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Infrastructure funding in the age of austerity – just don’t call it a “tax”

17 Jan 2017

As demands for municipal services increase, costs go up and tax revenues flatten or fall, what is a municipality to do?  Most Michigan politicians have decided that even to suggest more taxes is the kiss of death.  Everyone agrees Michigan’s roads need work.  The gas tax went up on January 1 and even that increase was widely viewed as an inadequate to fully improve our sub-par roads. Recently, a Michigan State study indicated that nationally, roughly 12% of households cannot afford the cost of water services and, if water rates rise to cover repair and upgrade expenses due to the aging of our systems and other factors, that unaffordability factor may go up to almost 36% in the next five years.

The Governor’s 2016 Infrastructure Commission, appointed in the wake of the Flint Water Crisis, reported that we need a modern infrastructure system to compete globally, to have economic prosperity, and to have healthy citizens and a healthy environment.  However, the Commission did not answer the all-important question of how to fund all of this work.  The Commission reports that Michigan lags behind every other state in the region in capital funding for infrastructure and that Michigan needs to spend $4 Billion more every year than it currently does just to align with an average state and the State’s needs.  This would be a 7% increase in spending.  The Commission did not address how Michigan should fund this shortfall.

The business group, Business Leaders for Michigan issued a report earlier this month. That Report reached the same conclusion and proposed that the State ramp up its spending and opened a door to creative and novel financing approaches including user fees which the Report indicated may be used to fund costs of “services, enhancements to increase the quality of life, and … administrative and regulatory processes.”  This report discusses such fundraising approaches as: fees per mile traveled (vs gasoline taxes); public-private partnerships; fees based on property value increase; fees which take into account all lifetime system costs; selling or leasing systems to raise funds for new infrastructure improvements; toll roads and other more “outside the box” approaches.

We have seen this before but not on a statewide approach such as when municipal governments try to fund environmental initiatives, such as stormwater management (required by federal law). The cities of Lansing, Jackson and Detroit all adopted stormwater “fees” based on the paved acreage of various properties within their jurisdiction.  Clearly, to the municipalities, this seems like a good idea – otherwise, why would they keep doing it? Reportedly, nine Michigan communities have created stormwater utilities to impose such charges (Adrian, Ann Arbor, Berkley, Chelsea, Harper Woods, Jackson, Marquette, New Baltimore, and St Clair Shores).

The Michigan Supreme Court established a three part test to distinguish between a fee and a tax: (1) “a user fee must serve a regulatory purpose rather than a revenue-raising purpose;” (2) “user fees must be proportionate to the necessary costs of the service;” and (3) “user fees must be voluntary.”  Bolt v Lansing, 459 Mich 152, 161-162 (1998)

Unfortunately for the municipalities, the Michigan Courts keep striking these fees down as illegal, hidden taxes.  In the case of Jackson County v City of Jackson, the plaintiffs challenged a stormwater management charge imposed by the Jackson City Council. The Court of Appeals ruled that the charge was a tax imposed in violation of §31 of the Headlee Amendment to the Michigan Constitution. The court held that the charge: (1) did not serve a regulatory purpose because it shifted funding of certain activities from the general fund to the charge; (2) was disproportionate to the benefits conferred upon the payor as there were no payor-specific benefits; and (3) was not voluntary because there was no way to avoid the charge by doing, or not doing, something.   The Court of Appeals cited Bolt v Lansing, which invalidated a similar stormwater charge on similar bases. Ultimately, both courts held these “charges” to be taxes subject to, and failing to meet, Headlee Amendment requirements.

Last year, the Michigan Legislature saw the introduction of a bill that would authorize such “fees,” regarding water and sewer, ostensibly to make them harder to defeat in Court under the Bolt test. The need is real and I am a big believer in top quality infrastructure which needs to be paid for.  My question is, with the 1978 Headlee Amendment that puts the size and cost of government in the hands of the taxpayers, and with a backdrop of fees rising beyond what some citizens can afford – can and should our Legislature try to pass this off by various “fees” without getting the voters’ approval as well as other “creative” solutions, some of which may cost the taxpayers less in the short run but more in the long run?  I’m all for the efficiencies in purchasing and scheduling that Governor Snyder has been pushing for but, as we watch more and more systems fail (like the recent Fraser sinkhole), it is clear that we cannot continue to push this off – if the citizens see that, they should be willing to pay for it. If these expenses get passed on in the form of fees which are not voted on and the citizenry gets hit with larger fees that they were not told about, who thinks that will play well at the voting booth?

