"TRANSFORMATIONAL" BROWNFIELD REDEVELOPMENT PROJECTS
Senate Bill 111 with adopted House committee amendments
Sponsor: Sen. Ken Horn
Senate Bill 112 with adopted House committee amendments
Sponsor: Sen. Jack Brandenburg
Senate Bill 113 as passed by the Senate
Sponsor: Sen. Tom Casperson
Senate Bill 114 as passed by the Senate
Sponsor: Sen. Peter MacGregor
Senate Bill 115 as passed by the Senate
Sponsor: Sen. Steven Bieda
House Committee: Tax Policy
Senate Committee: Economic Development and International Investment
Complete to 4-18-17
OVERVIEW: Senate Bills 111-115 would allow for the creation of "Transformational Brownfield Plans" (TBPs) through 2022, allowing the capture of income taxes and sales and use taxes, in addition to the current permitted capture of property taxes, for certain eligible uses associated with an approved brownfield plan agreement. The new concept is introduced through amendments to five acts:
· the Brownfield Redevelopment Financing Act (SB 111)
· the Income Tax Act (SB 112)
· the General Sales Tax Act (SB 113) and the complementary Use Tax Act (SB 114)
· the Michigan Renaissance Zone Act (SB 115)
No new TBP could be approved after December 31, 2022, and no unused plans could carry over past that date. A TBP approved prior to that date would remain in effect and could be amended.
BRIEF FISCAL IMPACT: The bill would authorize development incentives for large development projects totaling $1.0 billion across all transformational brownfield plans (TBPs) over the life of the program. To the extent that the package of bills would result in investment and activities that would not have taken place but for the provisions of the bills, there would likely be a positive fiscal impact on state revenues, although there is no reliable way to quantify the magnitude. This also assumes that economic activity was not simply transferred to the eligible property from another area of the state. The annual fiscal impact would vary depending on the characteristics of the TBPs and economic activity generated. See EXPANDED FISCAL IMPACT for additional information, later in the summary.
CONTENT OF THE BILLS: Following are a key elements of the proposal, most of which are found in Senate Bill 111.
o A Transformational Brownfield Plan (TBP) is defined as a brownfield plan that, among other requirements, "will have a transformational impact on local economic development and community revitalization based on the extent of brownfield redevelopment and growth in population, commercial activity, and employment that will result from the plan."
o The project must involve a minimum level of capital investment (for example, $500 million in a city with a population over 600,000; $15 million in a community under 25,000 in population; and four other levels of investment depending on the population of the local unit). There would be exceptions for certain locales. A TBP must ensure a significant equity contribution from the developer.
o It also must be a mixed use development, defined in the bill as "a real estate project with planned integration of some combination of retail, office, residential, or hotel uses". The project could be a single development on eligible property, or consist of a series of developments on eligible property that are part of a "related program of investment" (the bill outlines criteria to meet this standard), even if they are not contiguous.
o A TBP would allow for the capture of three kinds of income tax revenues associated with the project, in addition to property tax increments, for use in financing a large array of eligible activities, specifically including as new activities, "any demolition, construction, restoration, alteration, renovation, or improvement of buildings or site improvements on eligible property, including infrastructure improvements that directly benefit eligible property."
o The three kinds of revenues from income tax capture, are as follows:
- Construction Period Tax Capture Revenues: Funds equal to the amount of income tax levied and imposed in a calendar year on wages paid to individuals physically present and working within the eligible property for the construction, renovation, or other improvement of eligible property that is an eligible activity within a TBP. (Excluded are wages paid to employees of the owner or developer of the project.)
- Income Tax Capture Revenues: Funds equal to the amount for each tax year by which the aggregate income tax from individuals domiciled within the eligible property subject to a TBP exceeds the initial income tax value (that is, the value in the year the resolution adding BPT property is adopted). The State Treasurer makes these calculations. The MSF could not approve a TBP that proposes to use more than 50% of the income tax capture revenues.
- Withholding Tax Capture Revenues: The amount for each calendar year by which the income tax withheld from individuals employed within the eligible property subject to a TBP exceeds the initial withholding tax value. (Excludes those domiciled within the eligible TBP property and construction period tax capture revenues.) The MSF could not approve a TBP that proposes to use more than 50% of the withholding tax revenues.
- The State Treasurer would require information be provided from the developer to make these various calculations.
o In addition, the purchase of certain tangible personal property used in eligible brownfield redevelopment activities would be exempt from sales and use taxes. Generally speaking, the legislation provides an exemption, subject to limits and various approvals, for the sale of tangible personal property to the extent the property will be affixed and made a structural part of the real property or infrastructure improvements included within a TBP.
o There would be caps on the capture of tax revenue, as follows:
- The total annual amount of income tax capture revenue and withholding tax capture revenue that may be reimbursed each calendar year under all transformational brownfield plans would be capped at $40 million.
