Quote Originally Posted by Lorax View Post
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.