This document discusses various tax incentives that can be applied to real estate development projects, including tax increment financing (TIF), tax credits, and tax abatements. It provides an overview of each incentive and how they are determined. It also includes a case study of applying these layered incentives to a commercial rehabilitation project, showing how the different incentives can increase available funding sources and improve financial metrics like debt coverage ratio.

1. March 7, 2008
Filling the Gap
Fred Zorn, CEcD, Exec Dir - Housing & Neighborhood Svcs
City of Taylor
Corey Leon, CEcD, Director of Development Incentives
AKT Peerless Environmental Services, LLC
Anne Jamieson-Urena, Senior Project Mgr.
AKT Peerless Environmental Services, LLC

2. Goals:
Introduce various tax incentives
Tax Increment Finance
Tax Credits
Tax Abatements
Apply each incentive to a case study
Layer incentives on a case study
March 2008

3. Incentive Evaluation
Programs operate over various tax structures:
Local Property Tax
Michigan Personal Income Tax
Michigan Business Tax
Federal Income Tax
Apply one-at-a-time to understand effects
March 2008

4. Project financing fundamentals
Net Operating Income (NOI) is the most
important number in a real estate project:
Represents overall cash return on capital
Determines the loan amount
Used to determine value
Determines cash return on equity
March 2008

5. Determining NOI
Gross Rent Rent at 100% occupancy
+ Tenant Contributions For operating expenses
- Vacancy Vacancy & collection loss
= Effective Gross
Income
- Annual Operating Taxes, Maintenance,
Expenses Insurance, Utilities, Mgmt
= Net Operating Cash Available for Debt
Income Service
March 2008

6. Real Estate Ratios
Debt Coverage Ratio (DCR):
DCR = NOI / Annual Debt Service
Typical DCRs range from 1.15 to 1.35
Loan to Value Ratio (LTV):
LTV = Loan Amount / Post-project Value
Typical LTVs range from 0.70 to 0.90
March 2008

7. Case Study
123 Main Street Rehabilitation project Post-development Appraised Value: $ 9,000,000.00
Suburb, Michigan Commercial tenants only Bank 1 Loan: 6% interest on a 20 year amortization
Sources
Equity Developer: $ 400,000.00 Gross Rent: $ 1,000,000.00
Tenant Contributions: $ 200,000.00
Vacancy: $ (120,000.00)
Bank Bank 1: $ 7,000,000.00
Effective Gross Income: $ 1,080,000.00
Total Sources of Fund $ 7,400,000.00
Sources do not match uses!! Taxes: $ 200,000.00
Uses Insurance: $ 40,000.00
Land $ 100,000.00 Maintenance: $ 40,000.00
Asbestos Abatement $ 200,000.00 Utilities: $ 30,000.00
Construction $ 6,000,000.00 Management: $ 32,000.00
Const Period Expenses $ 500,000.00 Reserves: $ 100,000.00
Architect/Engineer $ 200,000.00 Annual Operating Expenses: $ 442,000.00
Developer Fee $ 2,000,000.00
Contingency $ 1,000,000.00 Net Operating Income: $ 638,000.00
Total Development Co $ 10,000,000.00
Debt Service (Bank 1): ($601,802.09)
LTV: 0.78
Cash Available: $ 36,197.91
DCR: 1.06
March 2008

8. Tax Increment Financing
An Economic Development Tool to Spur Economic Activity.
What does Tax Increment Financing mean?
Tax Increment Financing is used to publicly finance site
development improvements for projects or public
infrastructure improvements:
public facilities
enhanced or new infrastructure
streetscape enhancements
Real Estate Acquisition
The intended purpose is to enhance the economic vitality through
quality public investment and attract new private investment to the
district.
March 2008

9. Tax Increment Financing
How is tax increment financing determined?
First understand the taxable values.
Base taxable- value for the entire district is established or
“frozen” at the time the tax increment financing plan is
approved
New taxable value-value that is created when new
investment and inflation occurs within the district.
Tax increment value- the difference between the base
taxable value and the new value.
March 2008

10. Concept of Tax Increment Financing
500 New Value
400
TAX
INCREMENT
300
200
BASE
BASE VALUE
VALUE
0
Base value Tax Increment Value
March 2008

