Book Buiding to Get Apartments

[PQZ]

There is NO cost to the tax system to extend historic credits to a building that is generating NO tax revenue. I don't know how more simply I can state it.

If anything, depending on where the building is located, Novine has it right. There can actually be a contributing factor, tax wise, as in the case of Michigan which has a state income tax, those working in that rehabbed building are paying state income taxes, city taxes in some cases, etc. The fact that for up to 12 years there is no property tax collection is non-detrimental, and is not costing the system one dime.

The historic tax credits are granted to income taxes at the state and federal level. Corporations that would normally pay those taxes enjoy a reduction in their tax burden because they purchased the credits.

Follow the bouncing ball:

Lets take a vacant building not on the tax rolls in Detroit and do a $100,000,000 redevelopment project. I chose this number because its easy to work with. We will use the structure of a typical development deal in Detroit.

The state and federal historic tax credits and state brownfield tax credits are applied to hard costs only, call it about 85% of project cost. The other 15% is acquisiton, architectural / engineering, legal fees etc.

That means there is about $17,000,000 in federal historic credits available and about $8,500,000 in state historic and about $8,500,000 in state brownfield credits.

In a normal market, pre crash, a tax credit purchaser will pay in about 90% on the federal credits and about 70% on the state credits.

So, the credit purchaser pays a total of $15,300,000 for the federal credits - but will reduce it tax obligation to the federal government by $17,000,000. Plain and simple, the federal governement has lost $17,000,000 in revenue. In a similar fashion the purchaser pays $11,900,000 for $17,000,000 million worth of state credits - so the state is out the $17,000,000 it should have collected. In all, the two governments are out $35,000,000. This is money that has to be replaced through other federal and state revenue taxes. It is separate and distinct from the City's property tax which we will now look at. You cannot argue that there is new revenue created as people and corporations are not created by the existance of a building. People and corporations already exist or form and occupy some building - whether new or rehab. Buidlings do not spawn businesses or people.

The theoretical building is vacant and is owned by the city and is off the tax rolls. It will likely be sold for a few hundred thousand dollars ot the developer. Lets be generous and give it a preimprovement value of $1,000,000. The City will likey particpate with an OPRA which caps the property at its pre-improvement value so lets be generous and say the taxable basis is $500,000. That means the property for a period of 12 years will pay about $36,000 a year in taxes.

But wait, theres more. The developer will likely claim a brownfield TIF to reimburse the remediation of the site, which runs for ten years or the cap which ever is reached first and will represent about $25,000 per year [[not all of the millage is eleigible for TIF inclusion). So, the city will net about $9,000 a year in new taxes for the first ten years and then $36,000 a year for two years.

In year 13 the project un-caps and the buildings taxable basis skyrockets to $40,000,000. The City starting in year 13 collects $2,880,000 a year or so. So the state and the federal government are still out their collective $34,000,000 and it takes until 23 - 24 years after the project was finished for the City to collect property taxes equal to what the City and State have alreasy foregone.

That is not a tax neutral proposition. It is a heavily subsidized proposition as you and I and Rjlj and 3WC have picked up the difference in the federal and state budgets through our higher taxes and the citizens of Detroit have subsidized the project through paying for increased muncipal services for the tenants of the rehab but have not realized a comcomitant rise in gross property tax receipts to offset the costs associated with the building for the first 13 - 15 years. It will take decades for the City to recoup the outlays in services prior to taxes rising to a level to pay for the services used by the building and its tenants.

And 3WC, be careful on the BC tax credit layering. There are a number of "ghost layers" created by the partnership structure.

Recall that a bankrupt LLP owned the building with some 13 or so members. The DDA purchased all the debt for cents on the dollar and became the sole creditor. If the DDA pushed for liquidation, all the value that had been stripped out of the building and the loans that the LLP had not paid would become taxable income - charge offs if you will - to the 13 members. All of them being older and not having millions in disposable assets, they were prepared to fight any proceeding tooth and nail. $100,000 in lawyers is better than $1,000,000 in taxes and drag out the proceedings. As they passed away, their heirs and assigns would take control of the LLP but not have the tax burdens transferred to them.

