Detroit redevelopment survives GOP tax deal

For a while it looked like the Republican tax plan, ultimately approved before the new year, would severely hurt redevelopment efforts in Detroit by killing off some of the tax incentives developers rely on to do their deals.

These various tax incentives have proven crucial to projects as varied as the renovation of the old Book Cadillac into the Westin Hotel and low-income affordable housing projects in Detroit and elsewhere in Michigan.

The final bill singed into law dropped most of the more threatening proposals. But in some ways the finished product may still hamper redevelopment efforts in cities like Detroit — although a lot depends on how individual deals are put together.

Let's review. First, the initial proposals in Congress called for the elimination of the federal historic preservation tax credit. This credit allows developers to deduct up to 20% of their costs when they rehab an historic building or district.

Essential to Detroit's redevelopment, the federal credit has been used in multiple renovation projects around town and throughout Michigan's older cities.

Ultimately the final bill signed into law dropped that idea and retained the 20% credit. But there's a catch — the new law says developers must spread the tax benefit over five years instead of taking it all at once when the project is done.

Since the tax credit cannot be turned into cash all at once, developers may find it harder to attract investors willing to buy the credits. And developers will find it harder to pay off their construction loans prior to getting a final mortgage.

That waters down the usefulness of the historic preservation credit — not enough to make it an afterthought, but enough to perhaps stymie a few deals or at least make them harder to put together.

The initial proposals in Congress also threatened to end the tax exemption available for so-called private activity bonds. Those bonds are sold by entities such as the Michigan State Housing Development Authority to raise money to build affordable housing in Michigan.

Each year, MSHDA sells tax-exempt bonds to investors and uses the money to build about 3,500 units of affordable housing throughout the state, including in Detroit. If the Republican tax plan, as first proposed, made those bonds no longer tax exempt, investors would not buy them and MSHDA's efforts to build affordable housing would be seriously curtailed.

But the final bill signed into law retained the tax exemption for those bonds.

"We're breathing a sigh of relief," Earl Poleski, director of MSHDA, told me.

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But there's reason to not celebrate quite yet. As Poleski and others have noted, tax rate reductions in the final law mean that investors who would have paid a lot more tax under the old system don't need exemptions and credits as much as they once did. The top corporate tax rate, for example, drops from 35% to 21%.

That means that groups like MSHDA or private developers will have to work a little harder to sell their bonds and tax credits to investors who just don't need them as much.

That's not likely to kill any development deals, but it is likely to make them more cumbersome to put together.

"I think you’ll still have development occurring," Poleski said. "The financial calculations will be adjusted to some extent. There may be a little less interest in the low income tax credit but not enough to affect our deals.

"Developers will have to sharpen their pencils a little bit more, but we still think we can get development done."

Of course, if proponents of the tax bill are proven right and the economy expands significantly in the next couple of years — a big "if" — the increase in activity generated by higher incomes and market enthusiasm may outweigh any downside from the watering down of some incentives.

Bottom line, the process of putting deals together in places like Detroit that rely on these incentives will change a little. And a lot will depend on market conditions in any given city.

But for now, Detroit's redevelopment efforts survived what could have been a very nasty surprise from Republican tax planners.

Contact John Gallagher: 313-222-5173 or gallagher@freepress.com. Follow him on Twitter @jgallagherfreep.