11. Tax Increment Financing cont…
How is tax increment finance revenue
generated?
The Tax Increment Value that is created
based on new investment is multiplied by the
available millage rate in the district.
This Tax Increment Value x Millage Rate
=Tax Increment Revenue
March 2008

12. Tax Increment Financing cont…
Does this mean the City will finance
projects through bonds?
Financing projects on “Pay As You Go Basis”.
The Tax Increment Revenues can be pledged
to cover debt service on bonds.
March 2008

13. Tax Increment Financing cont…
What about the other taxing jurisdictions?
Currently the General fund relies on the City levied
millage rate to funds its operations.
Although the City collects other taxing jurisdiction dollars,
it does not get to keep them, they have to be reimbursed
to those entities by law.
In all TIF Jurisdictions with the exception of Brownfield
TIF’s, other taxing units have the ability to opt out.
In all cases School Millages are not eligible for collection
with the exception of Brownfield TIF if approved by the
MDEQ or MEGA Board.
March 2008

14. Types of Tax Increment
Financing Authorities
Brownfield Redevelopment Authority
Downtown Development Authority
Local Development Finance Authority
(includes Smart Zones)
Corridor Improvement Authority
Neighborhood Development Authority
March 2008

15. Case Study v2
123 Main Street Rehabilitation project Post-development Appraised Value: $ 9,000,000.00
Suburb, Michigan Commercial tenants only Bank 1 Loan: 6% interest on a 20 year amortization
TIF: Brownfield covering Asbestos + DDA $600k
Sources
Equity Developer: $ 400,000.00 Gross Rent: $ 1,000,000.00
Tenant Contributions: $ 200,000.00
Vacancy: $ (120,000.00)
Bank Bank 1: $ 7,000,000.00
TIF Loan: $ 800,000.00 Effective Gross Income: $ 1,080,000.00
Total Sources of Fund $ 8,200,000.00
Sources do not match uses!! Taxes: $ 200,000.00
Uses Insurance: $ 40,000.00
Land $ 100,000.00 Maintenance: $ 40,000.00
Asbestos Abatement $ 200,000.00 Utilities: $ 30,000.00
Construction $ 6,000,000.00 Management: $ 32,000.00
Const Period Expenses $ 500,000.00 Reserves: $ 100,000.00
Architect/Engineer $ 200,000.00 Annual Operating Expenses: $ 442,000.00
Developer Fee $ 2,000,000.00
Contingency $ 1,000,000.00 Net Operating Income: $ 638,000.00
Total Development Co $ 10,000,000.00
Debt Service (Bank 1): ($601,802.09)
LTV: 0.78
Cash Available: $ 36,197.91
DCR: 1.06
March 2008

16. Tax Credits and Tax Abatements
Rehabilitation
Federal Historic Preservation Tax Credit (20%)
Federal Pre-1936 Building Tax Credit (10%)
Michigan Historic Preservation Tax Credit (25%)
Michigan Obsolete Property Tax Exemption
Industrial Facilities and Commercial Property
Michigan Brownfield Tax Credit (10%)
Michigan Neighborhood Enterprise Zones
Low-income Housing Tax Credits
March 2008

17. Tax Credits and Tax Abatements
New construction
Michigan Brownfield Tax Credit
Industrial Facilities Tax Abatement
Michigan Neighborhood Enterprise Zones
Low-income Housing Tax Credits
March 2008

18. Credits and Abatements
Tax Credits typically generate equity
through their “sale”
Tax Abatement typically lower expenses
Both positively influence your Sources of
funds
March 2008

19. Federal and State Tax Credits
Tax Credits typically generate equity through
their “sale” (or syndication)
Michigan (MBT) Brownfield Tax Credit (10%)
Federal Historic Preservation Tax Credit (20%)
Federal Pre-1936 Building Tax Credit (10%)
Michigan Historic Preservation Tax Credit (25%)
Federal Low Income Housing Tax Credits (4%-9%)
March 2008

20. Brownfields Defined
USEPA Definition:
“Abandoned, idled, or under-used industrial and
commercial facilities where expansion or
redevelopment is complicated by real or perceived
environmental contamination.”
Michigan Definition:
Any parcel(s) with contamination
above residential standards, blighted
or functionally obsolete.
March 2008

