In our May 24, 2012 blog entry, we cautioned that Brownfield plans and related agreements may be in jeopardy. Under the Local Governmental and School District Fiscal Accountability Act, MCL §141.1501, et seq. (the “Act”), an Emergency Financial Manager (“EFM”) may be appointed to resolve a government’s financial situation. An EFM may “make, approve, or disapprove” any contract or “reject, modify or terminate” any terms or conditions of existing contracts under the Act. This means that an EFM could terminate any Brownfield Plan and related agreement.

Tax increment financing (“TIF”) is used by many owners of property to finance previously incurred eligible environmental costs. In essence, TIF uses increased tax revenue to reimburse owners for eligible costs. Developments of obsolete or contaminated property often result in an increase in the taxable value of real property which, in turn, cause additional tax revenue to be generated. Under a Brownfield TIF arrangement, instead of a source of additional funding for governments, the incremental increase in the tax revenue is used to pay eligible costs incurred by a developer through a reimbursement agreement with the local community.

Now that the City of Detroit has an EFM, those involved in Brownfield Plans should be aware of potential consequences. The new EFM, Kevyn Orr, has yet to use his incredibly broad legal powers to invalidate Brownfield plans or reimbursement agreements or portions of them in Detroit, but he has started to use these powers to assert control over union contracts (see Detroit News, 4/23/13). A unilateral termination of the entire agreement or portions of it are clearly within his powers. This means that developers counting on reimbursement through a TIF arrangement may be disappointed when a EFM terminates such arrangements.

A strategy that might be employed by an EFM, based on our sources, is to request a status report from each person benefitting from a Brownfield plan or reimbursement agreement. If the audit shows little or no economic benefit to the local community, the agreements could be terminated and TIF would no longer be available and, as a result, the governmental entity would not be obligated to reimburse those owners for such costs.

It might be wise for Brownfield plan beneficiaries to consider how to respond when such questions are asked. Further, it may be important for one to proactively communicate directly with the EFM to stave off any potential for such documents to be terminated or rejected. We will continue to monitor not only Detroit’s situation but others as EFMs are appointed for governments throughout Michigan.