Leon, Jameison, Zorn: Filling The Gap

Filling the GapFilling the GapFred Zorn, CEcD, Exec Dir - Housing & Neighborhood SvcsCity of Taylor

Corey Leon, CEcD, Director of Development IncentivesAKT Peerless Environmental Services, LLC

Anne Jamieson-Urena, Senior Project Mgr.AKT Peerless Environmental Services, LLC

March 7, 2008

March 2008

Goals:Introduce various tax incentives

Tax Increment FinanceTax CreditsTax Abatements

Apply each incentive to a case studyLayer incentives on a case study

March 2008

Incentive Evaluation

Programs operate over various tax structures:Local Property TaxMichigan Personal Income TaxMichigan Business TaxFederal Income Tax

Apply one-at-a-time to understand effects

March 2008

Project financing fundamentals

Net Operating Income (NOI) is the most important number in a real estate project:

Represents overall cash return on capitalDetermines the loan amountUsed to determine valueDetermines cash return on equity

March 2008

Determining NOI

Gross Rent Rent at 100% occupancy+ Tenant Contributions For operating expenses- Vacancy Vacancy & collection loss= Effective Gross

Income- Annual Operating

ExpensesTaxes, Maintenance, Insurance, Utilities, Mgmt

= Net Operating Income

Cash Available for Debt Service

March 2008

Real Estate Ratios

Debt Coverage Ratio (DCR):DCR = NOI / Annual Debt ServiceTypical DCRs range from 1.15 to 1.35Loan to Value Ratio (LTV):LTV = Loan Amount / Post-project ValueTypical LTVs range from 0.70 to 0.90

March 2008

Case Study123 Main Street Rehabilitation project Post-development Appraised Value: 9,000,000.00$ Suburb, Michigan Commercial tenants only Bank 1 Loan: 6% interest on a 20 year amortization

SourcesEquity Developer: 400,000.00$ Gross Rent: 1,000,000.00$

Tenant Contributions: 200,000.00$ Vacancy: (120,000.00)$

Bank Bank 1: 7,000,000.00$ Effective Gross Income: 1,080,000.00$

Total Sources of Fund 7,400,000.00$ Sources do not match uses!! Taxes: 200,000.00$

Uses Insurance: 40,000.00$ Land 100,000.00$ Maintenance: 40,000.00$

Asbestos Abatement 200,000.00$ Utilities: 30,000.00$ Construction 6,000,000.00$ Management: 32,000.00$

Const Period Expenses 500,000.00$ Reserves: 100,000.00$ Architect/Engineer 200,000.00$ Annual Operating Expenses: 442,000.00$

Developer Fee 2,000,000.00$ Contingency 1,000,000.00$ Net Operating Income: 638,000.00$

Total Development Co 10,000,000.00$ Debt Service (Bank 1): ($601,802.09)

LTV: 0.78Cash Available: 36,197.91$

DCR: 1.06

March 2008

Tax Increment FinancingAn Economic Development Tool to Spur Economic Activity.

What does Tax Increment Financing mean?Tax Increment Financing is used to publicly finance site development improvements for projects or public infrastructure improvements:

public facilitiesenhanced or new infrastructure streetscape enhancementsReal Estate Acquisition The intended purpose is to enhance the economic vitality throughquality public investment and attract new private investment to the district.

March 2008

Tax Increment Financing

How is tax increment financing determined?First understand the taxable values.

Base taxable- value for the entire district is established or “frozen” at the time the tax increment financing plan is approvedNew taxable value-value that is created when new investment and inflation occurs within the district.Tax increment value- the difference between the base taxable value and the new value.

March 2008

500

400

300

200

0

TAX INCREMENT

Base value

BASE VALUE BASE VALUE

Tax Increment Value

New Value

Concept of Tax Increment Financing

March 2008

Tax Increment Financing cont…

How is tax increment finance revenue generated?

The Tax Increment Value that is created based on new investment is multiplied by the available millage rate in the district.This Tax Increment Value x Millage Rate =Tax Increment Revenue

March 2008


Does this mean the City will finance projects through bonds?

Financing projects on “Pay As You Go Basis”.The Tax Increment Revenues can be pledged to cover debt service on bonds.