21. Urban Brownfield
March 2008

22. Hart
Core Communities (As of 1/3/08) Hartford
Ionia
NOT A COMPLETE LIST Kalamazoo Adrian Iron Mountain
Ann Arbor Albion Iron River
Lansing
Battle Creek Alma Ironwood
Lincoln Park Alpena
Bay City Ishpeming
Livonia Baldwin Village Ludington
Center Line Melvindale Bangor Manistee
Dearborn Midland Benton Harbor Manistique
Dearborn Monroe Benton Township Marquette
Heights Bessemer Menominee
Mt.Clemens
Detroit Big Rapids Mt. Morris
Oak Park Bronson
East Lansing Mt. Morris Twp
Pontiac Buena Vista Twp. Mt. Pleasant
Eastpointe
Portage Burton Muskegon
Ecorse
Port Huron Cadillac Muskegon
Ferndale Carson City Heights
Redford Twp
Flint Caspian Norton Shores
River Rouge
Genesee Twp Cheboygan Norway
Royal Oak Twp
Gilbralter Coldwater Omer
Saginaw Coleman Onaway
Grand Rapids
Southfield Crystal Falls Owosso
Hamtramck
Taylor Dowagiac Pinconning
Harper Woods Saint Louis
Trenton Escanaba
Hazel Park Gaastra Sault St.Marie
Traverse City
Highland Park Gladstone Sturgis
Warren
Holland Grand Haven Three Rivers
Wayne Vassar
Inskster Grayling
Wyandotte Harbor Beach Wakefield
Jackson
March 2008 Ypsilanti Wyoming

23. Michigan Brownfield Tax Credit
A credit against the Michigan Business Tax
worth up to 10% of the real property
improvements (rehab or new construction) and
personal property invested at the site.
Since most developers and single-purpose
entities do not have a MBT liability, can assign
the credit through syndication or to a lessee.
Only investment after a “pre-approval letter” is
issued by the state can be included.
March 2008

24. Case Study v3
123 Main Street Rehabilitation project Post-development Appraised Value: $ 9,000,000.00
Suburb, Michigan Commercial tenants only Bank 1 Loan: 6% interest on a 20 year amortization
TIF: Brownfield covering Asbestos + DDA $600k
Sources
Equity Developer: $ 400,000.00 Gross Rent: $ 1,000,000.00
Brownfield Tax Credits: $ 720,000.00 Tenant Contributions: $ 200,000.00
Vacancy: $ (120,000.00)
Bank Bank 1: $ 7,000,000.00
TIF Loan: $ 800,000.00 Effective Gross Income: $ 1,080,000.00
Total Sources of Fund $ 8,920,000.00
Sources do not match uses!! Taxes: $ 200,000.00
Uses Insurance: $ 40,000.00
Land $ 100,000.00 Maintenance: $ 40,000.00
Asbestos Abatement $ 200,000.00 Utilities: $ 30,000.00
Construction $ 6,000,000.00 Management: $ 32,000.00
Const Period Expenses $ 500,000.00 Reserves: $ 100,000.00
Architect/Engineer $ 200,000.00 Annual Operating Expenses: $ 442,000.00
Developer Fee $ 2,000,000.00
Contingency $ 1,000,000.00 Net Operating Income: $ 638,000.00
Total Development Co $ 10,000,000.00
Debt Service (Bank 1): ($601,802.09)
LTV: 0.78
Cash Available: $ 36,197.91
DCR: 1.06
March 2008

25. Federal Historic Preservation Tax
Credit
A 20% credit on qualified expenditures for rehabilitation
of historic commercial or rental residential properties.
Properties must be either listed individually or be a
contributing building in a district on the National Register
of historic places.
The rehabilitation work must follow the “Secretary of the
Interior’s Standards for Rehabilitation” in order to qualify
for the tax credit.
After the rehabilitation, the historic building must be used
as an income-producing property for at least five years.
March 2008

26. Federal Pre-1936 Building Tax
Credit
10% credit on investment value based on
rehabilitation. Used on buildings that were put in
service prior to 1936 but not eligible for the 20%
credit.
Rehabilitation expenses must exceed the
property’s basis.
No residential uses, not even rental.
Limitations on building changes are much less
restrictive than the 20% credits.
March 2008

27. MI Historic Preservation Tax Credit
A 25% credit (5% if used in conjunction with the Federal
Historic Credit, 15% if used in conjunction with the
Federal Pre-1936) on “qualified rehabilitation
expenditures”.
Work must be conducted and certified as consistent with
the “Secretary of the Interior’s Standards for
Rehabilitation” for Historic Preservation.
For most of Michigan, must be in a locally designated
historic district.
The State Historic Preservation Office (SHPO) reviews
both the State and Federal Tax Credit applications.
March 2008

