May 11 2010 12:00 AM

Untangling Knapp's building incentives, and Council budget blues

The package of state, local and federal loans, grants and tax incentives being assembled to help out the Eyde Co.’s $23 million renovation of the Knapp’s building in downtown Lansing is, in a word, confusing. One city official called it “alphabet soup” (and some members of the public have been calling it “corporate welfare”). And although most of the incentives for the project haven’t been approved by the city, the city’s economic development mavens gave the Lansing City Council a pretty cogent view of what’s to come at last week’s Committee of the Whole meeting.

On Monday at its regular meeting, the Council gave the OK for the city to apply for two of the incentives: a maximum $6 million U.S. Housing and Urban Development Section 108 Loan, and a $2 million Brownfields Economic Development Initiative grant, also from HUD.

Here’s an overview of the grants, loans and tax incentives:

The Section 108 loan comes from a chunk of money (about $20 million) that HUD sets aside every year. The amount that a city can borrow is based off its annual allotment of Community Development Block Grant (CDBG). Lansing gets about $2 million in CDGB funds from HUD every year, which fund things like grants for low-income people wanting to fix their homes. The city can apply for a Section 108 loan up to five times its CDGB allotment.

The Section 108 loan is very important — city officials say the project will be kaput without it. However, the Eyde Co. has hired a consultant who specializes in HUD loans and grants, and he is helping put together the city’s application.

If the city is given the Section 108 loan, which will be determined by October, it will be loaned the money by the federal government, and will in turn funnel the money to what’s called a “community development entity.” This will likely be a bank. The CDE will then loan the money to the Eyde Co.

A possible downside to the Section 108 loan is that the city’s CDBG allotment is used as collateral. If the Eyde Co. were to default on the loan, a portion of the CDBG would be used to pay off the loan. However, the city officials say that they have worked out an agreement with the Eyde Co. to make sure that this is a far-out possibility. The development agreement between the city and the Eydes spells out that the Knapp’s renovation must be complete — so, the Eydes would not be able to default until after the project is complete, leaving the city with a building that is considerably more valuable than the Section 108 loan. Also, city officials say that the Eyde Co. has never defaulted on a loan.

The other layer of protection is the Brownfields Economic Development Initiatives grant. The city will apply for the $2 million BEDI and use it to pay off the first seven years of interest on the Section 108 loan for the Eyde Co. City officials say that relieving the Eydes of the first seven years of payments on the loan will allow them to establish tenants in the Knapp’s building, getting the project on its feet.

The project is also aiming to receive several tax incentives, the most valuable likely being the Renaissance Zone. A Renaissance Zone, which has been used in only four other instances in Lansing: the Seven Block at the west end of the Capitol complex, Lindell Forge, an industrial site on the south side, on the site of the proposed Capitol Club Tower, and in for the Ottawa Power Station project. This incentive removes state and local taxes for a period of 12 years. After 12 years, taxes ramp up over a period of three years to their full potential.

A criticism of giving the Knapp’s project a renaissance zone is that it will pull from Lansing’s tax base. However, this is not entirely true. Downtown Lansing is blanketed by a tax increment-financing district. The TIF is a special taxing district that siphons all additional tax revenue after the base year — property, income and personal property — into a fund for economic development. So, all but $12,000 (the taxes paid on the building the year the TIF went in place) of the taxes being paid on the Knapp’s building are going to the TIF, which is not used for typical city services like public safety. Right now, the Lansing Economic Development Corp. uses a majority of the roughly $5 million culled from the TIF to pay off debt from the city’s various parking structures. But it uses some of the money for other services (it’s pledged $400,000 from the TIF for a skating rink near the city market, and will pay city subsidies to arts groups).

In any case, the TIF will outlive the Renaissance Zone by at least eight years. The TIF is scheduled to last until 2031, the Renaissance Zone until 2023.

The Eyde Co. will also apply for a Brownfield Michigan Business Tax Credit, valued at $1.8 million. The $1.8 million credit is a percentage of expenses related to developing a brownfield site, which in this case is the Knapp’s building.

