MICHIGANMICHIGANCOMMERCIAL TAX COMMERCIAL TAX

ABATEMENTSABATEMENTS

““A PRIMER”A PRIMER”

Chuck Eckenstahler219-861-2077

HISTORY – HISTORY – Original ActOriginal Act

Commercial Rehabilitation Act, Commercial Rehabilitation Act, P.A. 255 of P.A. 255 of 19781978

50% tax beak for up 12 years on taxable rehabilitation investment50% tax beak for up 12 years on taxable rehabilitation investment Legislation terminated in 1988Legislation terminated in 1988

“Commercial Tax Abatements are nothing new…

we just have not been able to use them in a while”

History – History – Replacement ActReplacement Act

Commercial Rehabilitation Act, Commercial Rehabilitation Act, P.A. 210 of P.A. 210 of 20052005

100% tax beak for up to 10 years on taxable rehabilitation investment100% tax beak for up to 10 years on taxable rehabilitation investment Legislation terminates in 2015Legislation terminates in 2015 Property must meet definition of “obsolete property”Property must meet definition of “obsolete property”

BlightedBlighted Functionally obsoleteFunctionally obsolete A MEDQ designated “facility” (building with hazardous substances)A MEDQ designated “facility” (building with hazardous substances)

“Commercial Tax Abatements

limited to a very select number of buildings”

History - History - New and Improved ActNew and Improved Act

Commercial Rehabilitation Act Commercial Rehabilitation Act Amendment, Amendment,

P.A. 8 of P.A. 8 of 20082008

Removed definition of “obsolete property” Removed definition of “obsolete property” New standards for Commercial Tax Abatement Rehabilitation New standards for Commercial Tax Abatement Rehabilitation

Districts - Districts - 1.1. Commercial property, a building or group of buildings at least Commercial property, a building or group of buildings at least

15 years old15 years old2.2. A group of buildings allocated New Market Tax Credits under A group of buildings allocated New Market Tax Credits under

IRS provisionsIRS provisions3.3. A district of 3 acres is sizeA district of 3 acres is size4.4. Buildings located with a a downtown or business area Buildings located with a a downtown or business area (no size (no size

reqmt.)reqmt.)

“Commercial Tax Abatement Districts

now available for most older buildings “

Rehabilitation Rehabilitation

Is included for Is included for new constructionnew construction on on vacant propertyvacant property from which a previous from which a previous structure has been demolished and if structure has been demolished and if the new construction is an the new construction is an economic economic benefitbenefit to the local community as to the local community as determined by the local government determined by the local government unitunit. .

Section 2 (k)Section 2 (k)Underline addedUnderline added for emphasis for emphasis

Example - BridgmanExample - Bridgman

Example - BarodaExample - Baroda

Case StudyCase Study

State Equalized Value - $50,000Taxable Value - $50,0002008 Taxes - $ 2,012

County - $ 239 * City - $ 735 * Library - $ 87 *School Operating $ 744 LMC - $ 89 *ISD - $ 118

* Abatable

Building RehabilitationBuilding Rehabilitation

Facade and other improvements - Facade and other improvements - $50,000$50,000 Taxable valuation of improvements -Taxable valuation of improvements - $25,000$25,000 Increase in annual taxes w/o abatement Increase in annual taxes w/o abatement

$ 2,012 + $1,006$ 2,012 + $1,006 $ $ 3,0183,018

Commercial Tax Abatement - Commercial Tax Abatement - $ 575$ 575 % savings in annual taxes - % savings in annual taxes - 19% 19% % saving on increased taxes% saving on increased taxes 57% 57%

Tax Abatements Benefit Tax Abatements Benefit

How much bank financing can the How much bank financing can the tax abatement support?tax abatement support?