- The MSF would be prohibited from committing, and the Department of Treasury from disbursing, a total amount of income tax capture revenue and withholding tax capture revenue that exceeded $800 million.
- The MSF could not approve more than a total of $200 million in construction period tax capture revenue and in projected sales and use tax exemptions.
- Further, there could be no tax capture allowed after total revenue captured under a TBP is equal to the total costs permitted by the plan; and there could be no income tax capture or withholding tax capture beyond 20 years from the from the beginning date of capture.
o A TBP could include a request to the Michigan Strategic Fund and a city levying a city income tax that the income tax exemptions of a Michigan Renaissance Zone be terminated (this would only be utilized if a TBP overlapped with a Renaissance Zone)
o TBP projects would require the approval of the local unit of government and of the Michigan Strategic Fund; and the State Treasurer must concur with the MSF that a project would have a positive fiscal impact on the state. A resolution of the governing body that created the local brownfield redevelopment authority would be required to initiate a TBP.
o The MSF could approve no more than five TBPs in a calendar year statewide and no more than five TBPs in any individual local unit for all years (that is, prior to December 31, 2022, the deadline for approvals). However, these limitations could be waived by the MSF to allow certain additional TBPs in certain areas: communities under 25,000 if the development would not be economically feasible otherwise; those eligible for federal blight elimination program funds; for a municipality subject to a state of emergency for drinking water contamination (Flint); and for eligible property that is a historic resource and would not otherwise be transformed.) For years in which fewer than five are approved, the unused approval authority will carry forward five years from date of enactment.
o The MSF would have to ensure an equitable geographic distribution of plans, balancing the needs of municipalities of different sizes and geographic areas. The MSF would have to set a target that at least 35% of all TBPs be located in cities, villages, and townships with populations under 100,000.
o The Department of Treasury would deposit, from the General Fund, the amount equal to the construction, withholding, and income tax capture revenues due to be transmitted under all TBPs. The Treasury would then distribute the collected revenues to an authority or to the owner or developer of the eligible property to which the revenues are attributable, subject to the terms of the written development or reimbursement agreement for each TBP. Treasury would be required to account for the revenues attributed to each TBP separately, and funds may only be used for the specific TBP.
Capital Investment Criteria
A TBP would be expected to result in the following levels of capital investment, based on the population of a municipality that is not a county:
Expected Capital Investment
>150,000 and <599,999
>100,000 and <149,000
>50,000 and <99,999
>25,000 and <49,999
- The capital requirements could be waived for a city, village, or township with a population of under 25,000 (or one that is eligible for that population tier) if the MSF determines redevelopment is not economically feasible without the TBP.
- The capital requirements may also be waived for areas approved as eligible for federal blight elimination program funds, for a municipality subject to a state of emergency for drinking water contamination (Flint), and for eligible property that is a historic resource and would not otherwise be transformed.
- Municipalities with populations that are less than 10% above the maximum for a tier may select that tier for the investment requirement.
- Total capital investments (both proposed and actualized) within 10% of the applicable minimum investment would satisfy the requirement.
- Upon completion of TBP construction, or completion of a specific phase, MSF would only commence reimbursement from the construction period, income tax, and withholding tax capture sources when the owner or developer has certified the actual capital investment. If the capital investment is less than included in the plan, MSF has the right to modify the amount of reimbursement and take other recourse.
To seek TBP status, a plan must include:
o The basis for designating the plan as a TBP.
o A description of the costs of the TBP that are intended to be paid for with construction period, withholding tax, and income tax capture revenues. (In certain instances, subject to approval, these tax capture revenues can reimburse eligible activities up to 90 days prior to a property being approved for TBP status. They can also be used to reimburse advances made by municipalities, land bank fast track authorities, or other entities for costs of eligible activities.)
o An estimate of the amount of construction period, withholding tax, and income tax capture revenues expected to be generated for each year of the TBP.
o The beginning date and duration of capture of construction period, withholding tax, and income tax capture revenues.
o A statement that describes what portion of the tax capture revenues will be used.
o An approved work plan and a written development or reimbursement agreement between the owner or developer of the property, the authority, and the MSF if the TBP authorizes use of the construction period, withholding tax, and income tax capture revenues.
