On March 20, 2008, the legislature passed House Bill 5511, which amended the brownfield MBT credit statute. Through the efforts of John Byl and Troy Cumings, Warner Norcross & Judd LLP was instrumental in crafting the legislation and shepherding the bill through the legislative process. House Bill 5511 includes significant improvements to the brownfield MBT credit program that will streamline many processes and spur development in the state, including:
New 20% credit for "urban area development projects." To encourage increased urban redevelopment in the state, for the next 3 years an "urban redevelopment area project" is eligible for a credit of up to 20% of the eligible investment for the project, and after 3 years will still be eligible for up to a 15% credit. An "urban development area project" must be located in the "downtown or traditional business district" or a "traditional commercial corridor" of a "core community" or county seat. And there are certain criteria that MEGA must consider when reviewing an application for an "urban redevelopment area project" including:
a. If the project increases the density of the area by promoting multistory development.
b. If the project promotes mixed-use development and walkable communities.
c. If the project promotes sustainable redevelopment.
d. If the project addresses areawide redevelopment and includes multiple parcels of property.
e. If the project addresses underserved markets of commerce.
f. Any other criteria determined by MEGA.
For all other projects, the credit is increased from 10% to 12.5%. For all other projects, the credit limit has been increased from 10% to 12.5% of the eligible investment for the project. The 10% credit was increased to 12.5% to compensate for removing "soft costs" from the eligible-investment calculation, as discussed immediately below.
Most soft costs eliminated. Eligible investment for all projects will no longer include any "soft costs," except architecture, engineering, surveying, and similar professional fees.
Redefining "small" and "large" credits. Before HB 5511, the statute defined the "small" and "large" credit categories based on the amount of the credit. A "small" credit was any credit of $1,000,000 or less. And a "large credit was any credit of more than $1,000,000. This worked because there was only one maximum credit percentage—10%. But the new increased-credit percentages in HB 5511 created a problem. For example, before HB 5511 a 20% credit based on $10,000,000 of eligible investment would have been considered a "large" credit because it would be more than $1,000,000 and, thus, would have counted toward the 20-credit limit. HB 5511 solves this problem by defining the credit categories based on the amount of the eligible investment rather than the credit amount. So now a "small" credit is any credit based on $10,000,000 or less of eligible investment and a "large" credit is any credit based on more than $10,000,000 of eligible investment, both regardless of the credit amount.
Changes to annual credit limits. HB 5511 includes "mini" credits (credits based on eligible investment of $2,000,000 or less) within the "small" credit category (credits based on eligible investment of $10,000,000 or less) and creates a new annual limit for these "small" credits. In 2008—to carry forward the unused allocation of SBT credits from 2007—the total amount of all "small" credits may not exceed $63,000,000. Beginning in 2009 and continuing thereafter, the annual limit for "small" credits is $40,000,000. In addition, beginning in 2008, the annual limit for "large" credits (credits based on eligible investment exceeding $10,000,000) is increased from 17 to 20. And of these 20 credits, only 1 may be a "jumbo" credit (credit of more than $10,000,000).
Carrying forward unused annual allocation for "small" credits. Beginning in 2008, if the total annual amount of "small" credits that MEGA approves is less than $40,000,000, MEGA may carry forward the unused amount to the following year. But the carried-forward amount can only be used after the total amount of approved "small" credits in that following year exceeds $40,000,000.
Amending preapproval letter to increase credit amount. Before HB 5511, the statute prohibited MEGA from increasing the amount of eligible investment or the credit for a project after the preapproval letter had been issued. This prohibition did not take into account changes in project costs that inevitably occur over time and especially at the beginning of a project. To give more flexibility to MEGA, HB 5511 authorizes MEGA to amend a preapproval letter to increase the total maximum eligible investment and the total maximum credit before a qualified taxpayer has made any hard-cost eligible investment into a project.
MEGA may extend duration of project up to an additional 5 years. The statute requires a qualified taxpayer to complete a project within 5 years after MEGA issues the preapproval letter. In practice, however, some projects cannot be completed within this 5-year timeframe. For these projects, it has been common practice for MEGA to convert the projects into multi-phase projects to give additional time to complete. HB 5511 eliminates the need for this by allowing a qualified taxpayer to request an extension of the duration to complete an approved project for an additional 5 years, i.e., the project must be completed within 10 years after the date of the preapproval letter.
Discretion to determine when a component of a multi-phase project is complete. Before HB 5511, the statute required each component of a multiphase project to obtain all certificates of occupancy in order to be considered complete. This was a problem for some residential developments where the municipality would not issue certificates of occupancy for unoccupied units even though the units were complete. HB 5511 addresses this concern by allowing MEGA to determine that a component is complete, regardless of whether the municipality has issued all certificates of occupancy.
Cash refund of 85% now available. Many developers who apply for a credit are limited liability companies with no MBT liability. These developers must sell the credits in the open market for a discounted rate to receive any benefit from the credit. HB 5511 gives these developers the additional option of electing to have the amount exceeding the developers’ tax liability to be refunded at the rate of 85% and forego the remaining 15%.
Recapture risk reduced for personal property. Before HB 5511, the statute required recapture if the qualified taxpayer sold personal property or disposed of or transferred personal property off-site. HB 5511 limits the recapture provision to disposing of or transferring personal property off-site. So now a qualified taxpayer may sell personal property to another entity without being subjected to the recapture provision if the personal property remains on-site.
Assignment provision fixed. When the brownfield-credit program was transferred from the SBT statute to the MBT statute, a mistake in the language caused the simplified assignment provision not to apply to MBT credits. HB 5511 fixes this mistake, so now the simplified assignment provision applies.
Ninety-day look-back for eligible investment expenses. HB 5511 creates a 90-day look-back on eligible investment made before the date of the preapproval letter but after the date the brownfield plan was approved. Previously, any investment made before the date of the preapproval letter was ineligible.
- A qualified taxpayer includes a person who has entered into a purchase agreement. Before HB 5511, an applicant was required to own or lease eligible property before applying for a credit. Unfortunately, for many projects, the applicant does not own or lease the property at that time, but rather has only entered into an agreement to purchase or lease. This requires many applicants to enter into a temporary lease for the sole purpose of receiving a preapproval letter, which creates unnecessary legal fees. HB 5511 solves this problem by allowing an applicant who has entered into an agreement to purchase or lease to apply for and receive a preapproval letter.
If you have any questions regarding House Bill 5511 or any other brownfield matter, please contact John Byl (616.752.2149), Troy Cumings (517.679.7411), or Jared Belka (517.679.7414).