On December 18th, Gov. Rick Snyder signed Senate Bill No. 556 into law, amending Michigan’s Commercial Rehabilitation Act (CRA). The CRA (P.A. 210 of 2005) had been set to expire at the end of 2015, but the amendment serves to extend the sunset by five years to December 31, 2020. This is great news for developers and communities throughout Michigan. Tax abatements like the CRA can encourage economic development by significantly boosting a new project’s income in the years soon after completion. This reduces the risk of default on loans by making it easier to meet debt service obligations. It also helps raise equity for projects on the front end by increasing the likelihood of providing an acceptable long-term return to investors. Moreover, local control over redevelopment priorities is enhanced, because the abatements must be run through municipalities before state approval. Historically, Michigan has taken a complicated, multi-statute patchwork approach to tax abatements. In addition to the CRA, Michigan offers the Obsolete Property Rehabilitation Act (P.A. 146 of 2000), the Industrial Facilities Exemption (P.A. 198 of 1978), the Neighborhood Enterprise Zone (P.A. 147 of 1992), and the Commercial Facilities Exemption (P.A. 255 of 1978). Each of these abatements (and there are more!) applies to different types of development, offers different levels of benefits, and places differing restrictions on developers and property owners during the abatement application and approval processes. The extension of the CRA’s sunset is important, because the CRA is flexible in ways that other Michigan abatements are not, especially for redevelopment of downtown properties. Specifically, the CRA has two distinctions which make it a critical tool for developers:
- It allows for full demolition of existing structures. Some buildings are simply too blighted to be re-used in any fashion. Other abatements, like the Obsolete Property Rehabilitation Act, cannot be applied to these types of projects because of significant restrictions on the extent of demolition permitted.
- In many circumstances, the CRA can be applied to vacant property. This is especially important in urban areas where blight removal activities have created large tracts of vacant land. Often, these tracts of land are contaminated or contain large amounts of fill material that cannot be constructed on, increasing redevelopment costs.
The benefit of a CRA abatement can be substantial. Say, for example, that a developer purchases a qualifying piece of vacant commercial land with a taxable value of $350,000. The developer then invests $7 million in new improvements on the property. Property taxes at the time of acquisition would be ~$19,000 per year. After the improvements – but in the absence of an abatement – property taxes would shoot up to ~$212,000 per year. A CRA abatement would reduce the property owner’s tax bill to ~$120,000 per year, bringing a $92,000 annual savings to the property owner.
This hypothetical assumes (1) post-development taxable value increases by 50% of the value of the new improvements, or, $3.5 million; (2) the project is located in a municipality with a property tax rate of 55 mills, including 18 mills of school operating tax and 6 mills of state education tax; and (3) the property’s post-development taxable value increases by 2% annually.
Over ten years (the maximum term of a CRA exemption), the property owner would likely see a cumulative benefit in excess of $1 million. In certain cases, this type of benefit can be further enhanced by layering additional incentives, such as a brownfield reimbursement. Two recent AKT Peerless projects that took advantage of the CRA were Orleans Landing and Du Charme Place in the City of Detroit. Both projects were constructed on vacant or largely vacant properties whose blight conditions had stymied years of redevelopment efforts. The CRA was the only applicable real property tax abatement for these projects, and neither would have been financially feasible without an abatement. The 10-year Orleans Landing incentive is valued at $5.8 million, and the Du Charme Place incentive is valued at $1.9 million. Both projects are currently under construction and are revitalizing their respective neighborhoods. With the extension of the CRA, more projects like Orleans Landing and Du Charme Place will be possible. Tax incentives in Michigan can be complicated, but AKT Peerless can help. For questions about economic development services, please call me directly at (517) 482-9227 or email me at email@example.com.
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About the Author
Bret Stuntz is an attorney and a geologist. He is AKT Peerless’ Regional Manager for Mid & West Michigan and the company’s service line leader for Economic Development.