Process of Creating a TBP
The governing body of the local municipality must make an initial determination as to whether a TBP constitutes a public purpose. If it finds public purpose, it can approve, reject, or modify the plan using criteria outlined in the bill. If the governing body approves the TBP, it is sent to the Michigan Strategic Fund. Within 90 days, in determining whether to approve a TBP, the MSF must:
o Conduct a financial and underwriting analysis of the developments included in the plan that:
- Sets the use of additional tax capture revenues only to the point that makes the project economically viable. The MSF would have to develop standardized underwriting criteria for determining economic viability.
- Takes into account the impact of the sales and use tax exemptions in determining the amount of tax capture revenue required.
- Ensures a significant equity contribution from the developer.
- Considers both rental rates at the time of project delivery and potential increases over time.
o Determine that a plan will result in an overall positive fiscal impact to the state, considering:
- The potential displacement of tax revenues from other areas of the state.
- The effects of the TBP on economic development in the surrounding area.
o Have an independent, third-party underwriting analysis and an independent, third-party fiscal and economic impact analysis if a plan proposes to use more than $1.5 million in any year in withholding and income tax capture revenues
o Amendments to existing plans are treated in the same manner as new plans, but are not considered new plans under the five-plan limit.
o Findings, procedures, and notices of economic viability and other related criteria are presumed valid unless contested in a court within 60 days after approval of a TBP by the MSF.
o Any determinations made by the MSF must be supported by objective analysis and documented in the record of its proceedings.
o The MSF would charge and collect a fee to cover its costs associated with TBP review.
o MSF approval is required for a transfer of ownership for any TBP with existing and continuing reimbursements.
Senate Bill 112 would amend the Income Tax Act (proposed MCL 206.51e) to provide that, from total income tax revenue collected, an amount equal to the construction period tax capture revenues, withholding tax capture revenues, and income tax capture revenues due to be transmitted under all TBPs shall be deposited each state fiscal year into the State Brownfield Redevelopment Fund.
Senate Bill 113 would amend the General Sales Tax Act (205.54d) to exempt from sales taxes the sale of tangible personal property for use in eligible brownfield redevelopment activities on eligible property included in a TBP, to the extent that the tangible personal property will be affixed and made a structural part of the real property or infrastructure improvements included within the TBP.
Senate Bill 114 would amend the Use Tax Act (proposed MCL 205.44d) to exempt from use taxes tangible personal property acquired by a person engaged in the business of altering, repairing, or improve real estate for others, or to the manufacture of a specific product if the property or product is to be affixed or made a structural part of improvements to real property included within a TBP, to the extent that those improvements are eligible activities on eligible property within a TBP.
Senate Bill 115 would amend the Michigan Renaissance Zone Act (MCL 125.2689) to provide that, where a renaissance zone overlapped with a TBP, the property owner and local government unit may request that exemptions from the Income Tax Act and City Income Tax Act not apply within the overlapping portion of the renaissance zone. The MSF and city levying the income tax would decide whether to approve the request.
EXPANDED FISCAL IMPACT:
To the extent that the package of bills would result in investment and activities that would not have taken place but for the provisions of the bills, there would likely be a positive fiscal impact on state revenues, although there is no reliable way to quantify the magnitude. This also assumes that economic activity was not simply transferred to the eligible property from another area of the state. The annual fiscal impact would vary depending on the characteristics of the transformational brownfield plans (TBP) and economic activity generated.
Under the provisions of the bill, the Michigan Strategic Fund would be required to determine that the transformational brownfield plan would result in a positive fiscal impact to the state. This analysis would be required to be verified by an independent, third-party analysis if the plan proposed to use more than $1.5 million in any year in withholding and income tax capture revenues.
Senate Bill 111: The bill would authorize development incentives for large development projects totaling $1.0 billion across all transformational brownfield plans (TBP) over the life of the program. Of that amount, a total $800.0 million could be captured from income and withholding tax revenue associated with the TBP and $200.0 million could be captured from a combination of construction period tax capture revenue in the TBP and sales and use tax exemptions on certain tangible personal property provided for in SB 113 and SB 114. Disbursements of construction period tax capture revenue and the value of the sales and use tax exemptions would not have an additional annual reimbursement cap. Disbursements of income and withholding tax capture revenue would be limited to $40.0 million annually across all TBPs. However, if the $40.0 million threshold was not reached in a given year, the remaining balance could be carried forward into subsequent years for disbursement.
In general, a TBP could not use more than 50% of the income and withholding tax capture revenues to reimburse eligible activities. The TBP could capture 100% of the construction period tax capture for transmittal to the brownfield authority or developer. The available development incentives from any source for a TBP would be limited to an amount that made the project economically viable. Further, no tax capture would occur after the permitted costs under the TBP were met or after 20 years from the start of the capture.