Brownfield Funding Legislation Enacted

5 Jan 2017

law

The bills passed.  At last.  As you may recall from two years ago, I served on an MDEQ-led task force to  review and improve the “patchwork quilt” of statutes and rules regarding brownfield redevelopment incentives, grants and loans.  A CSI II group (of which, in full disclosure, I chaired the Legislative Committee) met regularly in 2014.  The changes certainly would’ve been introduced earlier but the Flint Water Crisis happened and everyone’s attention was diverted. Earlier this year, a package of six bills was introduced in the Legislature; on the 15th they were passed and on  January 5, 2017, the Governor signed them.  They take effect in 90 days and are now 2016 Public Acts 471-476.

These changes streamline, simplify and speed up the process for loan, grant and TIF approvals to enable projects to get started faster than ever before while supporting a greater range of eligible activities than previously available.

The most significant changes include:

  • demolition, lead abatement, asbestos abatement dredging and excavation of uncontaminated but unusable soils may be eligible for grant and loan funding, subject to certain criteria and prerequisites (such as a threshold that at least 51% of the eligible activities are part 201 type expenses);
  • one can be technically liable under Part 201, TSCA or RCRA and still be eligible for grant, loan or TIF funding – previously, even someone who submitted a technically deficient BEA was barred from eligibility – with a renewed emphasis on remediation and redevelopment, only those who actually caused contamination are barred from eligibility, again, subject to certain criteria and prerequisites;
  • while the definition of “eligible property” was changed very little, activities eligible for funding through TIF are broadened to include such things as due care expenses, UST removals, solid waste disposal, sediment removal and disposal (where either the sediments or the upland are contaminated), plan preparation and implementation costs (subject to certain conditions and caps), including the costs to track plan compliance and a clearer set of sheeting and shoring costs;
  • overall streamlining of the application and review processes in an effort to speed up the TIF process including giving greater authority to the Michigan Strategic Fund to approve plans of up to $1 Million without waiting for a Fund Board meeting.

There was some tension between those championing redevelopment and those focusing on environmental remediation but, ultimately, the set of changes to the rules and statutes clarifying the process for obtaining loans, grants and tax increment financing for brownfield redevelopment. Not every issue was agreed upon and there was a list of so-called “parking lot issues” (either because they were discussed at length in the parking lot after the meetings or because we “parked them” there as we couldn’t reach consensus).  Hopefully some of these will be addressed in the near future but these changes should streamline, simplify and speed up the process for loan, grant and TIF approvals to enable projects to get started faster than ever, while supporting a greater range of eligible activities than previously available.  Given the Legislature’s unwillingness to approve other similar bills, this was a real accomplishment for brownfield redevelopment in the State of Michigan.

Reduce, Reuse and Recycle Homes in Detroit

4 Jan 2017

table1“Would you cut down an old growth forest just to put the lumber in a landfill? That’s what typical demolition of a neighborhood does.” This was our introduction from Kevin at Workshop  – a Detroit-based furniture manufacturer that uses lumber reclaimed from Detroit’s vacant and abandoned building stock.  Detroit has been trying to save homes that can be saved but is moving quickly to demolish homes which are beyond repair to stabilize the remaining neighborhoods as the City continues to reinvent itself.

Detroit has reportedly demolished 10,700 homes since 2014 and has another 2,436 in the pipeline.  The bulk of these homes are demolished the way you’d expect – wrecking ball, dumpster, landfill.  However, some houses are being “deconstructed” rather than demolished. Reclaim Detroit is working to fight blight, create jobs for Detroiters, and prevent resources from being landfilled by using deconstruction and reuse techniques.  Their crews dismantle parts of buildings that would otherwise be destroyed, saving antique doors to old growth lumber, while training workers in the green construction and demolition industry. I’ve been told that the average Detroit house has some 10,000 board feet of reusable lumber which would normally go to waste.  Some sources I’ve read indicate that would equal some 20 tons, or roughly  1-3 acres, of trees.

My family and I have been trying to live our espoused values and, while separating our recyclables, trying to be more energy efficient and composting is a start, when we decided to get a new kitchen table (don’t worry, the old one has a new home), we explored options and found Workshop.  The table is old made new again and even is stamped with the address that was the source of the wood.   We’re looking forward to using it for many years to come.

