How is tax policy shaping the revitalization of two Michigan cities?
Last month, the Tax Hound considered Benton Harbor. This month, she takes a look at Detroit.
Back in 1987 my family and I visited Detroit and toured its Renaissance Center (RenCen). The multiple-building river-front complex was remarkable but the city surrounding it felt… empty.
The RenCen was supposed to revitalize Detroit after the 1967 riots. Henry Ford II convinced dozens of businesses to invest in the $350 million project in 1971 ($1.5 billion in today’s money), making it that era’s largest privately funded development.
The hoped-for transformation never took place and the RenCen’s value collapsed. General Motors bought it for $73 million in 1996 but its hopes for a city renewal were dashed as well. The population of the once-proud Motor City has fallen by a staggering two-thirds from its peak of 1.85 million in 1950, down to 672,000.
Now Detroit and the state of Michigan seem ready to make a half-trillion dollar bet that one well-connected real estate developer can do what the RenCen couldn’t—spark an economic revival with a glitzy downtown project.
Billionaire developer Dan Gilbert, founder of Quicken Loans, wants to transform Detroit’s skyline with 3.2 million square feet of office, residential, and retail space, including a skyscraper and 900 apartments. And, unlike the backers of the privately financed RenCen, he wants tax incentives to do it.
Why? Could he do a smaller project for less money without state tax dollars? My efforts to reach Gilbert and his development team were unsuccessful, but other reporting indicates that Gilbert believes these tax dollars are “essential” for not only this project but other investment in the city.
Not surprisingly, the financing would be complicated. Gilbert plans to put up a total of $1.9 billion, with about $500 million up-front. In return, he wants additional funding from a newly amended state tax incentive program. He’s in line to get an eye-popping $557 million paid out over three and a half decades.
The Michigan Thrive Coalition (MIThrive), of which Gilbert is a member, lobbied the state legislature for the revamped incentive over the past year. Signed by Governor Rick Snyder this summer, it amends Michigan’s Brownfield Redevelopment Financing Act of 1996.
“Brownfield development” sites are either blighted or environmentally compromised properties, functionally obsolete properties, or historic resources. Under the old law, brownfield developers could recoup limited construction costs (such as demolition, site preparation, and infrastructure improvements) through property tax-increment financing. It allowed local governments to finance subsidies with tax-exempt bonds backed by tax revenue from incremental increases in property values resulting from the new development.
The new MIThrive-sponsored amendment is far more generous. For what it calls “transformational brownfield sites,” it subsidizes any construction costs that directly benefit the eligible property. And the tax-increment financing bonds can be much bigger since under the new law they’d now be backed by 100 percent of state sales and income taxes generated during on-site construction and 50 percent of state income and withholding taxes from those who will live and work on the sites in the future, as well as the added property tax revenue.
Gilbert’s development firm, Bedrock Detroit, was the first to submit such a development plan for its four sites, which include vacant lots, a historic building, and Quicken Loan’s own headquarters. Only one such plan is allowed for a Michigan city as large as Detroit this year, and lucky for Gilbert, he can provide the required $500 million up-front investment for a Detroit plan.
The bond-financed subsidy for the project would be massive: The Detroit Brownfield Redevelopment Authority, would reimburse Bedrock for $557 million in construction costs over 35 years: $229.6 million from property taxes, $18.2 million from construction site income taxes, $1.6 million from city income tax, and $307.9 million from state income taxes paid by future workers and residents.
Gilbert promises this project will attract 2,122 residents who’d pay monthly rents ranging from $2,287 to $3,321 and create 8,500 direct permanent jobs, including 5,400 office jobs paying an annual average of $85,000 and 1,700 retail and service positions paying $25,000. He expects those jobs to be created by the year 2021. To reimburse Gilbert, the state would capture income tax from those jobs for twenty years after that.
The question, of course: If he builds it, will they come?
The risk is enormous. So is the need. Detroit has the highest rate of concentrated poverty among the 25 most populous metro areas in the US. Its median household income is about $26,000 and its unemployment rate was 9.6 percent in July.
Who will be willing to move into $3,000-a-month downtown rental apartments? How many current Detroit residents would get jobs in those brand new offices and stores? How much would those $25,000 retail jobs improve their well-being? And what will this new development do to the existing pattern of business location in Detroit?
MIThrive says the risk is Gilbert’s. If the project flops, he won’t be fully reimbursed for eligible construction costs. But if the project fails, the city would increase its supply of exactly what it already has far too much of—empty residential and commercial space.
If the project succeeds, the state would get 50 percent of the tax revenue it would otherwise generate. MIThrive members argue that half of something is better than all of nothing. But past tax incentives have left Michigan short of money to provide state services. And the city and state would be on the hook to provide public services to all those new residents, with only limited tax revenues available to them after the developer’s incentives are paid.
Could other, smaller, unsubsidized endeavors boost Detroit’s economy without mortgaging the state’s future revenue base? Or would a smaller subsidy be effective? Granted, there’d be lower potential reward, but there could be lower risk, too.
Gilbert breaks ground on the first of its four sites next month. Here’s to not repeating history. Detroit’s is too painful.
The Tax Hound, publishing the first Wednesday of every month, helps make sense of tax policy for those outside the tax world and connects tax issues to everyday concerns. Need help or have an idea? Post a comment, or send an email.