March 2008


What about the other taxing jurisdictions?Currently the General fund relies on the City levied millage rate to funds its operations.Although the City collects other taxing jurisdiction dollars, it does not get to keep them, they have to be reimbursed to those entities by law.In all TIF Jurisdictions with the exception of Brownfield TIF’s, other taxing units have the ability to opt out.In all cases School Millages are not eligible for collection with the exception of Brownfield TIF if approved by the MDEQ or MEGA Board.

March 2008

Types of Tax Increment Financing Authorities

Brownfield Redevelopment AuthorityDowntown Development AuthorityLocal Development Finance Authority (includes Smart Zones)Corridor Improvement AuthorityNeighborhood Development Authority

March 2008

Case Study v2123 Main Street Rehabilitation project Post-development Appraised Value: 9,000,000.00$ Suburb, Michigan Commercial tenants only Bank 1 Loan: 6% interest on a 20 year amortization

TIF: Brownfield covering Asbestos + DDA $600kSourcesEquity Developer: 400,000.00$ Gross Rent: 1,000,000.00$

Tenant Contributions: 200,000.00$ Vacancy: (120,000.00)$

Bank Bank 1: 7,000,000.00$ TIF Loan: 800,000.00$ Effective Gross Income: 1,080,000.00$

Total Sources of Fund 8,200,000.00$ Sources do not match uses!! Taxes: 200,000.00$

Uses Insurance: 40,000.00$ Land 100,000.00$ Maintenance: 40,000.00$

Asbestos Abatement 200,000.00$ Utilities: 30,000.00$ Construction 6,000,000.00$ Management: 32,000.00$

Const Period Expenses 500,000.00$ Reserves: 100,000.00$ Architect/Engineer 200,000.00$ Annual Operating Expenses: 442,000.00$

Developer Fee 2,000,000.00$ Contingency 1,000,000.00$ Net Operating Income: 638,000.00$

Total Development Co 10,000,000.00$ Debt Service (Bank 1): ($601,802.09)

LTV: 0.78Cash Available: 36,197.91$

DCR: 1.06

March 2008

Tax Credits and Tax AbatementsRehabilitation

Federal Historic Preservation Tax Credit (20%)Federal Pre-1936 Building Tax Credit (10%)Michigan Historic Preservation Tax Credit (25%)Michigan Obsolete Property Tax ExemptionIndustrial Facilities and Commercial PropertyMichigan Brownfield Tax Credit (10%)Michigan Neighborhood Enterprise ZonesLow-income Housing Tax Credits

March 2008

Tax Credits and Tax Abatements

New constructionMichigan Brownfield Tax CreditIndustrial Facilities Tax AbatementMichigan Neighborhood Enterprise ZonesLow-income Housing Tax Credits

March 2008

Credits and Abatements

Tax Credits typically generate equity through their “sale”Tax Abatement typically lower expensesBoth positively influence your Sources of funds

March 2008

Federal and State Tax Credits

Tax Credits typically generate equity through their “sale” (or syndication)

Michigan (MBT) Brownfield Tax Credit (10%) Federal Historic Preservation Tax Credit (20%)Federal Pre-1936 Building Tax Credit (10%)Michigan Historic Preservation Tax Credit (25%)Federal Low Income Housing Tax Credits (4%-9%)

March 2008

Brownfields DefinedUSEPA Definition:“Abandoned, idled, or under-used industrial and commercial facilities where expansion or redevelopment is complicated by real or perceived environmental contamination.”

Michigan Definition:Any parcel(s) with contaminationabove residential standards, blightedor functionally obsolete.

March 2008

Urban Brownfield

March 2008

Core Communities (As of 1/3/08)

NOT A COMPLETE LISTAnn ArborBattle CreekBay CityCenter LineDearbornDearborn HeightsDetroitEast LansingEastpointeEcorseFerndaleFlintGenesee TwpGilbralterGrand RapidsHamtramckHarper WoodsHazel ParkHighland ParkHollandInsksterJackson

AdrianAlbionAlmaAlpenaBaldwin VillageBangorBenton HarborBenton TownshipBessemerBig RapidsBronsonBuena Vista Twp.BurtonCadillacCarson CityCaspianCheboyganColdwaterColemanCrystal FallsDowagiacEscanabaGaastraGladstoneGrand HavenGraylingHarbor Beach