The Eyde Co. is also seeking $4.8 million in federal New Market Tax Credits. The federal government gives the credits to entities making investments in low-income communities. The credit is taken against federal income taxes, and the Knapp’s project qualifies because it is located in a qualifying census tract.

Finally, the Eyde Co. is seeking $7.3 million in state and federal historic tax credits. Because Knapp’s is a historic structure, various tax credits from the state and federal government. From the state, the Eyde Co. is seeking $3.6 million in credits, and $3.7 million in federal credits.

Monday night’s City Council meeting was headed toward a city budget show down if not for a last minute motion to table budget discussions. At-large Councilman Derrick Quinney made a motion in a Committee of the Whole meeting before Monday’s regular meeting to postpone budget approval until May 17. This was done so that Council could have more time to consider several deficit-reducing proposals. May 17 is also the last day Council has, under the City Charter, to approve the budget.

When asked what would happen if the Council does not approve the budget next Monday, City Attorney Brig Smith’s said that it had never happened before.

“It would be a charter violation,” he said.

The budget-reducing proposals in front of Council include: a 0.4 increase in the city’s operating millage (the tax rate) was brought by At-Large Councilman Brian Jeffries last Thursday. According to a poll of Lansing residents solicited by Council, 37 percent would agree to an increase, 61 percent would not, and 2 percent were unsure (the total number polled was not available). The tax increase would be part of the Council’s overall passage of the budget, requiring a five-vote majority.

Other cost saving proposals include 26 furlough days for city employees in lieu of a 36-hour workweek, which was proposed by Lansing Mayor Virg Bernero when he proposed the budget back in March. However, Smith has told Council that it does not have the power to legislate furlough days — Council can recommend them in a budget resolution, but not mandate them. The city administration holds that power.

Though, as some might expect, the option of raising taxes is not completely opposed by all on Council. One Council member said Monday night that four, possibly five, Council members would support it.

During discussion at Monday’s Committee of the Whole, At-Large Councilwoman Kathie Dunbar said, “I am not against a tax increase,” but took issue with the way it was being proposed. She said that it seemed that the spirit of Jeffries’ increase suggestion was to pay salaries, not improve city services. “To sell a tax increase, you have to talk about the services,” she said.

Also part of the Council’s budget process was a resolution by the Council to pledge a percentage of their gross income equivalent to whatever the amount is that will be given up by city workers. This was an issue two months ago when Jeffries tried to pass a resolution asking Council members to give up pay equivalent to what city workers lost from a round of furloughs that went into effect in the beginning of the year. This time, Council members say, they are all in agreement over giving up some pay.

Though it did not approve the budget, Council on Monday approved a number of other items. Show cause hearings were set for May 24 for three properties: 6226 Barker St., 711 Carrier St., and 420 N. Martin Luther King Jr. Blvd. After the show cause hearing is held, Council can enter a “make safe or demolish order.” After the order is issued, a property owner has 60 days (but usually more because of the time it takes for the city to move to demolish the house) to fix the property, or the city will tear it down.

Public hearings were set for May 24 for two tax incentives applied for by developer Pat Gillespie for his renovation of the Marshall Street Armory into a headquarters for nonprofit businesses. Gillespie is seeking an obsolete property rehabilitation certificate and district, and a brownfield redevelopment plan, which can qualify the development for a Michigan Business Tax Credit. A Historic District Study Committee was also established by Council to study the armory.

Council approved a property split for the Sam’s Club on the far south side, and the construction of a new 145-foot cell phone tower by MetroPCS, which will be located the property of Capital Area Transportation Authority on Tranter Street. Also approved was a wine tasting room for Uncle John’s Fruit House Winery to be located at the Lansing City Market. The Council also ratified a new contract between the city and the International Association of Firefighters Local 421 union, which includes the shuttering of the city’s fire station No. 3 near the intersection of Hillsdale and Pine streets.