Michigan Continues to Improve Its Brownfield Tax Credit Program
By Gordon Goldie & Jim Manning
Universal Advisor, 2006 Issue No. 2
Michigan’s Brownfield Tax Credit Program is already one of the most effective Brownfield incentive programs in the country. Since its inception, it has helped spur the redevelopment of hundreds of Brownfield properties across the state. The program promotes the redevelopment of Brownfield properties by providing businesses and real estate developers with a tax credit against the Single Business Tax (SBT) equal to 10 percent of eligible investment in qualified property. To qualify, property must be contaminated, blighted, or functionally obsolete, and the taxpayer must receive approval from the Michigan Economic Growth Authority (MEGA) before undertaking the project.
Recent Enhancements
In an effort to continue to improve the Brownfield Tax Credit Program, Governor Granholm recently signed several amendments to the Brownfield Tax Credit Program (Public Act 111, 112, and 113 of 2006). Most notably, the amendments accomplish the following:
- Greatly simplify the process of assigning credits
- Allow multiple credit assignments
- Allow credits to be claimed after each phase in multi-phased projects
- Create a new $10 million pool of credits for small projects
These changes are generally effective immediately.
Who Will Benefit From These Enhancements?
These recent enhancements will benefit a variety of different Brownfield redevelopment projects. Following is a summary of the major beneficiaries of the recent changes.
Small Projects
Arguably the biggest beneficiaries of the law changes are taxpayers with small Brownfield redevelopment projects (i.e., project costs up to $2,000,000). Previously, such projects had to compete with much larger projects (i.e., project costs up to $10,000,000) for a piece of a $30 million annual pool of credits. However, small projects now have their own $10 million annual pool of credits. This change will ensure that at least 50 small projects each year will benefit from the Brownfield Tax Credit Program. Brownfield redevelopment projects between $2 million and $10 million will continue to compete for a $30 million annual pool of credits.
Taxpayers Who Develop Property for Sale
Real estate developers have generally been prohibited from claiming Brownfield credits on a phased project until the entire project was complete. As a result, developers often had to write a check to pay SBT on the annual profits from lot or unit sales and then wait until the project was complete to “sell” their Brownfield credits. However, under the new law, developers will be able to claim Brownfield credits as each phase in a multi-phased project is completed. This will enable such developers to apply the project’s SBT credits against the project’s SBT liability.
Taxpayers who develop property for sale will also benefit from the new simple credit assignment process if they decide to “sell” part or all of their Brownfield credits. Under the previous law, Brownfield credits could only be assigned to the owners of the project entity or to certain tenants in the development. However, the new law eliminates these restrictions and makes it easy to assign credits to anyone who is willing to pay for them. Taxpayers who expect to lease or operate the redeveloped property will generally still be able to maximize the value of their Brownfield credits by structuring the “sale” as an assignment to an owner of the project entity, since such a structure can be used to defer income taxes on the proceeds. However, real estate developers who develop property for sale will frequently be able to maximize the value of their Brownfield credits by structuring the assignment of the credits as a taxable sale (versus as a tax-deferred assignment to a project owner).
Brownfield Developers With Net Operating Losses
As mentioned earlier, taxpayers who expect to continue to own the redeveloped property are generally better off structuring the “sale” of their Brownfield credits to defer income taxes on the proceeds. However, if such taxpayers have net operating losses that can shelter the taxable income related to the Brownfield credit sale, they may be able to maximize the value of their Brownfield credits by taking advantage of the new flexible credit assignment rules to structure the assignment of the credits as a taxable sale.
New Markets Tax Credit Eligible Properties
It often takes more than one incentive program to turn a Brownfield property into a viable redevelopment project. Many Brownfield properties are also eligible for New Markets Tax Credits. Now that Brownfield credits can be assigned multiple times, they may be worth up to 30 percent more to a project that receives an allocation of New Markets Tax Credits.
In Conclusion
If you’re involved in the redevelopment of Brownfield properties in Michigan, it’s important that you understand how these new rules apply to your particular project. If you’d like to learn how you can take advantage of available tax incentives such as Michigan Brownfield SBT credits, New Markets Tax Credits, or historic tax credits, please contact Gordon Goldie at 248.375.7430 or Jim Manning at 616.643.4054.