Land banks have proven to be a powerful economic development tool since the Michigan Legislature’s adoption of the Land Bank Fast Track Act nearly 20 years ago.
The 2003 Act was a package of tax and economic development bills that created land banks and gave them a number of powers to assist governmental entities with clearing title to properties and placing properties back into productive use. Taken together, these bills codified a “wish list” of revisions that added both certainty and a set of extraordinarily powerful tools to the redevelopment toolbox.
Most often, land banks acquire tax-foreclosed properties. Prior to the 2003 Act, acquiring clean title to these properties presented monumental challenges that impeded development. The Act allows land banks to proceed with a quiet title action in circuit court, which is obligated to handle this expeditiously, enabling land banks to facilitate the development of properties and return them to the tax rolls.
Important role in brownfields
Land banks can assist in other areas of property development — namely under the Brownfield Redevelopment Financing Act, which is commonly referred to as Act 381. This law has a similar purpose as the Land Bank Fast Track Act: promote the revitalization, redevelopment and reuse of certain property, including tax-reverted, blighted, functionally obsolete and other property.
Importantly, under Act 381, properties that qualify as brownfields can leverage certain redevelopment tools. Eligible properties include contaminated or functionally obsolete facilities, historic buildings or structures and blighted properties.
This is where land banks can play another important role. Act 381 defines a “blighted” property as one “owned by or under the control of a land bank fast track authority whether or not located within a qualified local government unit.” That means a land bank’s involvement in a development project can provide an otherwise unqualified project with core community status, enabling a broader group of eligible activities in its brownfield plan.
Generally, all eligible properties qualify for reimbursement of environmental investigation and remediation costs, demolition, asbestos and lead-based paint removal, as well as certain costs associated with developing, implementing and approving the brownfield plan.
In certain core communities, the eligible property also may qualify for reimbursement of additional non-environmental activities, such as installation of public infrastructure and site preparation. For this reason, qualifying a property as blighted results in an additional sought-after incentive.
Steps to consider
It may seem straightforward to consider transferring an interest in the property to the land bank to take advantage of this mechanism. Ownership of an interest in the real property, however, also may require due diligence, including reviewing title and survey, obtaining a Phase I report and performing additional environmental due diligence, if needed.
The other option, however, is to demonstrate the land bank has control of the property. This can be accomplished through a well-drafted development agreement to be executed by the developer and land bank. The developer’s obligations to the land bank under the development agreement should be secured by a lien on the property in favor of the land bank.
A lender’s title insurance policy insuring the lien should be obtained for the land bank, and each party’s obligations and roles should be spelled out in the development agreement.
Incentives for land banks
A local unit of government’s request can go a long way toward encouraging a land bank’s participation in the project. Additionally, payment of a fee to the land bank in exchange for its participation, as well as a development agreement, also can be significant motivators.
The fee can help offset the land bank’s costs for oversight and participation in the project — and provide much-needed money for its overall mission at a time when funding is challenging. The legal fees, premium for the lender’s title insurance policy and land bank fee all are recoverable and can be considered eligible activities.
Land banks are a win-win for all parties involved — if leveraged correctly.
Rachel J. Foster is a partner at Warner Norcross + Judd LLP, where she represents clients across numerous industries in a wide array of real estate transactions. She can be reached at firstname.lastname@example.org. Kurt M. Brauer also is a partner at Warner, where he focuses on environmental and economic development matters. He can be reached at email@example.com.