Loss of brownfield credit could significantly hit development
If state lawmakers pass the budget as proposed by Gov. Rick Snyder, which includes elimination of the brownfield redevelopment and historic tax credits, then development in urban areas like Grand Rapids will slow significantly.
That frank assessment comes from attorney John Byl, a partner at Warner Norcross & Judd. Byl has helped developers of roughly 150 brownfield projects work their way through the application process for state tax credits for over a decade.
“I think that it will slow down to a snail’s pace if the brownfield credit and historic credit are no longer available, particularly for rehabilitation projects in a downtown and a near-downtown area — and I think this will be true across the state,” said Byl. “Urban redevelopment will slow down significantly if the brownfield and historic credit go away and there is no suitable replacement.”
Cornerstone Architects President Tom Nemitz, who may have designed more renovations and rehab projects in the past 15 years than any other architect in the state, said brownfield credits have had a substantial positive impact on a number of projects, especially those from nonprofit developers like Dwelling Place of Grand Rapids. Nemitz also pointed to the Inner City Christian Foundation and its award-winning conversion of the former D.A. Blodgett Building into its headquarters.
“That, in turn, has provided the nonprofit ICCF with a headquarters from which they provide an entire community with a tremendous benefit. Very little thought of ‘personal gain’ came from the people involved with that development. The renovation has also spurred additional development in the area, most not utilizing brownfield credits, but still improving the tax base, security, stabilization and a ‘sense of place’ that attracts people,” he said.
The importance of those credits can’t be understated for developers; they can account for a vital part of a project’s equity. Byl explained that when a developer is approved for a credit, a lender is more open to granting a “bridge” loan for the project until a developer completes it.
“And it’s viewed by the lender as additional equity in the project,” he said. “So it’s really made the difference for many of these projects. For example, there are many projects in the Grand Rapids area that would not have happened without that credit.”
“There are many purchasers, large retailers and others with significant MBT liabilities that will buy these. So for the developer, the real benefit here is the sale of the credit and the fact that they can get the bridge financing from a lender up front until receipt of the proceeds from the purchasers of the credit,” he said.
Nemitz indicated that the intention that underlies the credits shouldn’t be lost or glossed over during the legislative discussion. He said credits have been seen as incentives to redevelop properties and increase local tax bases from vacant and underused sites. Without that incentive, though, Nemitz said a number of developers wouldn’t have the financial backing to do a project, and the area a project is in may not be developed any further.
“The upside to this is to make it possible to restore a historic building or an under-utilized property to a viable use that encourages other adjacent development, draws people and income to areas that may not have had it before (or in a long time), and strengthens communities,” he said.
“Yes, it can also assist the developer, property owner, and even the mom-and-pop small business to construct a deal that does all of the previous, plus it helps them to earn a fair income from development. This is not a bad thing,” added Nemitz.
The possible elimination of the brownfield tax credit is a reversal in thinking of sorts from just a few years ago. The basic return on a brownfield credit was 12.5 percent. Up until the end of last year, however, a developer in one of the state’s designated urban development areas such as a downtown sector could collect a credit worth up to 20 percent of an investment.
But this year that credit dropped to 15 percent. Byl said the state increased the return to 20 percent in 2008 to help with urban projects “particularly because the Michigan economy was suffering and it was felt to be necessary, at least in the short term, to have that 20 percent credit available to projects.” Now the credits may be done away with because the state’s economy is suffering.
Nemitz said there probably have been abuses by developers who may not have necessarily needed the incentives. But before the Legislature acts, he felt they should take a good look at how much the credits have cost the state and at the return on that investment — and not in what he called “cosmic terms” but in hard dollars.
“If the state can identify measures that may cost taxpayers $1 but return $10, they should keep and encourage those revenue-positive endeavors. From my involvement with the brownfield credits, it appears that this is the case,” said Nemitz.
Byl said eradicating the Michigan Business Tax doesn’t help developers; that move is aimed at helping other types of businesses. He felt that replacing the credits will be the key to future urban development statewide, and he is part of the effort to do just that in his role as chairman of the Michigan Chapter of the National Brownfield Association.
Byl told the Business Journal that he and three others from the association met with representatives of the Snyder administration just before the governor unveiled his budget to discuss how the brownfield credit has been a benefit to the state and for urban redevelopment.
“We pointed out that these credits have generated at least 10 times their value in capital investment. So roughly $400 million in brownfield credits that have been approved in the past 10 years have generated $4 billion, at least, in capital investment — all of which has occurred on contaminated or functionally obsolete or blighted properties. Much of that has occurred in the true urban areas, and the majority of those projects would not have happened without this tool,” he said.
“I believe the brownfield credit has been one of the most effective tools for the state because you get development where you want it to occur.”
Byl said he learned that the governor’s office wants to see appropriations-based programs rather than incentives based on tax credits. He said there have been some discussions on enhancing tax-increment financing or possibly creating a pool of grants to use as incentives for brownfield-type projects.
“I think there will continue to be an emphasis on urban areas, poor communities, and particularly downtown areas and urban centers. In Grand Rapids, that would, of course, include downtown and near-downtown areas, but also areas like Eastown,” he said.
“So we’re working with the governor’s office, and they’re certainly interested in our suggestions and hope that we can come up with a suitable replacement program sooner rather than later, because uncertainty slows down progress.”