1.1. Assume an 80% loan ($40,000) at 7% Assume an 80% loan ($40,000) at 7% annual interest for a 20 year termannual interest for a 20 year term

2.2. Annual interest cost for loan= $2,800Annual interest cost for loan= $2,800

3.3. $575 tax abatement equals $575 tax abatement equals 2121%% of of annual interest payment for up to 10 annual interest payment for up to 10 yearsyears

Cautionary Note – No Simple Cautionary Note – No Simple RuleRule

Actual abatement savings are variableActual abatement savings are variable Based onBased on

The increased value determined by the The increased value determined by the assessorassessor

Millage rates established by taxing bodiesMillage rates established by taxing bodies

Best guidance – Best guidance – between 20% to 33% overall between 20% to 33% overall tax savingstax savings

The “Pro & Con” View PointsThe “Pro & Con” View Points

ABATEMENTABATEMENT

DDA/”LUG” leaves funds that DDA/”LUG” leaves funds that would be used for taxes with would be used for taxes with the business/property ownerthe business/property owner

NO ABATEMENTNO ABATEMENT

DDA collects taxes and DDA collects taxes and spends them for benefit of spends them for benefit of businesses in the DDA Districtbusinesses in the DDA District

REMEMBERREMEMBER

Not all DDA’s etc., or “LUG’s” will want to part Not all DDA’s etc., or “LUG’s” will want to part with the possible loss of future tax revenuewith the possible loss of future tax revenue

The Bridgman PolicyThe Bridgman Policy

We in Bridgman feel a tax We in Bridgman feel a tax break is an economic break is an economic development tool development tool necessary to redevelop necessary to redevelop our downtown and we are our downtown and we are willing to forgo taxes to willing to forgo taxes to encourage new encourage new businesses to locatebusinesses to locate……

Kathy Ramso, Realtor and Councilperson.Kathy Ramso, Realtor and Councilperson.

Forming a CTA DistrictForming a CTA District

Legislative body can set up district Legislative body can set up district by their own actionby their own action

Owners of 50% of the taxable value Owners of 50% of the taxable value of a proposed district can petition the of a proposed district can petition the legislative legislative

Setting Up a CTA DistrictSetting Up a CTA District

Legislative body approves resolution to form district containing:Legislative body approves resolution to form district containing:

1.1. Legal description of the property in the districtLegal description of the property in the district

2.2. Statement of findings and determination the district is composed of a Statement of findings and determination the district is composed of a “qualified facility (ies)” that being a commercial building (s) 15+ years old in “qualified facility (ies)” that being a commercial building (s) 15+ years old in DDA or in a 3 acre district)DDA or in a 3 acre district)

Public hearing – notification to county, college, etc. and property owners in Public hearing – notification to county, college, etc. and property owners in proposed districtproposed district

Public hearing adoption of resolution by legislative bodyPublic hearing adoption of resolution by legislative body

County notification of adoption – 28-day “opt out” periodCounty notification of adoption – 28-day “opt out” period

State Tax Commission State Tax Commission ApplicationApplication

Application contents containing a general Application contents containing a general description of:description of:

1.1. The qualified facilityThe qualified facility2.2. Proposed use of the facilityProposed use of the facility3.3. Nature & extent Nature & extent 4.4. of the proposed rehabilitationof the proposed rehabilitation5.5. Fixed building equipmentFixed building equipment6.6. Schedule for starting and completionSchedule for starting and completion7.7. The economic advantages expectedThe economic advantages expected8.8. Number of jobs to be created Number of jobs to be created

– – permanent and constructionpermanent and construction Treasury Treasury Form 4507Form 4507

Proposed ChangesProposed Changes

City of Bridgman (among others) City of Bridgman (among others) requesting changes to current law – requesting changes to current law –

Allow tax abatements in DDA’s etc. Allow tax abatements in DDA’s etc. for –for – ““vacant but previously occupied’vacant but previously occupied’

Thank YouThank You

Contact information –Contact information –

Email - Email -

ckeckenstahler@mcka.comckeckenstahler@mcka.com

pctecken@comcast.compctecken@comcast.com

Phone – Phone –

219 - 861- 2077219 - 861- 2077