28. Case Study v4
123 Main Street Rehabilitation project Post-development Appraised Value: $ 9,000,000.00
Suburb, Michigan Commercial tenants only Bank 1 Loan: 6% interest on a 20 year amortization
TIF: Brownfield covering Asbestos + DDA $600k
Sources
Equity Developer: $ 400,000.00 Gross Rent: $ 1,000,000.00
Brownfield Tax Credits: $ 830,000.00 Tenant Contributions: $ 200,000.00
Pre-1936 Building: $ 970,000.00 Vacancy: $ (120,000.00)
Bank Bank 1: $ 7,000,000.00
TIF Loan: $ 800,000.00 Effective Gross Income: $ 1,080,000.00
Total Sources of Fund $ 10,000,000.00
Taxes: $ 200,000.00
Uses Insurance: $ 40,000.00
Land $ 100,000.00 Maintenance: $ 40,000.00
Asbestos Abatement $ 200,000.00 Utilities: $ 30,000.00
Construction $ 6,000,000.00 Management: $ 32,000.00
Const Period Expenses $ 500,000.00 Reserves: $ 100,000.00
Architect/Engineer $ 200,000.00 Annual Operating Expenses: $ 442,000.00
Developer Fee $ 2,000,000.00
Contingency $ 1,000,000.00 Net Operating Income: $ 638,000.00
Total Development Co $ 10,000,000.00
Debt Service (Bank 1): ($601,802.09)
LTV: 0.78
Cash Available: $ 36,197.91
DCR: 1.06
March 2008

29. Federal Low Income Housing Tax
Credits
Created in part to partially privatize the
affordable housing industry.
The program works by providing investor equity,
thus reducing the amount of debt service on a
project, allowing for lower rents to be charged to
tenants while still producing positive cash flow.
The program provides a dollar-for-dollar
reduction in tax liability for owners (and
partners).
March 2008

30. Federal Low Income Housing Tax
Credits continued…
4% and 9% Credit Allowed
4% for new construction w/Federal subsidies
(i.e., tax-exempt bonds);
4% credit for acquisition of existing buildings
which are substantially rehabilitated; and
9% for new construction/rehabilitation
expenditures w/out Federal subsidies.
March 2008

31. Tax Abatements
Tax Abatements are used by a community
to reduce the post-improvement real and
personal property taxes.
Used to spur or reward new investment –
tax abatements do not impact the current
level of taxes.
March 2008

32. Tax Abatements (cont.)
Types of tax abatements:
Obsolete Property Rehabilitation Act
Commercial Rehabilitation Act
Neighborhood Enterprise Zone
Industrial Facilities Tax Abatement
Renaissance Zone
March 2008

33. Michigan Obsolete Property
Tax Exemption
A 100% abatement of non-school real property taxes on
new value (i.e. improvements) from rehabilitation of a
commercial or rental residential building located in a
“Core Community”.
Abatement may last up to 12 years.
Property must be contaminated, functionally obsolete or
blighted.
Must be in an OPRA district and should have an
approved certificate before making improvements.
March 2008

34. Michigan Commercial Property
Tax Exemption
A 100% abatement of non-school real property taxes on
new value (i.e. improvements) from rehabilitation of a
commercial or multi-family building that meet certain
requirements.
Abatement may last up to 10 years.
Property must be within a Commercial Rehabilitation
District of not less than 3 acres in size (if downtown area,
can be less than 3).
Within 6 months of starting improvements, the
developer needs to file their Exemption Certificate
application.
March 2008

35. Michigan Neighborhood
Enterprise Zones
Rehabilitation value must be greater than
$5,000. Unit’s true cash value can not exceed
$80,000 prior to rehab or construction.
District must be established and an exemption
certificate applied for before any permits pulled.
Certificates may be approved for 15 years (17
years if historic tax credits used) and are
transferable to new owners.
March 2008

36. Michigan Neighborhood Enterprise
Zones (continued)
On rehab, abates the real property taxes
on the improvements (i.e. freezes taxes at
their pre-rehab level).
On new construction, reduces the total
property rate to ½ of the statewide
average rate (about 17 mills for owner-
occupied property).
March 2008

