City dwellers came for the tax breaks. Will they stay when breaks expire?

From his 24th floor condo in the Westin Book Cadillac in downtown Detroit, tech entrepreneur Kevin Morin can see the central city revive below him. That view is scheduled to get a lot more costly: The state incentive that keeps his property taxes at roughly $450 a year – on a condo he paid $290,000 for in 2008 – will climb markedly in seven years, perhaps exceeding $12,000 a year.

Kevin Morin is someone any Detroit advocate would welcome to the city: Young, educated, entrepreneurial.

Morin runs two tech companies out of an office in Corktown and has opened and sold a restaurant in the middle of a popular downtown park. And every day begins and ends in a modern 1,000-square foot-condo that he bought in 2008 on the 24th floor of the Westin Book Cadillac, a beautiful if once dilapidated hotel restored to one of the city’s finest jewels and an anchor of the current downtown revival. He works in the city, shops in the city, entertains in the city.

But Morin said his love for this high-rise downtown condo is in jeopardy. The tax break that helped lure him to Detroit expires in seven years, threatening to turn his tiny tax bill – under $500 a year on a condo he bought for more than $300,000 – into a $12,000 millstone that he said could drag down his property value.

“I think it is too aggressive in that it is too low to begin with and so black and white at the end,” he said. Even though that’s seven years away, he’s already thinking of selling.

“It’s too good,” Morin said of his current taxes. “Things that are too good to be true, they go away, right?”

At a time when Mayor Mike Duggan and others are touting a nascent Motown revival, city officials acknowledge that state tax breaks that helped draw professionals to downtown and midtown could act as a repellant when they expire, in part because Detroit has one of the highest property tax millage rates in the state.

Which leaves Detroit -- and some other Michigan cities -- with a delicate decision: As Dan Gilbert and others gobble up and develop buildings, as construction on a commuter train line along Woodward continues, as the city hopes to lure thousands, is now the time to take the thumb off the scale and allow the state Neighborhood Enterprise Zone (NEZ) tax breaks to quietly expire?

“If you start taxing them on what their (properties are) worth, they’re not going to stay,” predicted Tim Hodge, who performed his doctorate study at Michigan State University on Detroit’s tax break programs.

But if the city opts to further extend generous tax breaks to new(er) Detroiters living in some of the city’s most expensive homes, what message does that send to ordinary residents of more modest means, people taxed on the full value of their properties for decades? After all, the city’s high assessments, combined with the city’s high tax rate, are why so many longtime residents have been unable to pay their tax bills.

In neighborhoods far from bustling downtown, there will likely be little sympathy for Morin and his fellow condo owners at the Book Cadillac.

“You knew what you signed up for when you did it,” said Brian Ferguson, who lives near Schoolcraft and Southfield on the northwest side of Detroit.

Ferguson, who works as an auto technician, noted that many of his neighbors have struggled to pay taxes, and some have failed. But he acknowledged the tax break program puts the city in a tough position: whether to continue to subsidize residents already receiving the biggest breaks.

In Ferguson’s view, residents taking advantage of the state program should have been planning and setting aside money for the eventual and predictable rise in their taxes.

“You knew it was going to happen,” he said.

Morin and other beneficiaries say they understand they’ve gotten a good deal. Morin, in fact, said he’d trade a far higher bill now – say, $4,000 a year – if he could stay at that level well beyond the original 15 years of the incentive.

From the U.P. to Detroit, tax breaks abound

Across the state, from Iron Mountain to Wyandotte, Muskegon to Traverse City, more than 14,600 residential properties in 26 communities have received state-sanctioned Neighborhood Enterprise Zone (NEZ) tax breaks since 1993, designed to encourage residential development in financially distressed communities.

Kevin Morin in his Book Cadillac condo with his dog. (Photo by Brian Widdis)

The vast majority – nearly 90 percent – have been issued in Detroit to foster new construction throughout the city and the rehabilitation of older buildings like the Book Cadillac. More recently, Detroit and River Rouge have found ways to save taxes for longtime city homeowners as well; if the homeowners invest as little as $500 in improvements.

Beneficiaries of NEZ program range from those in riverfront condos to modest-single family homes in suburban-style subdivisions.

They include 5,000-square-foot mansions in gated communities with personal boat docks along the Detroit River; homes bought for more than $800,000 yet pay under $5,000 in taxes. While less than a mile to the north, modest Detroit homes worth $30,000 are paying more than $1,500 a year in taxes, triple what Morin pays in his perch atop the Book Cadillac.

If these condos and sprawling riverfront luxury homes paid taxes on their true value at the full city of Detroit rate of 69 mills, those bills could range from $9,000 to more than $27,000. They do not – yet.

