Crain's article on tax credit crunch mentions Southwest Housing

May 5th, 2008
Lithuanian Hall, the offices of Southwest Housing Solutions

Diminished tax credits, tighter standards toughen funding search

By Tom Henderson
Crain’s Detroit Business
May 05, 2008

Like seemingly all things financial, funding for brownfield redevelopment is in flux. Some big banks that have traditionally been buyers of tax credits are now losing money and can’t use credits. And they aren’t funding deals, either.

Banks that are lending have tightened credit standards on all deals, making it all the more important to take advantage of every available tax credit and incentive, say developers, bankers and brownfield development professionals (See box, this page).

The state of Michigan has helped offset the credit crunch with recent initiatives that increased urban brownfield tax credits from 12.5 percent to 20 percent, has allowed developers to sell credits directly to the state Treasury for 85 cents on the dollar and eased eligibility for demolition costs. The state also streamlined the approval process for brownfield work plans and sped up the time for reimbursement on some preconstruction costs.

Locally, the uncertainty has been compounded by the woes of Cleveland-based National City Corp., which has been a leading player in brownfield development in Southeast Michigan, both as a buyer and seller of tax credits from developers and as a lender for their deals.

With losses in the hundreds of millions of dollars in the past two quarters, stemming from former Chairman David Daberko’s push into subprime mortgages, National City has no taxes to offset and is more worried about fixing its balance sheet than making new real estate loans.

An interview that had been arranged with a specialist on brownfield development in the Troy headquarters of National City’s Michigan operations for this story was canceled by officials in Cleveland. But according to figures provided by National City, the bank has been involved in projects worth hundreds of millions of dollars in recent years in Southeast Michigan, including the TechTown incubator associated with Wayne State University, the Mexicantown Mercado and Welcome Center by the Ambassador Bridge and the Book-Cadillac Hotel.

“NatCity has been fabulous for the Detroit area as far as helping developers utilize various resources for brownfield development,” said Julie May, president of Southfield-based Integrated Tax Strategies L.L.C., which helps developers bundle and sell tax credits. “What company is going to step in and fill the role NatCity filled? We’ve had so many clients who just loved NatCity. They played such an important role.”

Coincidentally, Key Bank’s parent, Cleveland-based KeyCorp, was reported to be one of those interested in buying National City before National City announced on April 21 that it was no longer for sale and was raising $7 billion in a stock offering. Key is aggressively seeking brownfield deals, with projects that bundle its buying of tax credits — it is still a profitable bank — with loans to developers.

William Koehler, president of Ann Arbor-based Key Bank’s Michigan district, said “the strategy is to focus on segments of the market where we could leverage our people and capital to have an impact. … In an environment like this, where people choose to look inward, we can look outward to help clients solve problems.”

“We’re seeing a lot of activity in Southeast Michigan,” said Tom Walker, Key’s community development lender and relationship manager, who works at the Livonia office. Of brownfield development, he said, “It’s a good business and a good place to get deals done. “

Bruce Martin, senior vice president of community development real estate at JPMorgan Chase, said activity has picked up at his bank, too, as struggling lenders cut back.

“Chase is well-capitalized,” he said. “We’re seeing longer looks at transactions in general. If other lenders aren’t lending, it provides more opportunity for us.”

Said Ron Hodess, leader of the real estate practice group for Miller Canfield: “There are other buyers of tax credits out there. Bank of America is a buyer of credits, and they’re coming into the market.”

“We can put a great package together, but bank financing is still difficult,” said Corey Leon, director in the Detroit office of Saginaw-based AKT Peerless Environmental Services. His specialty is advising customers on project feasibility and whether leveraging tax credits and other incentives will make a development profitable. Projects include the Fort Shelby Hotel, the Whittier Hotel, and, on behalf of Southwest Housing Solutions, the Lithuanian Hall and the Vernor Scotten Apartments in southwest Detroit.

William Lichwalla, president and CEO of Southfield-based Plante & Moran Cresa L.L.C., a real estate services company, said that while the tightening of capital markets is affecting brownfield development, “Michigan has made a fairly aggressive effort that is having a significant impact on countering tightening credit standards.”

The impact of changes in state law means that for some developers who are financially stretched, “brownfield credits may be the difference in doing a deal or not. If it’s a greenfield, you might not be able to do it,” he said.

Those changes “made it easier to do a brownfield deal,” said Hodess. “Brownfield deals are always more difficult to put together, because they typically have multiple layers of financing and multiple layers of incentives. They’re still tough deals, but with the changes in incentives, if you’re up to the challenge, brownfield is a good place to be.”

Michael Kulka, president of Hazel Park-based PM Environmental Inc., which does due diligence on brownfield sites for prospective lenders, said developers on large brownfield deals, in the $50 million to $100 million range, “are having a heck of a time. They need banks pooling money, and no one is. On smaller deals, the volume is healthy.”

PM is doing a brownfield development for its own new headquarters in Berkley, and Kulka said the $80,000 it will get in tax credits made the project doable.

“I knew it was a contaminated site before I bought it,” he said. “Credits make it work. We’ll apply the credit to our own liability. That’s real dollars in my pocket.”

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