The structure that came out of that is that Ferchill and the tax credit purchasers formed a new entity in which the credit purchaser became the 99% partner to reap the taxc credits [[the legal structure necessary for tax credit purchases).
This new tax credit entity became a 99% partner in the original LLP in which all benefits flow to the 99% partner and the 1% partner slowly evapoates as the members die and their shares - but not tax liability - conver to the 99% partner.

Got that?

Much of the complexity is around the partnerships for all the different tax credits and working the original LLP as additional partners. Without recognizing those two pieces you will spend days on the structure and still not understand it.

[3WC]

PQZ: BRAVO!!!!!!!

I'll bet you are either a partner in a major law firm or a large CPA firm. I'm glad we're not getting billed for your professional analysis. [[Butzel Long? You may have represented Ferchill.)

I will eventually locate B-C because it is quite interesting. [[I'll bet you have it as well.)

[Lorax]

Looks like a little fuzzy math to me. In your words:

'So, the credit purchaser pays a total of $15,300,000 for the federal credits - but will reduce it tax obligation to the federal government by $17,000,000. Plain and simple, the federal governement has lost $17,000,000 in revenue. In a similar fashion the purchaser pays $11,900,000 for $17,000,000 million worth of state credits - so the state is out the $17,000,000 it should have collected."

By my math, the difference between 17,000,000 and 15,300,000 is 1,700,000.00.

Also, you cannot "lose" what you didn't have to collect in the first place.

Next point- you state:

"You cannot argue that there is new revenue created as people and corporations are not created by the existance of a building. People and corporations already exist or form and occupy some building - whether new or rehab. Buidlings do not spawn businesses or people."

Your assumption is again, incorrect. My statement did not imply that revenues were created by a building. Only by those who inhabit that building, and pay local taxes that more than likely would have been paid to a different city and county. City vs. suburbs in most cases.

Buildings don't spawn people, but they do draw people, where vacant lots do not. The right building, rehabbed, will attract the tenant or owner suited to it's location and physical attributes, and it's proximity to restaurants, freeways, apartments, etc. There are too many variables for your argument to hold water. Rehabbed properties spawn spending in the area where they are located, like the aforementioned restaurants, services, etc. This would be considered a revenue generator in my book.

Next point-

"That is not a tax neutral proposition. It is a heavily subsidized proposition as you and I and Rjlj and 3WC have picked up the difference in the federal and state budgets through our higher taxes and the citizens of Detroit have subsidized the project through paying for increased muncipal services for the tenants of the rehab but have not realized a comcomitant rise in gross property tax receipts to offset the costs associated with the building for the first 13 - 15 years. It will take decades for the City to recoup the outlays in services prior to taxes rising to a level to pay for the services used by the building and its tenants."

No one denies it's a heavily subsidized position, but it's still tax neutral, and with the added influx of tenants, has a positive residual effect on the local economy, which would offset any perceived "loss" in federal tax revenue.

How exactly do "we" pay more in taxes when a non-income generating structure becomes a revenue generating one? Your premise is still not making sense.

Your insistence that a brownfield application will result in addtional losses, is hypothetical, depending on where such a development is located. In the case of restoring the built environment downtown, asbestos may be an issue, but soil abatement most likely will not. Regardless, any mitigation of the site adds to the positive revenue stream, since you need to hire people to do the work.

Additionally, there would be no measurable costs added to the city's end, since the city is already set up to handle the built environment as it stands, infrastructure, etc. There would be added revenue generated to utilities as well, where there currently are none.

I think you're good at reciting chapter and verse as it relates to the process, however, much of what you propose is hypothetical, and lacks an understanding of the positive residual effects of having an existing structure rehabbed and contributing to the fabric of the built environment.