The provisions of the bill would require the General Fund to absorb the entire potential $800.0 million cost of the development incentives related to the income and withholding tax capture revenues. The potential $200.0 million cost associated with the construction period tax capture revenue and value of sales and use tax exemptions would reduce revenue to the General Fund and School Aid Fund depending on the source of the incentive. The provisions of the bill require the Treasurer to deposit annually from the General Fund to the State Brownfield Redevelopment Fund an amount equal to the construction period tax capture revenues, income tax capture revenues, and withholding tax capture revenues due to be transmitted under all transformational brownfield plans. It is unclear if "due to be transmitted" limits the deposit of income and withholding tax capture revenues to the 50% reimbursable amount or the total tax capture of these revenues.
Assuming the economic activity would not have happened without the development incentives, which cannot be ascertained with any degree of certainty, the costs noted above could be offset to some extent over the life of the TBP through new income, sales, and use tax revenue. While the entire cost of the development incentives would be borne by the General Fund, the offsetting benefits from new income tax revenue would flow to either the State Brownfield Redevelopment Fund or the General Fund and School Aid Fund in the following manner: 76.2% to the General Fund and 23.8% to the School Aid Fund (Based on the review of various provisions of the bill, it is unclear where the increased income tax revenue would accrue – see NOTE above). Sustained economic activity following the expiration of the TBP would result in revenue that would accrue to the state. Distribution of that revenue would depend on its source (e.g., income, sales, or use tax).
The MSF would incur certain costs outlined in the legislative analysis above related to TBP review and approval. To cover these costs, the MSF would be required to assess a reasonable application fee. Likewise, the Department of Treasury would be authorized to use funds available in the State Brownfield Redevelopment Fund to cover administrative costs related to the tax capture provisions and corresponding calculations.
The provisions of the bill would also generally have a positive fiscal impact on local units of government assuming the projects would not have occurred but for the development incentives. Assuming sustained economic activity beyond the tax increment financing period, the local government would realize increased property tax revenues in the long run.
On the other hand, the expanded use of tax increment financing under a TBP for eligible activities could lead to increased expenditures from the School Aid Fund due to the capture of additional 18-mill non-homestead local school operating millages.
A local unit of government would realize increased revenue if an advance was made to a TBP project and the tax capture was used to reimburse the local unit with interest. Moreover, a TBP could authorize reimbursement of administrative costs to a local unit of government associated with the development of a TBP.
Lastly, new economic activity directly attributable to the TBP that created new sales tax revenues in excess of the allowable exemptions would result in increased constitutional revenue sharing payments to local units of government.
Senate Bill 112: The bill would have the potential reduce General Fund revenue by a significant amount depending on the level and timing of economic activity under a TBP. The bill would require an amount equal to the total construction period tax capture revenues, withholding tax capture revenues, and income tax capture revenues attributable to all TBPs be deposited each state fiscal year into the State Brownfield Redevelopment Fund. The amount required to be deposited in the State Brownfield Redevelopment Fund would only be limited by the amount of actual tax capture revenues.
Senate Bills 113 & 114: The bills would result in foregone General Fund revenue, School Aid Fund revenue, and local unit revenue from Constitutional revenue sharing by an unknown amount. Any fiscal impact would be directly correlated to the revenue foregone through the purchase of tangible personal property exempt from the sales and use tax under the provisions of the bill.
Senate Bill 115: If the MSF and the local unit approved the removal of exemptions from the Income Tax Act and City Income Tax Act under a renaissance zone designation, individuals would be required to pay the state and city income taxes that would be subject to capture and distribution under the TBP. To the extent that the state or city would have received this revenue upon expiration of the renaissance zone, the income tax revenue would be foregone by the state and city. However, under SB 111, this provision would only apply to development on undeveloped land in the renaissance zone.
The state's Brownfield Redevelopment Program provides funding and tax incentives for the cleanup and redevelopment of contaminated, blighted, functionally obsolete, historic, transit-oriented, and certain other targeted properties with the aim of making them economically viable. As part of the program, the Brownfield Redevelopment Financing Act (Public Act 381 of 1996) allows municipalities to establish brownfield redevelopment zones and zone authorities ("authority"), which may implement brownfield plans. Brownfield authorities can use tax increment financing, which allows the "capture" of incremental increases in tax revenues on each parcel of eligible property subject to a brownfield plan, and use that "capture" to pay costs of eligible activities on eligible property.
Legislative Analyst: Patrick Morris
Fiscal Analyst: Jim Stansell
■ This analysis was prepared by nonpartisan House Fiscal Agency staff for use by House members in their deliberations, and does not constitute an official statement of legislative intent.