriate time in the future. He is, however, quite right when he says about pension and retiree health care costs, that "we make promises but fail to account for funding them." Common theme? Citizen involvement. Particularly in the case of pensions and retiree health care costs, we wish to bask in the satisfaction of having had magnanimous good intentions, but are not sufficiently virtuous as to make the sacrifice of adequately funding them.
Barry Visel
Wed, 06/15/2016 - 8:17am
Actually, we wouldn't be floating bonds forever. Instead, for water and sewer systems for example, we would set user charges to account for the inevitable future replacement costs. My point is, we build this stuff without thinking about, or accounting, for future costs...which become obligations of future generations.
Observer
Wed, 06/15/2016 - 6:11pm
I'm sure that Mr. Visel recognizes that water and sewer systems are one of the few cases of infrastructure that generate revenue. Most do not, and therefore my point about floating bond issues for replacement projects holds. He says, " My point is, we build this stuff without thinking about, or accounting, for future costs…which become obligations of future generations." Shouldn't we match costs and benefits? If future generations derive the benefit from an infrastructure project, shouldn't they bear the costs? The current generation is having extreme difficulty building and maintaining present day infrastructure. Surely, it is not feasible, or desirable, for us to also pay for future infrastructure. Surely, his instinct that we should not shift costs to future generations is sound, but if we build and maintain adequate infrastructure, we will have fulfilled our obligations in that regard.
Rich
Tue, 06/14/2016 - 1:09pm
The property tax is one of the most unfair tax that we have. All sorts of "must have" projects get added to the property tax - bike trails, beautification, regional transportation, libraries, sports stadiums, and on and on and on. Each of these "must have" projects should be taxed at a distributed rate, meaning that if 100,000 people live in the area served by a new library costing $1 million, then each person would pay $10. Why should one have to pay more just because they live in a place that costs more. And then there is the taxation without representation levied against those who only use their Michigan property part time and are residents of another state. They get to pay an extra 18 mils and do not get to vote on whatever is being levied.
MikeinTC
Tue, 06/14/2016 - 4:55pm
Interesting article for the Bridge to put forward: Well-to-do folks got tax breaks, so it would be terrible to take those tax breaks away! Question: Who then pays for municipal services? Answer, the permanent residents who have already been subsidizing the yuppies...and if that doesn't generate enough revenue, lets get the taxpayers in the rest of Michigan to bail them out! Did no one see this train wreck coming?
MikeinTC
Tue, 06/14/2016 - 7:54pm
What in the previous comment, made 4 hours ago requires "moderation"? Is there an algorithem in which the words"Detroit" and "bail out" automatically make the submission suspect? Shades of Facebook.
John Q. Public
Tue, 06/14/2016 - 11:50pm
I (and others) said it before, and it bears repeating--over and over. The problem isn't the property tax; it's the ad valorem property tax. Tax the size of the buildings, and the size and permeability of the lot, and the financial disincentive to improve existing property nearly all disappears. For lack of "equity," people seem to find the prospect of taxing all 2,000 square-foot houses with an attached two-car garage on a half-acre lot the same amount, whether they're worth $50,000 in Ecorse or $500,000 in Franklin, abhorrent. That lack of equity could be addressed with a hybrid property tax: ad valorem on the land, specific on the size of the improvements. You can see who the proponents of the tax breaks are: real estate developers,salespeople, and real-world Sim City players who think shiny buildings and expensive playthings, and not high-quality basic services, define a city.
Wed, 06/15/2016 - 2:56am
Give a little to gain a whole lot. Temporary freezes on city taxes are only that....temporary, and as such do not provide a long term solution to the city`s growth and development. A much broader based tax threshold needs to be in place across the entire city, thus providing long term incentives for repopulation and development, further bringing further populations back into the city, in turn creating a greater tax base. Keep them high, even in the neighbourhoods, where the city still forecloses every week, and you just end up with displaced citizens who will eventually live elsewhere in the US, therefore exacerbating the issue of a shrinking tax base. Populate or perish! Invest heavily in crime prevention and education, then the population will start to return at a greater pace, creating employment and a desirable place to live, building upon the slow but steady progress now being made in pockets of the city.
Connie Glave
Wed, 06/15/2016 - 12:06pm
Maybe we should have a discussion on eliminating property tax. You never really own your house if you can lose it when a major illness or life change makes it so you can't afford the taxes on a home you own. With a graduated income tax sufficient to cover services, we could eliminate property taxes. In 15 years the building should be mostly paid off and they should pay the taxes to provide the services. Why should someone who has been there for years pay the high rate while newcomers don't.
Joe
Wed, 06/15/2016 - 7:42pm
Cut property taxes and institute a progressive income tax to fund most educational expenses which should also lead to greater parity in educational investment.
Sun, 06/19/2016 - 8:30am
Detroit needs to copy Oklahoma. The city has an underutilized asset that only a few municipalities have. Here is Detroit's version of the Oklahoma Land Rush of 1889. The vacancy rate of apartments in suburban Detroit is very low with rental rates rising. The city has a high vacancy rate of single family homes that are deteriorating and an eyesore, a threat to the safety and viability of neighborhoods, not contributing to the tax base of the city and must be closely monitored thus contributing to the high cost of operating the city. This presents an opportunity for Detroit. The city should offer an abandoned home to anyone who will occupy it as their primary residence for at least 18-months and meet certain requirements. The objective is to grow the population and tax base and alleviate much of the blight in the city. Per Harper's Weekly, In April 1889 "At twelve o'clock on Monday, April 22d, the resident population of Guthrie was nothing; before sundown it was at least ten thousand. In that time streets had been laid out, town lots staked off, and steps taken toward the formation of a municipal government." In order for Detroit's program to succeed, the new residents must have "skin" in the game including the following. 1. Forgo all other residences not in Detroit within 90 days of occupancy of the Detroit homestead. 2. Occupant must complete agreed to repairs on the Detroit residence according to an agreed to time frame. 3. Must have been employed for at least one year prior to taking possession of the Detroit Residence and meet certain underwriting conditions. 4. Other conditions as deemed appropriate. There is more work needed to launch the program. The city must finalize the rules, set up appropriate procedures and controls to assure compliance with all requirements. Further, the city should add to the staff of the police and fire departments to assure proper servicing of these neighborhoods. The program should be introduced in certain neighborhoods of the city and expanded as experience is gained and demand warrants.
tikiman
Mon, 08/22/2016 - 10:43am
Ultimately a question of fairness. The whole taxation scheme needs to be drastically altered to reflect ACV's all over. Detroit's taxe rates are based on 60's & 70's value structure. Everyone has been paying way too much for way too long. And, what do you say to the families W.C. evicted? Sorry? My bad? Kill the NEZ, cut valuations by 1/2. Everyone on same playing field