[PQZ]

There is clearly a fundamental misunderstanding of what tax credits are. A corporation like Meijer goes out and does what ever it does to make money, in this case selling things in really big stores. When they are successful, they have to pay income taxes, say $50,000,000 a year to the federal goevernment and say $15,000,000 to the state government. When they purchase a $17,000,000 tax credit for $15,300,000 they get to deduct $17,000,000 from their federal income tax. Instead of $50 MM they pay only $35 MM in taxes. The federal government is now short $17 MM. That means they eithr have to trim $17 MM out of the budget or raise taxes on you and I to cover the shortfall.

The purchaser makes off great. They would have to pay the $17 MM in taxed but now are out only $15.3 MM. Its like someone standing outside target and offering you a $50 gift card for $40.

So, there needs to be new activity generated somehow that makes up that $17 MM to the feds to be a tax neutral proposition. That means enough new jobs, that wouldn't exist in the course of normal events, have to be created to replace the $17 MM. Its a very easy concept.

The statement that buildings draw jobs is correct. Whether it was a rehabbed building in the central city or a new build in a greenfield, the same number of jobs still exist, all you have done is relocated them. For a building to overcome the tax credits dumped into it, it would have to generate new jobs above and beyond that which would naturally occur. By the waym, this same argument can be made about spending money to build new freeway exits to develop greenfield sites. Those jobs would exist anyway, its just a matter of how much did we spend to put them here or there instead of yonder or afar.

In order to make up a $17,000,000 tax short fall, 1,166 new jobs with a pay scale at the metro Area Median Iincome - all paying highest marginal tax rate for AMI -would need to be created.

The argument that the City is already set up to hold more people than it has and therefore there is no cost for adding people is deeply flawed. Police, fire and other support personnel have been trimmed. An influx of residents requires more personnel and equipment and if the new development hat attracted those resdients are not paying taxes to support the new expenses, the burden falls on the exisiting taxpayers, not the inmovers.

The existing infrastructure such as utilities is in disrepair and disarray from dis-use. Reactivating a building often daylights broken infrastructure that must be repaired / replaced - on the city's dime.

This is not to say that development is bad and should never be done. But to say that there are no budget impacts, is absurd.

[3WC]

PGZ: I think there's a typo in your example. The post-tax credit tax would be $33 million, not $35 million.

Draw him a picture.

[PQZ]

PGZ: I think there's a typo in your example. The post-tax credit tax would be $33 million, not $35 million.

Draw him a picture.

You are correct, the taxes collected by the federal government would be $33,000,000 - not the $50,000,000 actually owed - a loss of $17,000,000 out of the federal budget.

That is not a perceived loss, it is an actual loss.

Mind you, I have no problems with the tax credit, I think it is an easy way to induce development that I believ to be good. I am a historic building buff and look to redevelop first at all times. That said, being clear eyed about it - it is a public subsidy and comes at a cost of other programs or of a higher tax burden. To pretend other wise or argue differntly only makes one look like an idiot in the eyes of policy makers.

I understand fluffy cute little sheep must die for me to have rack of lamb. I understand that grand historic buildings come at a budgetary cost carried by taxpayers. The sooner people realize that and act like adults about financing historic preservation, the more they can actually do to HELP preservation.

[Doma]

Exerpt from today's Detroit News:


Plans for Book Tower

While he gave up on the Lafayette Building, Ferchill said he has "high hopes" for an $87 million renovation of the Book Tower, a block from the restored Book Cadillac, with apartments and retail.


The Book Tower owners, Northeast Commercial Services Corp., filed for Chapter 11 bankruptcy protection in 2007, and the last tenant, a bar, closed this year.


"We will get that deal done," Ferchill said.

"We will get that deal done," Ferchill said.

"We will get that deal done," Ferchill said.


"We will get that deal done," Ferchill said.

Woo Hoo!!!

[Detroit500]

indeed. Glad to hear that Ferchill is going to do it.