Gilbert Transformational Brownfield Legislation Stalls

12 Dec 2016

MOnroeblock9Dan Gilbert’s team drafted legislation based on the current Brownfield law.  This legislation was  moving rapidly through the Michigan Legislature until the Michigan Speaker of the House announced that the House would wait until next year to move the bills forward.  While this seems to have killed the bills for now, some are still lobbying for them to become law before 2017.

Articles had appeared in the local papers describing two proposed towers for the Monroe block of downtown Detroit (pictured), These articles include statements that the buildings won’t be built without this legislation being enacted (and presumably implemented in their favor).

The legislation is based on an existing approach – when a project increases property value, the taxes on that increased value can be captured and used to pay for  “eligible expenses.” Typically, these TIF (tax increment financing) programs put the risk of failure on the developer (where it belongs) while they increase the potential return by reimbursing the developer for expenses it would otherwise absorb.  The current brownfield law allows communities to issue bonds and pledge their full faith and credit, but in the brownfield “universe” that almost never happens.

The brownfield TIF law allows reimbursements for cleaning up contamination and taking protective measures and, in more urban communities, for costs of site preparation and infrastructure improvements.   This State, like many others, has decided that these incentives are necessary to entice developers to take desired risks. This is not a tax credit, nor, do the taxpayers of the State front any money to the developer.  If the development does not result in the increase in taxes expected, the developer loses. Without a bond, if there is no tax increment, the community/state owes the developer nothing.  Further, the community is held harmless because the predevelopment property taxes continue to go to the government as they did before project development. In short, this is a kind of “deferred gratification” for the taxing authorities as they must wait until the developer is repaid to get taxes on the increased property values (certain taxes are exempted from the TIF program and so there is some immediate benefit to the community).

So what’s the fuss about the Gilbert legislation?  These bills take the Brownfield TIF and put it on a massive dose of steroids. In addition to capturing real property taxes,  the Gilbert team proposes to capture both income taxes and sales taxes generated on a property following its redevelopment, if the project is “transformational.” This legislation vastly broadens the eligible expenses which can be reimbursed.  Instead of covering only environmental cleanups, environmental due care and communal benefits like infrastructure, the Gilbert legislation would allow a developer to be reimbursed for all of its construction costs. This is bold and would almost certainly lead to new, riskier developments. A developer could wind up with a significant competitive advantage because his costs are could be fully reimbursed. This could allow such a developer to undercut the market or amass significant profits.  The potential for market distortion appears to have been overlooked by the few commentators who have spoken on the subject.

The legislation includes a cap on the number of such transformational projects per year and per community and with a maximum of $50 Million in the first year’s capture for new projects. It is tiered so what is transformational (based on a dollar amount) varies based on the size of the community. This was a sop to smaller communities to get their support for this legislation as was a provision putting funds into the State’s Brownfield revolving fund. There are also some exemptions from the spending requirements including one that seems directed right at Flint.

“Transformational” can mean many different things  but the legislation’s focus is whether a project will transform local economic development, community revitalization, growth in population, commercial activity and employment.

The legislation received little notice until recently. Interestingly, it has been criticized by those on the left and on the right. A Free Press column calling this legalized “serfdom” for employees seems over-the-top. Yes, taxes will be collected and ultimately reimbursed to the developer.  I don’t see that equaling employee slavery. The Mackinac Center piece is a bit closer to the mark. They complain of “crony capitalism.”  The fact that only a few developers can get these projects approved per year and one per community per year does seem like the sort of favoritism inherent in crony capitalism. Further, the fact that the projects are limited to extremely expensive ones (on a range between $15 Million and $500 Million depending on county population), again, seems to mean that only the elite get benefits that are not available to the ordinary developer. In that regard, as the Mackinac Center points out, this is no different than any TIF financing model (and there are many of them in use throughout Michigan and the US).  This is the world we live in as evidenced by President-Elect Trump’s efforts to keep a Carrier plant in Indiana.

The capture of sales and income taxes would be new to Michigan and would put Michigan in the minority of states that allow such capture.

What has not been commented on is the need for a mechanism to ensure that the taxpayers of the State of Michigan are held harmless – so that the income and sales taxes to be captured are truly new to the State and not the result of a business moving its operations from one place to another.  This mechanism (and others needed) are to be developed later.  This is a practical consideration with large implications.  The State’s review of this legislation thus far includes an admission that the Legislature has no idea how much this might actually cost the State in revenue if it passes as is.

Will this package of bills pass?  I expect it will.  If not this month, then early next year.  If the Legislature doesn’t address some of the concerns expressed above, we may find ourselves with some major projects and some unintended consequences not too far down the road.

