Tax Abatement Approved: How the Hudson Project’s Tax Abatement Could Affect Detroit

Billionaire Dan Gilbert’s real estate firm, Bedrock, was recently granted a tax abatement for the Hudson site development in Detroit.

 

Detroit’s J.L. Hudson’s site on 1208 Woodward Ave. is at the center of controversy after billionaire Dan Gilbert’s real estate firm, Bedrock, sought a $60 million tax abatement from the Detroit City Council to develop the site — leaving some Detroiters with a bad taste in their mouths over the request, which they feel would take dollars away from libraries and schools. Others argued that Gilbert, a well-off businessman, doesn’t need a tax break as this project is one of many his firm has already bought up; Bedrock has dozens of properties in Detroit’s central business district.

A tax abatement provides tax breaks to finance the revitalization of an area.

According to their website, Bedrock’s redevelopment of the 685-foot-tall Hudson site would include 1.5 million square feet of office, retail, food, beverage, hotel, residential, event and meeting, parking, and activated open spaces. A new plaza would also be situated between two buildings that will cut through the center of the development with designed office spaces, event venues, around 100-plus residences, and a hotel at the downtown location. The original building shuttered in 1983. The 49-story building, initially approved by City Council in 2017, is proposed to cost $1.4 billion.

Bedrock said in a Detroit Free Press article that the project’s costs had substantially increased to $1.4 billion, which is a jump from the $909 million when the development began in 2017. The abatement is vital to obtaining bank loans.

Gilbert initially withdrew his tax abatement request in late June after City Council had previously delayed the vote on the matter. On Tuesday, July 26, the City Council approved the long-awaited vote for the tax abatement in a 5-4 vote. Detroit City Council President Mary Sheffield, Council Member Mary Waters, Scott Benson, Fred Durhal III, and Coleman A. Young II voted “yes.”

The Detroit City Council, divided on the tax abatement issue, was initially to vote on it in June. Construction of the building is slated to be finished in 2024.

Council members Latisha Johnson, James Tate, Gabriela Santiago-Romero, and Angela Whitfield-Calloway voted “no” on the abatement.

There was also an 8-1 vote on additional community benefits packages that Sheffield introduced, along with three additional elements negotiated with Waters around bridging the digital divide, a Bedrock source confirmed.

The second supporting vote was around proposed items by Sheffield to be included in the tax abatement deal, which include:

  • Moving from 20 percent to 30 percent of Bedrock’s entire housing portfolio dedicated to affordable housing at 60 percent of Area Median Income.
  • Bedrock to dedicate 20 percent of the street-level retail space to be utilized by Detroit small businesses and community programming.
  • $1 million commitment to the development and growth of Detroit small businesses.
  • $5 million commitment to support the Neighborhood Improvement Fund (NIF).
  • A comprehensive annual transparency report completed by the Civil Rights, Inclusion & Opportunity Department to assess if commitments to jobs and investments are being honored and fulfilled.

Sheffield, who represents the 5th District, which covers the lower eastside, downtown, the riverfront, and central portions of Detroit, said in a statement that it’s her duty to ensure that “all Detroiters can benefit from the proposed development” when considering tax abatements.

“The residents of this city deserve to have a wonderful, lively downtown area to enjoy,” she said. “It is our duty to ensure all Detroiters can benefit from the proposed development.”

“I look forward to further discussions and negotiations with Bedrock to secure these commitments and I pledge to continue to listen to the voice of the people regarding this matter,” she said before the vote.

Bedrock also gave a statement before the vote.

“In a perfect world, we would not need to offer tax abatements to developers to attract projects to the city of Detroit,” she said in a Detroit Free Press article. “Unfortunately … Detroit has one of the highest tax rates in the nation amongst other major cities, and putting us at a competitive disadvantage, so tax abatements are a symptom of a much larger problem.”

“We look forward to the continuation of this process and to seeing Council affirm its support for this transformational investment.”

Detroit’s controversial choice

Mayor Mike Duggan supports the tax break.

“Two-thousand permanent jobs. Those 2,000 workers pay city income taxes. There’s 7,500 construction jobs. Those jobs pay city income taxes and those taxes do go to the neighborhoods,” Duggan said. “The police, the fire, the parks, and the like. We want this building to be built as large as possible for the long-term viability of the city.”

According to the Detroit People’s Platform, the controversy over tax abatements stems from some local groups saying that tax abatements or incentives hurt the majority of Black Detroit.

“Tax incentives tend to support those with the credit and the resources to secure them,” the Detroit People’s Platform notes. “None of the tax revenue from downtown projects goes to schools, libraries or other services because of the DDA (the Downtown Development Authority).”

Bedrock’s CEO Kofi Bonner told the Michigan Chronicle that naysayers have it wrong about the Hudson site project, and tax abatements are not taking money from libraries or schools, as some have said beforehand.

