GOP tax plan saves key breaks used by many developers
The $1.5 trillion Republican tax overhaul doesn’t kill various tax credits driving Detroit development, but changes in the plan have sparked debate whether it will slow or increase investments in city property.
“The changes aren’t as dramatic,” said Ben Phillips, vice president of real estate for Develop Detroit, who is no fan of the plan approved Wednesday by both houses of Congress. His company, which focuses on neighborhoods that are on the verge of going upscale, seeks to create developments offering a mix of affordable and market-rate housing. Its current efforts include $220 million worth of deals expected to create 850 residences and 300,000 square feet of commercial space.
Phillips, like many area developers, had been leery of the earlier versions of the tax overhaul.
“All of our projects would have ground to a halt,” he said.
At risk in the Washington overhaul were tax credits Detroit developers frequently use to revive historic buildings from downtown skyscrapers to neighborhood storefronts, and another meant to encourage development in low-income neighborhoods. Those credits had been eliminated in the House version of the tax plan.
The final bill retained both incentives but one change in the historic building credit has some analysts concerned about its future effectiveness. Under the new plan, that tax break must now be spread over five years, rather than being taken upfront in the first year of a project’s development.
“That change cuts the immediate cost benefit of the tax break, meaning some projects may not get done,” said George Jackson, founder of Ventra LLC, a Detroit real estate firm.
Jackson, a former president and CEO of the Detroit Economic Growth Corp., the quasi-public agency that promotes Detroit business investment, admitted the new historic tax credit ultimately results in a higher tax break. But he added, “A lot of developers count on that initial break” because it lowers the amount of funds they need to raise to get a project off the ground.
Another concern of Detroit developers of the overhaul is that it lowers the overall taxes for the wealthy and businesses. In the past, by investing in Detroit deals that use the tax credits, investors lowered their tax rate. But now that incentive is being taken away with an overall reduction of tax rates.
“That could be an unintended effect that we’ll have to wait and see” if it comes to fruition, said Richard Barr, a partner in the law firm Honigman Miller Schwartz and Cohn LLP. Barr is leader of the firm’s economic development incentives group.
Some analysts, however, contend the new tax plan will spark much new investment. By keeping the tax breaks coupled with the overall lowering of taxes for commercial real estate businesses, the result will be a boon, they said.
“If enacted, the commercial real estate industry will have hit the jackpot,” Steven Rosenthal, a senior fellow at the Urban-Brookings Tax Policy Center, a joint venture of the Washington think tanks Urban Institute and the Brookings Institution, wrote in his blog before the final vote.
Many area developers were relieved to see that the final bill preserved many of the elements of the new markets and the historic tax credits. Here’s a breakdown on how those incentives fared:
■The New Markets Tax Credits are available to investors who build or renovate in areas with high poverty and involve projects with a lack of private investment. It provides a 39 percent credit, taken over seven years, on new investment, and is often used in multi-partner projects coordinated by a city or public agency.
Since the start of the program in 2000 until 2014, the latest year data is available, Michigan received $675.4 million to fund 169 projects, according to State of Michigan data. In Detroit, one example is the Gateway Marketplace, a 360,000-square-foot retail center at Eight Mile and Woodward with a Meijer supercenter as its anchor tenant. Among the stores in the shopping center are a Marshall’s and a K&G Fashion Superstore. The development has created 600 permanent full-time jobs.
“It’s an invaluable tool,” Dana Thompson, a law professor and director of the Entrepreneurship Clinic at the University of Michigan Law School, said of the tax credit.
■The Historic Tax Credit, aimed at helping restore historic buildings, has been crucial in plenty of development deals in downtown Detroit and throughout the state. From 2002 to 2016 in Michigan, $368 million in federal credits leveraged $2.2 billion in investments across 315 projects. Those projects have created more than 17,000 permanent jobs and generated $344 million in federal tax revenue, not to mention state and local tax revenue.
“It seems to be nothing but good news,” said Leon LeBrecque, manager and CEO of LJPR Financial Advisors in Troy.
Commercial real estate businesses fare better because most of those firms are set up as partnerships, limited-liability companies and other so-called “pass-through” companies, LeBrecque said. Among other things, the tax overhaul gives such firms a new 20 percent deduction on taxable income to pass-through businesses owned by individuals making less than $157,500 and joint filers making less than $315,000.
There’s other changes that also could give more foreign investors more incentive to invest in commercial real estate as well as encourage small investors to want to bank on rental housing properties, LeBrecque said.
Developer Phillips says the overall effect of the sweeping tax plan may not be favorable.
“We are still digesting all the changes, but my take so far is that even the final version will make a challenging business even more complicated,” he said. His biggest concern is it will be harder to fund affordable housing, he said.