These sought-after, more affluent residents are not just benefitting in Detroit. In Grand Rapids, whose downtown has undergone a revival of residential living and commercial development, the impending expiration of the NEZ’s on its largest project, the Union Square Condos, has irritated condo owners and prompted a march to city hall. Condo owners in Grand Rapids, where the tax rate is roughly half of Detroit’s, will see bills rise from $500 to $3,500 or $4,000 a year when the tax breaks end.

In other Michigan cities, the NEZ program is used more sparingly, with projects in Holland and Lansing limited to just a few locations.

Detroit is another story.

The city, which has been hemorrhaging population for decades, has used the NEZ program aggressively over the past decade, a period notable for a renaissance of development in downtown and other neighborhoods near the city’s core. But hundreds of NEZ units are set to expire this year and next. More than 800 will end in 2020, and in 2021 and 2022 another 5,900 will expire, with substantial tax increases for homeowners across pockets of the city.

“It has to be addressed,” said Gary Evanko, Detroit’s chief assessor, who was hired after years working in Dearborn to fix that city’s property assessing program. Too many properties are assessed too low and many more are assessed too high, Evanko said.

But the NEZ program, he said, needs special attention. “The whole matter of addressing this policy is a must-do this year,” he said. “A must-do.”

Of course, tax incentives aren’t unique to residential development. Cities and states have long offered such deals to attract or keep auto plants, corporate headquarters and sports teams. As Bridge recently reported Michigan leaders now are bracing for other states’ pitches to take Dow Chemical out of Midland.

In offering industrial and commercial economic development deals, the idea is simple: A state or county will forego taxes – property or income – in exchange for a commitment to bring jobs. The upside is new income tax revenue from the employees and job opportunities for a community.

But when a business incentive expires, three things typically happen, said Mark Skidmore, an economics professor at Michigan State: The company that got the incentives tries to renegotiate, gets an extension -- or it moves.
That same dynamic could play out with residential properties in struggling cities, he said.

“The question is,” he said, “what will the city of Detroit do? Will they … extend the abatements for fear of losing the people, or will it make them pay the full rate?”

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Identify the problem, find solution

Along the Detroit River, just east of downtown, sits 200 River Place. It houses 48 units in a red-brick rectangular building first built early in the 20th Century for the former Parke-Davis pharmaceutical complex. It’s condos feature high ceilings, exposed ductwork and interior brick walls. Some units offer views of Belle Isle and downtown.

For many tenants, the prospect of higher taxes is fast approaching, with tax breaks set to expire this year or next.

That could mean a tax bill going from $1,300 a year to $9,000 or more.

“That’s a lot of money,” said Tim Quinn, a resident who worked for the company that developed the complex.
So far, residents have held two meetings to discuss what can be done. They’re hoping for a “transition” period before the full taxes are applied, Quinn said.

Like Morin, Quinn said he is well aware of the perception that wealthier waterfront residents are looking for another break after getting a real good one for a long time. And he said he understands the recently bankrupt city needs tax revenue to support basic services – fire, police, parks.

“I know that we have to support this city,” Quinn said. But he noted that he and many of his neighbors chose to move to Detroit at a time when the exodus was in full flight in the other direction. Those who stay are paying the city’s full 2.4 percent income tax, not the 1.2 percent that non-resident city-based workers pay.

“You don’t want to chase out of the community the people who are spending their money here,” he said. “That was the purpose of the NEZ, getting people into the city.”

Debra Pospiech, Detroit’s deputy treasurer for tax, said calculating how important those breaks are to homeowners is at the center of a comprehensive review of the NEZ program.

Interns from Wayne State University and the University of Michigan are completing an inventory of NEZ properties in the city. The city may end up asking Lansing to extend existing deals for the NEZ program, or it may look to convert people on one type of tax break to another, she said.

Everything is under consideration, agrees the mayor.

“We’re reviewing it right now,” Duggan told Bridge. “You have areas covered by NEZ and some not. The whole NEZ program, we’re evaluating it.”

The mayor has said repeatedly he wants his administration to be judged by a simple metric: Did the city’s population grow on his watch after six decades of decline?

Detroit’s crippling property tax rate is an impediment to that growth.

At 69 mills for owner-occupied homes and condos, the city’s tax rate can generate a bill of as much as $7,000 for homes worth $200,000, a staggering challenge for residents in one of the nation’s poorest cities.

By contrast, a home valued at $200,000 would cost a homeowner only $3,700 in upscale Troy, in Detroit’s northern suburbs; $3,800 in Alpena, $4,500 in Lansing and $3,300 in Grand Rapids.

Build here, pay less

Brian Ferguson, president of his west side homeowners association, is billed $1,400 a year on this 1,200 brick home just south of Schoolcraft Road. He said the city should not consider extending the tax breaks for those who live in the downtown condos and the new homes that benefitted from them.

The state launched the NEZ program more than 20 years ago and, at first, it targeted new construction and building rehabs. For new construction, the owner would get up to 15 years of tax relief, paying half the statewide average millage rate. This year, that’s just under 17 mills, a whopping 75 percent discount from the 69 mills that most Detroit homeowners without an abatement would pay.