He said the project faced obstacles along the way when Bedrock returned with final details for the second approval earlier this summer.

“We had such a partnership [that] we would do what we’re supposed to do and City Council do what they are supposed to do, which is approve the tax abatement,” he told the Michigan Chronicle, adding that “things got complicated” with the pandemic, inflation and supply chain disruptions. “There have been disruptions because of COVID – it all translated into accelerated costs,” he said of the $60 million tax abatement request.

District 3 Council Member Scott Benson was quoted saying in Bridge Detroit that he wants to tackle myths surrounding tax incentives.

“There’s so much misinformation surrounding tax incentives and recent development,” Benson said in the article. “Municipal finance is complex, and we try to distill it at the [City Council] table but we’ve done a terrible job. It’s important that residents have good information and facts.”

Bonner said that tax abatements overall help developers, especially Black developers who already have a steeper hill to climb from the get-go because of varying disparities.

“You have to look for ways to bridge the gap. And one of the ways which is accepted all over the country is through a variety of tax incentives, incentives and certainly a tax abatement, which is what one of the incentives that is offered to any and every developer,” Bonner said. “If you are a Black developer, you have limited access to capital… So often, that means that access to capital may actually cost them a little bit more. So, in addition to the higher costs that they may be facing, they also have a little more expensive cost of capital which means the gap that they are trying to close in order to make an economic project is even greater.”

What’s in it for the people?

Detroit Charter Commissioner Nicole Small told the Michigan Chronicle that many Detroiters are “gravely concerned” about the high rate of gentrification and “corporate welfare,” she says of tax abatements, which have very little return on investment in the community.

“[There are] no true safeguards in place that smaller businesses surrounding that area would be supported, nor the community,” she said. “For me personally for a project to have received tax subsidies on steroids, there should be a benefit across the city when you have a project [of] that magnitude.”

Small added that with poverty rates in the city, someone should stand up and leverage their power at City Council.

“Unfortunately, I don’t see it,” Small said. “We just need someone to do the will and the work of the people.”

Kenyetta Bridges, executive vice president of Economic Development & Investment Services, told the Michigan Chronicle that tax incentives are not negative.

“Economic development incentives are important tools within the suite of local and state economic development policies essential to driving growth in Detroit’s economy,” Bridges said. “The economic impacts associated with economic incentives, including tax abatements, profoundly impact the local economy. These positive outcomes include creating jobs for Detroiters, expanding the city’s economic base, and contributing significantly to local public expenditures, which exceeds the underlying cost of the program.”

Bridges said that attracting and retaining businesses in Detroit is “hampered” by three constant challenges:

  1. Rising development costs – construction, materials, and interest rates.
  2. Higher structural costs in Detroit than in other competitor cities.
  3. Lack of shovel-ready sites to meet market demands.

“Fortunately, tax abatements … serve as a critical mechanism to mitigate these structural disadvantages and help facilitate citywide growth,” she said, adding that the misconceptions about tax abatements should be addressed. “In the past, there has been misinformation in the public realm suggesting that tax abatements give away money to large developers in the downtown area, that residents’ taxes in the neighborhoods will increase because of tax abatements and take money from the schools. Tax abatements do not provide cash to developers, and tax abatements do not absolve a taxpayer from paying taxes.”

Chris Jackson, managing partner at the Detroit-based Queen Lillian Development, said as a Black developer in Detroit, he sees tax abatements as a positive thing. If they were done away with then, it would also set negative precedence for others looking for needed tax breaks on future projects.

“I can relate,” Jackson said of Bedrock’s request for a tax abatement. “Here in Detroit specifically the tax abatements there are two or three major ones people use. … If you want to build something new you have to clean [the property] and you ask for a tax abatement to get reimbursed for remediation to clean that site. … [It is] that simple. Sometimes people overthink this.”

Jackson said that some groups don’t want “rich people” like Gilbert to get tax abatements, with which he disagrees.

“Each project actually stands on its own, and if somebody is going to build something it has to make financial sense or otherwise you don’t do it,” he said, adding that in comparable cities like Chicago or San Francisco when developing a comparable apartment building, the market would set the square footage price at a much higher rate. In Detroit, that is not the case, the rates are much lower here, and developers would not recoup their money as quickly.

“It cost them [developers] both the same to build it but the developer in Chicago, New York, and San Francisco is getting twice, and sometimes three times, as much rent to justify the cost of that project,” he said, adding that the lower rate in Detroit is not enough money to pay the bank back through rent costs and the like. “You need these tax incentives to subsidize the cost of development or cost of operations.”

Jackson, who recently developed a 204-unit mixed-use development in the heart of midtown, said that if he were on the City Council, he would “absolutely” vote and support whatever abatement is out there that is a justifiable number.

“They have to show the gap between what it costs to build it and where they thought initial costs were,” he said, adding he supports the Hudson site project. “It absolutely is a net gain for the city.”

 

 

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