HartHartfordIoniaIron MountainIron RiverIronwoodIshpemingLudingtonManisteeManistiqueMarquetteMenomineeMt. MorrisMt. Morris TwpMt. PleasantMuskegonMuskegon HeightsNorton ShoresNorwayOmerOnawayOwossoPinconningSaint LouisSault St.MarieSturgisThree RiversVassarWakefieldWyoming

KalamazooLansingLincoln ParkLivoniaMelvindaleMidlandMonroeMt.ClemensOak ParkPontiacPortagePort HuronRedford TwpRiver RougeRoyal Oak TwpSaginawSouthfieldTaylorTrentonTraverse CityWarrenWayneWyandotteYpsilanti

March 2008

Michigan Brownfield Tax Credit

A credit against the Michigan Business Tax worth up to 10% of the real property improvements (rehab or new construction) and personal property invested at the site. Since most developers and single-purpose entities do not have a MBT liability, can assign the credit through syndication or to a lessee. Only investment after a “pre-approval letter” is issued by the state can be included.

March 2008


TIF: Brownfield covering Asbestos + DDA $600kSourcesEquity Developer: 400,000.00$ Gross Rent: 1,000,000.00$ Brownfield Tax Credits: 720,000.00$ Tenant Contributions: 200,000.00$

Vacancy: (120,000.00)$ Bank Bank 1: 7,000,000.00$

TIF Loan: 800,000.00$ Effective Gross Income: 1,080,000.00$ Total Sources of Fund 8,920,000.00$

Sources do not match uses!! Taxes: 200,000.00$ Uses Insurance: 40,000.00$

Land 100,000.00$ Maintenance: 40,000.00$ Asbestos Abatement 200,000.00$ Utilities: 30,000.00$

Construction 6,000,000.00$ Management: 32,000.00$ Const Period Expenses 500,000.00$ Reserves: 100,000.00$

Architect/Engineer 200,000.00$ Annual Operating Expenses: 442,000.00$ Developer Fee 2,000,000.00$

Contingency 1,000,000.00$ Net Operating Income: 638,000.00$ Total Development Co 10,000,000.00$

Debt Service (Bank 1): ($601,802.09)LTV: 0.78

Cash Available: 36,197.91$ DCR: 1.06

March 2008

Federal Historic Preservation Tax Credit

A 20% credit on qualified expenditures for rehabilitation of historic commercial or rental residential properties.Properties must be either listed individually or be a contributing building in a district on the National Register of historic places.The rehabilitation work must follow the “Secretary of the Interior’s Standards for Rehabilitation” in order to qualify for the tax credit.After the rehabilitation, the historic building must be used as an income-producing property for at least five years.

March 2008

Federal Pre-1936 Building Tax Credit

10% credit on investment value based on rehabilitation. Used on buildings that were put in service prior to 1936 but not eligible for the 20% credit.Rehabilitation expenses must exceed the property’s basis.No residential uses, not even rental.Limitations on building changes are much less restrictive than the 20% credits.

March 2008

MI Historic Preservation Tax Credit

A 25% credit (5% if used in conjunction with the Federal Historic Credit, 15% if used in conjunction with the Federal Pre-1936) on “qualified rehabilitation expenditures”.Work must be conducted and certified as consistent with the “Secretary of the Interior’s Standards for Rehabilitation” for Historic Preservation. For most of Michigan, must be in a locally designated historic district.The State Historic Preservation Office (SHPO) reviews both the State and Federal Tax Credit applications.

March 2008



Pre-1936 Building: 970,000.00$ Vacancy: (120,000.00)$ Bank Bank 1: 7,000,000.00$


Taxes: 200,000.00$ Uses Insurance: 40,000.00$







March 2008

Federal Low Income Housing Tax Credits

Created in part to partially privatize the affordable housing industry.The program works by providing investor equity, thus reducing the amount of debt service on a project, allowing for lower rents to be charged to tenants while still producing positive cash flow.The program provides a dollar-for-dollar reduction in tax liability for owners (and partners).

March 2008

Federal Low Income Housing Tax Credits continued…

4% and 9% Credit Allowed4% for new construction w/Federal subsidies (i.e., tax-exempt bonds);4% credit for acquisition of existing buildings which are substantially rehabilitated; and9% for new construction/rehabilitation expenditures w/out Federal subsidies.

March 2008

Tax Abatements

Tax Abatements are used by a community to reduce the post-improvement real and personal property taxes.Used to spur or reward new investment –tax abatements do not impact the current level of taxes.

