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Incentives – Still Picking “Winners and Losers”? (Updated 2/10/12)

Governor Rick Snyder was adamant during the 2010 election campaign that Michigan would have to stop picking ‘winners and losers’ when it came to doling out governmental incentives for private businesses. Once in office, he eliminated many programs, including tax credits for historic and Brownfield developments and substantially reduced the film industry tax breaks.

The idea behind this policy was that it was unfair to favor a certain industries or developments.  Also, it was felt that tax credits were not the best way to entice employers to invest and create jobs and, instead, front loading developments with grants or loans was preferred.  Already, the MSF has provided cash grants to facilitate developments.   As an example,  $2.5 million dollars was recently given by the MSF for the construction of a new DTE substation at Hyundai’s plant in Superior Township.

In December, the Governor signed a bill package which created the Michigan Business Development Program (“MBDP”) and the Michigan Community Revitalization Program (“MCRP”). These programs replace the tax credit programs previously administered by the Michigan Economic Growth Authority (“MEGA”) which distributed tax credits, including historic preservation and Brownfield credits. 

New Programs

The MBDP provides up to $100 million in grants, loans or other economic assistance for highly competitive projects in Michigan.  The applicant must be a “qualified business” that makes investments or create jobs in Michigan and the MBDP is principally designed to compete for projects that may otherwise go to other States.   A qualified business will be limited to receiving $10 million a year and must be a business that is located in or operating in Michigan or that will locate and operate in Michigan.  The business must create at least 50 jobs, but can also qualify if only 25 jobs are created in a rural area or are high tech jobs.   Retail projects and “job retention” projects are not eligible.   The elements  MBDP review process similar to the old programs administered by MEGA in that there will be a qualified investment review and a written agreement between the developer and the MSF.

The MCRP can grant up to $1 million per project.  Loans are available up to $10 million dollars. This program replaces the Brownfield and historic tax credit programs previously provided by MEGA. To be considered an MRCP eligible property, the Property must be one of the following:

  • a “facility”, i.e., a place where contamination exists above residential criteria;
  • a historic resource;
  • blighted;
  • functionally obsolete; or
  • adjacent to or contiguous to a property meeting any of the above characteristics.

These criteria are very similar to the prior programs administered by MEGA. In fact, the same language is being used in the statutes as previously used in prior legislation.   Perhaps the biggest hurdle for an applicant under the MCRP is that there must be a more rigorous demonstration of financial need through a proforma review.  Therefore, the applicant will need to show that the project would not be viable without the proposed incentive; and it is felt that this is getting closer to the “but for” test.   Also, local community support in the form of other tax abatements or incentives.  It is also important to note that the terms of the loan documents appear to be fully negotiable as there are not specific guidelines identifying interest rates, recourse, term, etc. 

Recently, program guidelines were published and here are the links to them:

MCRP – http://www.michiganadvantage.org/Michigan-Community-Revitalization-Program-Projects/

MBDP – http://www.michiganadvantage.org/Michigan-Business-Development-Program-Projects/

Overall View

Michigan’s new incentive programs are a venture into new territory.  They are not modeled after other States with higher employment and who arguably have had more success than Michigan in retaining and attracting business.  The funding for the programs pales in comparison to the previous administration’s budget for incentives.  Our concern is that other States may still be perceived as being exceedingly competitive and attractive to employers because of the quick turnaround and lack of “red tape”. 

It remains to be seen whether the new programs are really a change or whether Michigan will continue to pick ‘winners or losers’ through a discretionary application and vetting processes.   For instance, there are a variety of uses which are not allowed to receive such incentives such as sports stadiums, casinos, retail projects or other projects which may “induce businesses” to leave Michigan.   How much of the process is subjective?   Will the same rules apply to large and small developments?   Will the time frame involved be a non-starter for businesses looking to move quickly?

Businesses need certainty in order to operate effectively. Michigan needs to be competitive with other States who have large amounts of funds to throw at prospective employers.  Although Michigan is taking a positive step by revamping some of the rules and regulations previously used to hand out economic benefits, there continues to be a bit of a uncertainty surrounding how the new programs will be implemented.

Advice

For developer’s seeking economic and tax incentives from the State of Michigan, it is important to establish an early relationship with the various governmental authorities (e.g. local community, MEDC, and MSF) through pre-application meetings and consultation.   Further, a developer will need to be cognizant of the challenges associated with proving the financial soundness of the project as well as the access to other capital to make the project viable.   We are told that the process in both programs will take at least 30 days, but it is likely to take a lot longer to bring all parties to the table to get the desired benefit.  Stay tuned for more developments.

About Tyler D. Tennent

Tyler D. Tennent is a Member of Dawda, Mann, Mulcahy & Sadler, PLC. He concentrates his practice in the areas of land use, environmental, tax incentives, sustainability, real estate, general corporate and related litigation. Mr. Tennent has significant litigation expertise representing parties in commercial, land use, and environmental litigation, including local, state and federal administrative appellate actions and regulatory proceedings.

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