For owners of rehabbed buildings, like Morin in the Book Cadillac, the break is different. They pay the full tax rate, but it’s on an assessment that’s frozen at their share of the building’s value before renovations.

In the case of the Book Cadillac, which underwent extensive renovation and emerged as a mix of hotel rooms, condos and restaurants, that meant valuing refurbished condo units at their worth when the building was a hulking blight on Detroit’s skyline. In Morin’s case, the taxable value of his condo has been frozen for 15 years at $3,026, or roughly 1 percent of the $290,000 he actually paid in 2008. Which is why his annual property taxes are less than $500.

The taxable value of other units in Book Cadillac worth even more, including the three-story penthouse units, are frozen as worth $3,000.

This for top-floor views in a celebrated structure built in the Italian Renaissance style; indeed the world’s tallest hotel when it opened in 1924. Before falling into disrepair, the Book Cadillac was host to five U.S. presidents, the scene of a movie starring Spencer Tracy, and it’s where, in 1939, Yankee star Lou Gehrig told his manager he would have to sit out that day’s ballgame against the Tigers after 2,130 consecutive starts.

If a 2-bedroom, 2-bath condo, now on the market at the Book Cadillac for $465,000 was taxed at its true value, it would bring a property tax billl of $16,000. Instead, at least for a few more years, its owner will pay $382, according to the developers.

In Detroit, more than 3,000 tax breaks have been issued for rehabbed buildings; nearly 3,900 for new construction, most in the 1990s and 2000s.

“When that boom was here, it helped a lot of people,” said Verzell Page, a real estate agent in the city for over 20 years. “It was a necessity to have something like that to have the new construction boom.”

When the real estate market in the city started to get hot in the early 2000s, owners of existing homes across the city began to feel the tax pinch as well: 1994’s Proposal A limited how much a property’s taxable value could increase, but when a property was sold, the property was assessed at its full value.

That meant that buyers of homes in nicer Detroit neighborhood like Palmer Woods and Indian Village were staring at huge tax bills that the preceding owner didn’t face.

“The market got wise to this, the tax bill would go from $2,000 to $12,000 overnight,” Evanko said. The result: home sales slowed and city leaders feared more vacancies.

That’s when then-Mayor Kwame Kilpatrick successfully lobbied the state legislature for an innovative NEZ “homestead” program, to encourage some longtime residents to make even small improvements to their homes in exchange for lower taxes. If someone within the designated NEZ zones made at least $500 of improvements – a couple new windows would suffice – they’d get a 50 percent reduction in the city and county millage rate. It wasn’t as good as the NEZ new and rehabbed deals, but it was a roughly 20 percent break on property taxes.

Thousands signed up and continue to sign up.

Now, as many of the NEZ deals offered to both new and current homeowners mature, taxpayers across the city are starting to see higher tax rates because both NEZ programs call for a slow increase in rates in the last years before expiration.

Which means that across the city, neighbors are paying different amounts – some 69 mills, others 17 mills, and many in between. Evanko, the city assessor, said there are more than 100 properties that should be paying more but for some reason their rates were not adjusted upward.

“I think it does create some inequities in terms of the taxes people pay,” said Skidmore, the MSU economics professor. He said he favors steps to lower the city’s overall tax rate but acknowledged it may be difficult for the city to take a hard line with those who have already benefitted from the NEZ breaks.

“There’s reality and there’s principles,” he said. “If you stick with your principles” and require NEZ homeowners to now pay full freight, “you risk losing some of these people. I think I would probably allow this to phase out, but there’s a risk in doing this.”

Big decisions ahead for city and residents

At Kevin Morin’s condo, his 24th-floor view takes in the tree-lined city park at Campus Martius, where he once co-owned the Fountain Bistro at the hub of Woodward and Michigan avenues. He can see workers fixing roofs, tuck-pointing brick and glazing new windows on buildings in and around Capitol Park. The parking deck below his condo is getting several floors of hotel added on. It’s an amazing transformation for which he’s had a front-row seat.

It is progress spurred, in part, by the success of the Book Cadillac. And a large part of that success could be tied to that tiny tax bill Morin began receiving years ago.

Page, the real estate agent, said he can understand why those who haven’t gotten a tax break might loathe the NEZ program. Nonetheless, he said, it does have value and should continue. “We definitely need to maintain and extend it,” he said. “You’ve got so many things that are going to happen in the city.”

If the NEZ breaks are allowed to expire, with no additional relief, Morin said he will probably stay in the city, and most likely find another condo with a tax break. He wants to stay in the Book Cadillac – with its pool, health club and hot tub.

“If I didn’t have this tax situation, I wouldn’t move,” he said. “That’s how much I love this house.”
It may, in the end, turn into a game of chicken.

And the next move may be Detroit’s.