March 2008

Tax Abatements (cont.)

Types of tax abatements:Obsolete Property Rehabilitation ActCommercial Rehabilitation ActNeighborhood Enterprise ZoneIndustrial Facilities Tax AbatementRenaissance Zone

March 2008

Michigan Obsolete Property Tax Exemption

A 100% abatement of non-school real property taxes on new value (i.e. improvements) from rehabilitation of a commercial or rental residential building located in a “Core Community”. Abatement may last up to 12 years.Property must be contaminated, functionally obsolete or blighted.Must be in an OPRA district and should have an approved certificate before making improvements.

March 2008

Michigan Commercial Property Tax Exemption

A 100% abatement of non-school real property taxes on new value (i.e. improvements) from rehabilitation of a commercial or multi-family building that meet certain requirements. Abatement may last up to 10 years.Property must be within a Commercial Rehabilitation District of not less than 3 acres in size (if downtown area, can be less than 3).Within 6 months of starting improvements, the developer needs to file their Exemption Certificate application.

March 2008

Michigan Neighborhood Enterprise Zones

Rehabilitation value must be greater than $5,000. Unit’s true cash value can not exceed $80,000 prior to rehab or construction.District must be established and an exemption certificate applied for before any permits pulled.Certificates may be approved for 15 years (17 years if historic tax credits used) and are transferable to new owners.

March 2008

Michigan Neighborhood Enterprise Zones (continued)

On rehab, abates the real property taxes on the improvements (i.e. freezes taxes at their pre-rehab level).On new construction, reduces the total property rate to ½ of the statewide average rate (about 17 mills for owner-occupied property).

March 2008

Zones

Renaissance ZoneRenewal Community (North East Detroit) –interesting Commercial Revitalization Deduction (http://www.hud.gov/offices/cpd/economicdevelopment/programs/index.cfm)

Empowerment Zone – only employment tax credit is left, all other benefits expired December 31, 2004

March 2008

Renaissance Zone

Provides an exemption to businesses located within or residents living in the Renaissance Zone.Exemption covers most Michigan and local taxes including Michigan Personal Income Tax, Detroit Personal Income Tax, non-debt property taxes, Michigan Business Tax, utility users tax.Each Zone has its own expiration date (most between 2008 through 2017).

March 2008



Pre-1936 Building: 970,000.00$ Vacancy: (120,000.00)$ Bank Bank 1: 7,000,000.00$


Taxes: 40,000.00$ Obsolete PropertyUses Insurance: 40,000.00$







March 2008

Incentives MatrixRehab New Construction

Renaissance Zone $ $Tax Increment Programs $ $

Historic Tax Credits $ n/a

Neighborhood Enterprise Zone (Residential)

$ $

Commercial Property Tax Abatements (IFT, OPRA, Commercial)

$ IFT Only

Brownfield Tax Credits $ $

March 2008

Combining Tools

The incentive programs encompass all federal and state tax structuresThus, projects which combine incentives can leverage each tax structures to increase returnsA rehabilitation of a structure might get: Federal Historic Tax Credits, Michigan Historic Tax Credits, Brownfield Tax Credits and Obsolete Property Rehabilitation Act tax abatement.

March 2008

Debt Instruments

Subordinated debt programs: SBA 504, Detroit Community Loan Fund, Detroit Investment Fund, Wayne County Urban Loan FundMezzanine capital: Downtown Development Authority loans, Detroit Investment FundTax Exempt Bonds: Michigan Strategic Fund, Michigan State Housing Development Authority, Economic Development Corporations, Port AuthoritiesNew Markets Tax Credits – Wayne County –Detroit CDE

March 2008

Final Thoughts

With creativity, many seemingly impossible projects are possible.Most programs require approval beforeyou start the project. Approval timeframes can be 2-12 months

so start early.

March 2008

Contact Information:

Corey A. LeonAKT Peerless

Environmental607 Shelby, Suite 900Detroit, MI 48226313-962-9353Fax [email protected]

Anne Jamieson-UrenaAKT Peerless

Environmental22725 Orchard Lake RdFarmington, MI 48336248-615-1333Fax [email protected]

March 2008

Contact Information:

Fred E. Zorn, Jr., CEcDExecutive Director of

Housing & Neighborhood Services

City of Taylor23555 GoddardTaylor, MI 48180(734) 374-1661(734) 374-1342 [email protected]