37. Zones
Renaissance Zone
Renewal Community (North East Detroit) –
interesting Commercial Revitalization Deduction
(http://www.hud.gov/offices/cpd/economicdevelopment/programs/index.cfm)
Empowerment Zone – only employment tax
credit is left, all other benefits expired December
31, 2004
March 2008

38. Renaissance Zone
Provides an exemption to businesses located
within or residents living in the Renaissance
Zone.
Exemption covers most Michigan and local taxes
including Michigan Personal Income Tax, Detroit
Personal Income Tax, non-debt property taxes,
Michigan Business Tax, utility users tax.
Each Zone has its own expiration date (most
between 2008 through 2017).
March 2008

39. Case Study v5
123 Main Street Rehabilitation project Post-development Appraised Value: $ 9,000,000.00
Suburb, Michigan Commercial tenants only Bank 1 Loan: 6% interest on a 20 year amortization
TIF: Brownfield covering Asbestos + DDA $600k
Sources
Equity Developer: $ 400,000.00 Gross Rent: $ 1,000,000.00
Brownfield Tax Credits: $ 830,000.00 Tenant Contributions: $ 200,000.00
Pre-1936 Building: $ 970,000.00 Vacancy: $ (120,000.00)
Bank Bank 1: $ 7,000,000.00
TIF Loan: $ 800,000.00 Effective Gross Income: $ 1,080,000.00
Total Sources of Fund $ 10,000,000.00
Taxes: $ 40,000.00 Obsolete Property
Uses Insurance: $ 40,000.00
Land $ 100,000.00 Maintenance: $ 40,000.00
Asbestos Abatement $ 200,000.00 Utilities: $ 30,000.00
Construction $ 6,000,000.00 Management: $ 32,000.00
Const Period Expenses $ 500,000.00 Reserves: $ 100,000.00
Architect/Engineer $ 200,000.00 Annual Operating Expenses: $ 282,000.00
Developer Fee $ 2,000,000.00
Contingency $ 1,000,000.00 Net Operating Income: $ 798,000.00
Total Development Co $ 10,000,000.00
Debt Service (Bank 1): ($601,802.09)
LTV: 0.78
Cash Available: $ 196,197.91
DCR: 1.33
March 2008

40. Incentives Matrix
Rehab New Construction
Renaissance Zone $ $
Tax Increment Programs $ $
Neighborhood Enterprise $ $
Zone (Residential)
Commercial Property Tax $ IFT Only
Abatements (IFT, OPRA,
Commercial)
Brownfield Tax Credits $ $
Historic Tax Credits $ n/a
March 2008

41. Combining Tools
The incentive programs encompass all federal
and state tax structures
Thus, projects which combine incentives can
leverage each tax structures to increase returns
A rehabilitation of a structure might get: Federal
Historic Tax Credits, Michigan Historic Tax
Credits, Brownfield Tax Credits and Obsolete
Property Rehabilitation Act tax abatement.
March 2008

42. Debt Instruments
Subordinated debt programs: SBA 504, Detroit
Community Loan Fund, Detroit Investment Fund,
Wayne County Urban Loan Fund
Mezzanine capital: Downtown Development
Authority loans, Detroit Investment Fund
Tax Exempt Bonds: Michigan Strategic Fund,
Michigan State Housing Development Authority,
Economic Development Corporations, Port
Authorities
New Markets Tax Credits – Wayne County –
Detroit CDE
March 2008

43. Final Thoughts
With creativity, many seemingly
impossible projects are possible.
Most programs require approval before
you start the project.
Approval timeframes can be 2-12 months
so start early.
March 2008

44. Contact Information:
Corey A. Leon Anne Jamieson-Urena
AKT Peerless AKT Peerless
Environmental Environmental
607 Shelby, Suite 900 22725 Orchard Lake Rd
Detroit, MI 48226 Farmington, MI 48336
313-962-9353 248-615-1333
Fax 313-962-0966 Fax 248-615-1334
leonc@aktpeerless.com Jamiesona@aktpeerless.com
March 2008

45. Contact Information:
Fred E. Zorn, Jr., CEcD
Executive Director of
Housing & Neighborhood
Services
City of Taylor
23555 Goddard
Taylor, MI 48180
(734) 374-1661
(734) 374-1342 fax
fzorn@ci.taylor.mi.us
March 2008