MONEY

Will Gilbert's plan for tax incentives flare 'Two Detroits' tension?

John Gallagher

Detroit Free Press

Rendering provided by Rock Ventures shows Dan Gilbert's plans for the Hudson's site on the right. Two architectural firms, SHoP of New York and Hamilton Anderson of Detroit, are designing the project.

Businessman Dan Gilbert used mostly private money to move his Quicken Loans to downtown Detroit in 2010 and then go on a shopping spree for mostly vacant skyscrapers. As he amassed about 80 properties, he rarely asked for or received any government assistance.

But now that Gilbert is going "vertical," as he says, building new projects from the ground up, he needs the same sort of tax breaks — and more — that virtually all developers in Detroit have been getting for years. He and other business leaders are lobbying lawmakers for passage of sweeping new incentives to help create so-called transformational projects like what Gilbert and others envision.

That a billionaire like Gilbert — worth $4.6 billion in Forbes magazine's latest estimate — needs big-time government incentives for projects like his still-to-come plan for the Hudson's site raises two important questions.

What ails Detroit when even billionaires like Gilbert find redevelopment such a tough game?
Will Gilbert's plea for tax breaks exacerbate a socioeconomic tension dubbed "Two Detroits," the mostly white, upscale downtown, which has received big investment, and the mostly black and considerably poorer neighborhoods, largely left out of what many have called the Detroit renaissance?

More broadly, we can ask how plans for a massive new state-supported project on the Hudson's site, for example, fits into a holistic vision for Detroit's revitalization. We need a theory of everything in urban redevelopment. We still don't have that, just general assertions that these huge projects will boost the tax base and make Detroit more alluring in the future.

As John Mogk, longtime professor of development law at Wayne State University, put it last week, "It’s just not easy to explain how the public interest is benefited by having major incentives offered to developers downtown but not offered to neighborhoods to improve their conditions."

Tom Goddeeris, executive director of the nonprofit Grandmont Rosedale Development Corp. on Detroit's northwest side, questions where the general benefit is to the city at large from such incentives for big downtown projects, like Gilbert is requesting.

"There theoretically is some spin-off benefit," he said. "It's all this idea of trickle-down economics, and for the last 40 years, wealth trickles up, not down."

Yet we shouldn't pose this debate as a simple matter of rich guys versus the neighborhoods. That's too easy. To show what I mean, let's first talk about development obstacles.

Here's the problem: It costs just as much to build an office tower in downtown Detroit as it does in Chicago or San Francisco. But the rent Detroit landlords can get for downtown office space — an average $22.89 per square foot as of the third quarter this year — ranks among the lowest for the nation's top 50 downtown markets.

In Chicago, landlords were asking $37.55, and San Francisco landlords could command about double that at $74.93. The U.S. downtown average was $44.23 per foot. The data come from real estate consultant Jones Lang LaSalle's third-quarter report on the U.S. office market.

Steve Rosenthal, Gilbert's partner and a principal at Gilbert's Bedrock Real Estate Services, told me last week that Detroit cannot continue to make the progress it needs to eventually produce those higher rents without the kind of incentives Gilbert seeks. And as rents here gradually increase, the need for such incentives will diminish, the idea goes.

"It makes sense that to build these types of projects and to make the economics work, we either need rents commensurate with those other rents (in other cities) or we need incentives to make sure that we can fill in the gap to produce these great projects," Rosenthal said.

Perhaps we could temper the complaints about incentives for downtown projects in a couple of ways. One way might be to change the type of tax we rely on to create the incentives. Right now, downtown development relies on capturing a portion of downtown property taxes and plowing that back into new projects. Since many people enjoying downtown are outsiders — visitors, tourists, and commuters — maybe capturing sales taxes, and freeing up the property taxes to go for schools, libraries, and other services, would prove less contentious.

This rendering, supplied by Dan Gilbert’s Bedrock Real Estate Services, shows a conceptual image of their proposed Monroe Block development.

Then, too, developers like Gilbert or the Ilitch family might see fewer complaints if they were more transparent about their deals. We get some details when a group like the Downtown Development Authority debates and votes on an incentive, but we never see a developer's full pro forma, the financial details of revenues and expenses that make a deal workable since developers like to keep those details private.

If we did get that inside look, we'd know better whether a project really needs those big-time incentives or if they were just gravy in a deal that would happen anyway.

There is a glimmer of hope that the need for big incentives for downtown projects might be on the wane. Downtown office rents in Detroit jumped 12.5% for the third quarter, the highest percentage increase in the nation, according to the Jones Lang LaSalle report. And, as everyone who rents an apartment in the greater downtown knows, residential rental rates have soared in the past few years.

Higher rents translate into higher returns on investment for developers, and therefore less need for taxpayer assistance.

But for now, and the foreseeable future, incentives seem likely to remain part of the landscape. And the incentives that Gilbert and other developers and business groups throughout the state are now seeking constitute what Mogk calls "tax credits on steroids."

The current package of bills under debate in Lansing would allow major developers to capture not only a portion of local property taxes, but also a portion of sales and income taxes. The number of developments getting this help would be limited to five projects per year in Michigan, one per community and up to $50 million in tax capture for the projects.

Of course, it's hard to tell at this point what a final bill may look like, if indeed anything emerges from the debate.But it's remarkable that after years of Gov. Rick Snyder's administration preaching fewer incentives, we're talking about some of the biggest ones yet.

Sen. Ken Horn, R-Frankenmuth, who sponsored one of the bills, told my Free Press colleague Kathleen Gray last week, "We need to get people moved back into these cities with market-rate developments and new retail spaces. … I see this as an urban renewal package, probably the most significant urban renewal we've worked on in decades. This is real hard dollars, private dollars, multimillions put into a community with anticipation that there will be a return on investment."

It's hard to disagree with that logic. But as Mogk told me, it's also hard to imagine that ordinary Detroiters still trying to get tax breaks or redevelopment funds for their own districts will be happy with so much largess going toward downtown.

Again, it's not fair to say that downtown gets everything and the neighborhoods nothing. Officials have been trying to help the neighborhoods for years. Streetlights have been coming back on. Buses are more often running on time, and the City of Detroit is pumping more money into planning neighborhood revitalization.

Just last week, City Council approved $1.6 million in contracts for planning and design initiatives in four study areas in Detroit‘s neighborhoods in the areas of storm water management, landscape and architecture design, public infrastructure improvements; mixed-use developments and mixed-income housing.

That's all to the good.

But as long as there's such an imbalance in Detroit's revitalization story — the booming downtown and the stagnating neighborhoods — don't expect the complaints about tax breaks for billionaires to go away.

Contact John Gallagher: 313-222-5173 or gallagher@freepress.com. Follow him on Twitter @jgallagherfreep.