CSI Part II – MDEQ rolls out brownfield tax increment financing proposal – five major changes you should know about

11 Nov 2014

moneyAs you may recall from this spring, I was asked to serve on MDEQ’s initiative to  review and improve the “patchwork quilt” of statutes and rules regarding brownfield redevelopment incentives, grants and loans.  A CSI II group (of which, in full disclosure, I chaired the Legislative Committee) met regularly over the Spring and Summer and MDEQ has announced two meetings (see the attached flyer) to roll out the proposed changes. These changes have not yet been introduced in the Legislature and thus, are currently only an MDEQ internal recommendation. The hope is that these changes will be introduced shortly.

if passed, these proposed changes should streamline, simplify and speed up the process for loan, grant and TIF approvals to enable projects to get started faster than ever before while supporting a greater range of eligible activities than previously available.

There was some tension between those championing redevelopment and those focusing on environmental remediation but ultimately, there was agreement on a set of changes and clarification of the rules and statutes to clarify the process for obtaining loans, grants and tax increment financing for brownfield redevelopment.  The five most significant changes include: (more…)

Blight busting in Detroit – best of times/worst of times

29 May 2014

imageThis week, the City of Detroit rolled out its blight plan.  Of course, the national press highlighted the traditional “bad news about Detroit” story that we’ve heard for 40 years, replete with the traditional photo of the Ren Cen with a burned out house in the foreground.

The reports cite the negative big scary numbers: $850 Million to demolish most of the blight in the next five years; the City has access to about 1/2 of that; 84,641 blighted or nearly blighted structures and vacant lots, 1/2 of which should be demolished and cleaned up immediately; 93% of the properties held by governments need to be knocked down or cleaned up.

Well, that sure sounded bad but up at the Mackinac policy conference, Mayor Duggan told the most uplifting (in my opinion) Detroit blight story that I have ever heard. He talked about his goal to increase the City’s population by the end of his term – 3 years away.

Mayor Duggan talked about relighting the City’s streetlights, he talked about improved emergency response and about other issues.  But the best part of his talk was about blight. He discussed his new neighborhood approach – focusing on one neighborhood at a time; not waiting 3 years to take the properties back for taxes and, most importantly, telling owners of blighted homes to either agree to fix the homes in 6 months or lose them. Amazingly (to everyone including Mayor Duggan), many of the owners have stepped up and begun making repairs. The City has an auction site, which has gotten some national notice and, literally, thousands of people have shown up for open houses and the City has sold homes, sometimes for more than suburban homes. The Mayor discussed one neighborhood with 49 homes slated for demolition – after using his new approach, that list was cut to nine.

Certainly there are areas of the City that will need to be swept clean (and hopefully primed for redevelopment), and there are areas that won’t be addressed for a while, but the Mayor’s neighborhood program was a very uplifting breath of fresh air.

But they already did a phase I….

2 May 2014

cautionWhen a seller or lender gives a prospective buyer a phase I environmental site assessment (ESA) and it concludes there are no recognized environmental concerns, that means you’re “good to go,” right? Well, not so fast.  There are some things to check on which include:

1.  When was the ESA performed and to what standard?  Standards have changed over the years and if the ESA is 6 months old or older, parts of it will need to be updated.  Sometimes ESAs done for lenders don’t include all the elements a buyer must include to satisfy the All Appropriate Inquiry standard.  It is also possible for much older ESAs, that circumstances may have changed and you’re better served just starting over.

2.  For whom was the ESA prepared and can you rely on it?  Most ESAs were prepared for a specific client and often include a limit on who can “use” them.  There’s no certainty on whether a use limit actually prevents you from relying on an ESA to assert the innocent landowner defense but it is likely that such a limit would prevent you from seeking recourse from the consultant that prepared it, if it turns out to be inadequate.

3. Even if you can rely on it, will the consultant stand behind it?  Often, consultants will “let” you rely on their old ESAs for a fee.  The question to ask is – is it worth it? I have seen consultants attempt to contractually limit their exposure to $50,000 or their available insurance or their fee whichever is less!  I have also seen consultants say that they will only be liable for direct losses and will not be liable for so-called consequential losses such as lost value or revenue.  This means that the consultant will only be liable for the actual harm (breaking things or hurting people) they cause and not for any errors or oversights they make in actually doing their work!

In short, there are many pitfalls to relying on a so-called “clean” prior phase I and the list above only scratches the surface.  We still live in a caveat emptor world and you, as buyer, need to take steps to beware.