Economic incentives can fill gaps in project financing

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The rising cost of raw materials. Supply chain issues. A tight labor market. Increasing interest rates. The struggle is real for developers, who are watching their construction costs skyrocket — even as demand increases.

In Michigan, we’re seeing strong demand for industrial facilities as manufacturers look to expand production. We’re also seeing very strong demand for housing at all price points.

As developers juggle these competing realities, we’re seeing a renewed interest in economic incentives as a way to fill in the gaps in project financing. Between tax credits, tax abatements, tax increment financing, grants and loans, developers have various federal and state programs to help them turn blueprints into reality. Local programs, too, are providing financial incentives to broaden access and increase diversity in underrepresented businesses.

ARP, brownfields and land banks

Michigan allocated $100 million in American Rescue Plan Act funds to target revitalization and placemaking projects. The window for applications closed on June 3 for both direct project and regional applications.

Interest was particularly strong in ARP funds that were designated to jumpstart investments that may have been stalled during the COVID-19 pandemic.

Amendments to the Transformational Brownfield Plan legislation, or TBP, have made this workhorse of an economic incentive even easier to access. Under a traditional brownfield program, only specific activities are eligible for reimbursement. These would include such things as site preparation, lead and asbestos abatement, demolition and other activities on core community properties. TBP projects would support traditional tax-increment financing, or TIF, and capture of additional revenue streams, such as sales tax during the construction period or state income tax from those who will be using the new facility.

Relatively modest tweaks have opened the door to smaller projects that still may have investment needs but are more modest. TBP is now brownfield TIF on steroids, providing an even bigger shot in the arm to projects.

Recognizing the particular need for affordable housing in Michigan, the Michigan State Land Bank, or SLB, has become an active partner in the economic development community to deliver a unique approach to address housing needs. As interest rates increase and costs continue to escalate, the partnership with the SLB provides a tool to offset costs through the use of TIF.

Additionally, cities like Grand Rapids are incorporating inclusion plans into the incentive application process to increase contracting opportunities for minority-owned, woman-owned and micro-local businesses. The goal of the program is to reduce the current racial and gender gaps in the construction industry and to develop long-term prosperity through increased contracting opportunities.

Response from contractors has been good, which has resulted in increased opportunities for underrepresented subcontractors. The progress represents an incremental yet tangible step to raise awareness and begin addressing the issue.

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