Commercial Real Estate Lending Slow In Michigan

July 9, 2008
| By Pete Daly |
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GRAND RAPIDS — On June 30 last year, Michigan accounted for 23 percent of Huntington Bank's commercial real estate loans throughout the several states it operates in.

By this spring, that figure had dropped to about 13 percent.

West Michigan alone accounted for 11 percent of Huntington’s commercial real estate loans a year ago but that share is closer to 5 percent today.

"New investment (in Michigan commercial real estate) has slowed significantly," said James E. Dunlap, president of Huntington Bank's West Michigan region. Capital is flowing into other states, such as Indiana and Ohio, instead of Michigan.

A commercial real estate investment in Pittsburgh will earn more of a profit than the same investment in Michigan, according to Dunlap.

Dunlap said he is not sure if the root cause of Michigan's slow commercial real estate market is due to the state's ailing economy in general, or because of the Michigan Business Tax, or a combination of the two. However, he said he is going to emphasize at the first Regional Policy Conference here in September that every tax policy has consequences of which everyone in Lansing must be aware when they are making those decisions.

Dunlap is one of several West Michigan business leaders organizing the Regional Policy Conference at DeVos Place Sept. 18 and 19, with the Grand Rapids Area Chamber of Commerce.

The conference is expected to bring together hundreds of business and government leaders from the western half of Michigan to endorse issues and policies in state government that support western Michigan.

When approved by the Legislature late last year, supporters of the MBT noted that it would give manufacturers some breaks.

"I bank a lot of manufacturers. They're thrilled," said Dunlap.

But when the first quarterly payments were due late this past winter, the commercial real estate industry felt it was the victim of unintended consequences and quickly launched a state-wide campaign to change the new MBT.

Stuart J. Kingma, president of the Commercial Alliance of Realtors of West Michigan, said in March that the MBT "will negatively impact the ability to attract out-of-state investors and their investments."

Just one example of several new MBT liabilities on commercial real estate investors is the taxation of gross receipts received by the property owner from tenants for common area maintenance (CAM), which includes things such as snow removal from the parking lot. The maintenance payments are "of no economic benefit to the landlord, yet, under the MBT, it is taxed as revenue," according to a statement issued by the Commercial Alliance of Realtors.

"Now you get taxed on everything that comes in the door regardless of whether you make any money," said Kingma.

Dunlap said he does not believe the commercial real estate industry was deliberately targeted for higher taxation by the authors of the MBT.

If that had been the general perception, "There would have been more of a riot by the investor real estate community," said Dunlap.

The MBT was touted as revenue neutral — not intended to raise more money for the state than was raised in the past by the Single Business Tax.

Dunlap said he believes the MBT is revenue neutral, but he said the surcharge tacked on at the last second to pull the state government out of a cash flow crisis was "disingenuous."

Dunlap noted that there are "a tremendous number of amendments" to the MBT proposed in Lansing, but "I don't want to pick sides," he said.

He noted that there are two other major consequences of the MBT. One consequence does not help the commercial real estate market in Michigan, and the other doesn't help any business in Michigan — with the exception of accountants.

The first consequence is uncertainty, which Dunlap referred to as a "sub-plot." Most of the talk being heard now about the MBT is focused on the surcharge, but that re-opens a long discussion about the tax in general and how it should be written, he said.

Forecasting the future is a critical component of investment decisions, said Dunlap, but when tax policies are under serious review — which implies they are about to be changed — it's impossible to make sound predictions about some of the future costs that can make or break an investment.

"You would have to have enormous incentive" to invest in times of uncertainty, said Dunlap.

The second major consequence of the MBT, which many tax experts noted when it was rolled out, is its complexity.

"It is incredibly difficult to explain," said Dunlap, which makes it very difficult to predict its eventual impact on an investor.

The complexity also adds to the taxpayer's cost of complying with it, because it takes more time for an accounting firm to figure out a client's tax liability.

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