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By Joe Boomgaard | MiBiz
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WEST MICHIGAN ­— Michigan’s popular brownfield redevelopment and historic preservation tax credit programs were considered the national standard, but they fell casualty to Gov. Rick Snyder’s budget and tax reform process.

Snyder said he was no fan of tax credits, preferring appropriations instead. Even if the tax credits like the brownfield and historic preservation programs had widespread bipartisan support and have been credited for urban renewal and reinvestment across the state, they had to go.

“The administration and the legislature did not want any credits under the new corporate income tax,” said John Byl, partner at Warner Norcross & Judd LLP and chair of the Michigan chapter of the National Brownfield Association. “Brownfield credits did not have to be appropriated, and it has not always been apparent to the administration and the legislature how much it’s costing the state. It’s a little difficult to track what the expense was to the state. But candidly, you can figure it out by what was awarded, (by tallying) the certifications of completion.”

‘Better than nothing’

Under the budget that passed the Legislature in late May, $100 million total was appropriated to be used for brownfield, historic and Michigan Economic Growth Authority programs combined. At least $20 million was allocated to brownfield and historic projects that would have previously received tax credits, said Michael Shore, spokesman for the MEDC.

“The changes in statute also provide for greater flexibility and all of this is in the context of a greatly reduced business tax,” Shore said in an email. “The net of all this is that we are very confident we have ample resources to pursue new economic development strategies that will create new opportunities for business attraction and urban revitalization.”

But many worry the new program will not only fall short of the previous system, but also open the scheme to a host of potential negatives, not the least of which is politicizing the process.

“That won’t make up the former number of credits approved, but it’s better than nothing,” Andy Schor, assistant director of state affairs for the Michigan Municipal League, told MiBiz.

On average, the state had approved $170 million in brownfield tax credits per year from 2008 to 2010, about $85-100 million of which had been claimed. The historic credits averaged $15 million per year in the same time frame.

“(The credits) were instrumental in the redevelopment of industrial sites, particularly in core urban areas where they depend on tools like this to succeed. To drop from $170 million to $20 million would make it fairly ineffective,” Byl said. “I do believe and I certainly hope this is not the final work. It would be disappointing if $20 million is the final number.”

Byl was a member of a small workgroup that provided a recommended plan of action to Lt. Governor Brian Calley and the Michigan Economic Development Corp. The proposal included “more discussion on enhancements” and the recommendation that the state make a larger appropriation of funds for brownfield and historic projects.

The proposal includes a mix of grants and loans that developers could use to directly help finance projects for which they had previously turned to tax credits. In the past, the developers would often sell the tax credits to a third company at 87-90 cents on the dollar, in effect creating a bridge loan critical to getting some of these complex projects off the drawing board.

“That means that the project receives less than the full amount of the credit. The net amount to the project has been at a discount,” Byl said. “If they do the grant program, the full amount would go to the project.”

Conditions must be certain to secure lending

While the conditions of the new program have yet to be legislated — Schor expects that to happen by late summer — developers would likely have to apply to the MEDC and the Michigan Strategic Fund for the funds. If approved, the funds would then be dedicated to the project and payable upon completion. Various proposals have the state and the developer signing a binding contractual obligation reserving those funds, while others have proposed putting those funds into a segregated escrow account that would disburse the funds once the project is completed and the developer shows that the requirements were met.

Developers say whatever way forward the state chooses, it needs to make absolutely certain that the process is clear, binding and done in a timely manner to support the rapid pace of today’s business environment.

“The important thing is there needs to be a mechanism to make the obligation contractually binding to the state,” Byl said. “Under those circumstances, I’m confident the lending industry will get comfortable.”

Kara Wood, economic development director for the city of Grand Rapids, said that while the total dollar amount of brownfields is dropping significantly, she expects the volume of projects to remain the same. As a result, local tax breaks will become a more significant piece of the incentive puzzle.

Observers tell MiBiz it will likely be the large projects in urban areas like Grand Rapids that will see the least impact from the changes to the program.

“Given that Grand Rapids is continuing to redevelop its downtown, I still think that we’ll continue to use the program to its full extent. There will be some resource reductions (and) it will have an effect, certainly,” Wood told MiBiz. “There have been a lot of concerns from developers, but the fact of the matter is that the state’s resources are completely different than in the past. In the short term, they are frustrated. … At the end of the day, we will still be able to do a lot of projects that the city wants to do.”

Local economic developers were part of the negotiations with the state, and Wood hopes that by showing a good return on the $100 million left for tax incentives, the future amount may be increased.

“My hope is that after showing 6-8 months of success with the existing program they’ve approved, that we can go to the state and seek more funds,” Wood said. “The fact is that the brownfield system returned more to the state in terms of its return on investment than the film credits.”

Critics: Cap leaves door open to politicizing process

While the MEDC always had final approval over the tax credits for brownfield projects, there will soon be a finite pot of money. Schor said the process could create competition among developers to sway the MEDC that their project merits the allocation.

“It’s short-sighted and stupid, to put it bluntly. It’s a tragedy,” said Rebecca Smith-Hoffman, principal of Past Perfect Inc., a consulting company that works with historic preservation and rehabilitation projects. “We had a program that worked where everyone was treated fairly. Now we’ll go back to having the issue where it depends on what pull you have and who you contribute to. It’ll be a mess. … The stuff they’re putting together is like throwing coins in the street so the guys with the most pull get the most money.”

Greg Metz, principal at Lott3Metz Architecture, an active member of the state chapter of the American Institute of Architects government affairs committee and a staunch advocate for urban redevelopment, agrees. He said it’s “baffling” why the legislature wanted to tamper with a winning program in the first place, especially one that had such a positive impact on the state’s urban cores, an impact measured by dollars invested, jobs created and taxes paid by the developers.

“They seem to be saying that the current program is not self-sustaining. If it’s not, I’d like them to prove it,” Metz said. “It seems the investment outweighs the credits going out. It pays for itself and it makes money for the state. It’s just basic business. If something’s making you money, make more.”

Brownfield credits have been key to many projects Metz’s company has worked on in Grand Rapids, including the recently opened entertainment venue The Pyramid Scheme in the Heartside neighborhood, The Meanwhile bar and the current Reagan Marketing project, both in the Wealthy Hills neighborhood.

Metz anticipates those kinds of smaller projects, as well as projects in small communities and rural areas, could find problems with the new cap on the state’s brownfield and historic projects. It could become difficult for them to compete with the larger banner projects for any allocations.

Metz and others say the new process also seems set up to create a situation where there’ll be a run on the allocations at the start of the allocation calendar before the funds evaporate. Given a choice, Metz would keep the tried-and-true system in a heartbeat because it’s hard for him to argue against the data which shows project investment has averaged 12.6 times the amount of the credit claimed and that the state has earned a return on its investment of about $3.40 to every dollar.

Criteria key to program’s success

The many fears about the new program certainly have merit, Byl said, but he hopes those worries will be addressed by well-written criteria the state will apply when considering the applications. The workgroup recommendations also included criteria suggestions, said Byl, who contends Michigan’s current brownfield program led the nation in terms of effectiveness. He can cite numerous projects in Grand Rapids — The Fitzgerald, Founders Brewing Co., 38 Commerce, The Gallery on Fulton, and so on — that he said would not have happened without brownfield credits.

“If the administration and the legislature agree with our recommendations, Michigan will still have a robust program and one of the stronger and robust programs in the country for brownfield and historical development. The big question is the amount of appropriations for that program. If it’s limited to $20 million, it will not be an effective program,” he said.