• LEED Tax Abatement: Waste of Time or Strategic Opportunity
  • September 1, 2010 | Author: Jeffrey S. Ammon
  • Law Firm: Miller Johnson - Grand Rapids Office
  • Pending bills in the Michigan House of Representatives would create property tax abatement for LEED-certified (Leadership in Energy and Environmental Design) projects. Some believe this is a creative, proper method for inducing “green” construction (in step with incentives offered by other states). Others are not so sure. But whatever your view, there is much more (or much less) to this proposed incentive than meets the eye.

     

    The bills would add LEED projects to an existing tax abatement statutory scheme that has numerous intricacies, subtleties, traps, and opportunities. Read on to learn more about how the proposed LEED abatement compares to current incentives and whether the LEED abatement is better or worse.

     

    DOES LEED TAX ABATEMENT OFFER A BETTER TAX BREAK?

    Not necessarily. For example, LEED tax abatement is never as good as the tax break that developers can already get for restoring commercial properties. A restoration abatement provides a 100 percent exemption, but LEED provides at most 50 percent. And that 50 percent is available only for platinum LEED projects. Gold, silver, and certified LEED projects save less. A developer restoring a building might therefore save more money by skipping the LEED abatement in favor of other abatements.

     

    True, the state can exempt a few more mills under LEED tax abatement, but that additional benefit is capped at six years. Other commercial abatements have no such cap.

     

    OTHER SUPPOSED ADVANTAGES (THAT MAY NOT REALLY BE ADVANTAGES AT ALL)

    Let’s look at just a few of the pending bill features that are touted as advantages.

     

    LEED abatement is available regardless of whether the facility serves a commercial, industrial, or any other purpose. So, even a LEED-certified residence could qualify. But this lack of restriction on purpose is probably not significant. First, other tax abatement statutes are available for projects having almost every other kind of industrial and commercial purpose. Second, a LEED tax abatement for residential purposes is probably unrealistic. Will a city really see a sufficient public purpose in granting a LEED tax abatement for a wealthy homeowner’s brand new principal residence or vacation getaway?

     

    Another supposed advantage: a developer can apply for LEED tax abatement even after the project is completed and after the certification is received. But is this really an advantage? If the developer waits until the project is completely finished before asking for the incentive, would any city seriously hand out this windfall? In these days of local government cash-strapped budgets, that would look (correctly) like a handout, not a true incentive.

     

    LEED tax abatements need not satisfy the somewhat intricate zoning and planning rules that apply to some kinds of commercial tax abatements. But none of those zoning restrictions applies to commercial tax abatements for restoring existing buildings. And much of the development in this current economy is likely to be the reuse of existing facilities. The existing tax abatement may be much better suited to your project than LEED tax abatement, even if the restored facility will achieve LEED certification.

     

    A TRUE ADVANTAGE - MAYBE

    We note one true advantage to the LEED bills, although it will only come into play if something goes wrong later in the project. The bills would prohibit a city from revoking a LEED abatement for any reason except one: fraudulent misrepresentation of LEED certification. This ban on revocation can be a real advantage, because most cities currently require tax abatement recipients to sign an agreement that provides for revocation and clawbacks when certain events occur. This ban on revocations would prohibit a local unit from seeking revocation for those other reasons, and it may consequently ban clawbacks also.

     

    REMEMBER . . .

    Remember that developers will still need to consider the same strategies and tactics with LEED tax abatement that we always considered with tax abatement for commercial and industrial projects. For example, the developer’s tax savings will be significantly affected by how the tax abatement “facility” is defined and whether it includes all or only certain portions of the proposed construction and renovation. That is only one of a number of strategic decisions that developers will need to make up front to maximize tax savings.

     

    Remember also that this article is not a complete list of the advantages, disadvantages, tips, and traps that would be available under LEED tax abatement. But the point is simple: any project for which you’re considering tax abatement or other economic development incentives needs a well developed incentive strategy, one that is crafted long before the project is announced or shovels hit the ground. That strategy should be guided by legal counsel with years of experience in structuring and combining these incentives.

     

    For more information, please contact the author or any of the Miller Johnson attorneys in our construction or property taxation practice groups.