Development is booming in Detroit. Every month there’s new announcements for transformational projects, multi-million dollar mixed-use buildings, and countless other smaller developments.

But behind nearly all these developments are subsidies, adding up to billions of dollars in tax incentives, grants, low-interest loans, and cheap land provided by various government entities at the city, state, and federal level.

Despite its identity as a comeback city, Detroit still remains a “weak market” in development terms. Most projects are unable to secure sufficient financing, leaving a “gap”—the difference between development costs and what market rents or projected commercial revenue can support. For Detroit, that gap can be significant.

The memo cited inflated construction costs due to the scarcity of labor and demand for materials. It also argued that a considerable portion of the projects involve space dedicated to public and civic use.

The MEDC has been involved in a number of other developments around the city, like the new TCF Bank office downtown, The Corner at the site of the old Tiger Stadium, and a mixed-use development in the West Village, to name a few.

“Economic development at the city and state level is incredibly competitive,” says MEDC spokesperson Otie McKinley. Big and small projects require support through tools such as a Michigan Community Revitalization Program loan and extension of existing Brownfield Tax Increment Financing.

Ford Motor Company’s re-entry into Detroit’s renaissance, the $740-million Michigan Central Station restoration, involved about $240 million in state, county, and city tax incentives for the project that will last over 30 years.

Ford argues that the project would not be economically feasible without incentives. Taxes and other costs of doing business in Detroit are higher than average, according to Cristina Twelftree, Ford’s Corktown communications manager. “The cost to renovate a long abandoned historic structure, including the extensive environmental remediation, is so significant that it is almost cost-prohibitive,” she says.

Filling gaps in private financing involves not only public subsidy but “mission capital.” In a 2017 report, “Mission Finance in the Motor City,” the Urban Institute noted that mission capital—investment that delivers both financial and social return—has “outsized importance” in Detroit. According to the report, “Deals in Detroit often do not generate enough revenue to pay off the debt necessary to acquire and rehab a property,” and that subsidies will have an “enduring importance” as a development tool in the city.

Peter Cummings, executive chairman of The Platform, was a prominent developer in Midtown when it was, he says, “a pretty bleak place.” During those years, he was involved with the development of “The Max” at Orchestra Hall, the Ellington lofts, and Whole Foods.

“What was very obvious to me when I started working in this area is unless you had a critical mass of development, the existing blight and kind of inertia would pull back any small flag you would try to plant,” Cummings told the Huffington Post in 2013.

On the day Whole Foods opened, his perspective on the city changed. “The young and the old and the rich and the poor and the black and the white. I was stunned at how excited everyone was. … I no longer saw Detroit as distressed, but more as a city whose population was grossly underserved.”

Cummings, who sees himself as “mission-driven,” says subsidy has been required for all of their projects. The Platform currently has 20 developments in various stages, many of them in the Midtown/New Center area.

“Detroit has to be viewed as an emerging economy,” Cummings says. Despite the current boom, he sees subsidies as necessary and thinks it will take “a generation for normalization to occur” in its economy.

McKinley wouldn’t speculate on when or if Detroit will ever be able to attract development without tools such as those available through MEDC. It’s not so much the economic conditions of the city, but national competition.

“Cities of all sizes across the country leverage attraction and retention tools to grow businesses,” she says. “Economic development is rolling and cyclical in response to the current state of that area’s economy. Public private partnerships remain, and will likely continue.”

FCA’s plant will be creating an estimated 5,000 jobs. The city of Detroit bought and assembled land to help complete the deal in the hope that many of those jobs would go to Detroiters.

Twelftree says that Ford could have developed its mobility campus elsewhere, and in a new building. But its vision was, in part, to restore an iconic, historic building as its vehicle “to create a thriving space and a magnet for high-tech talent.”

The Detroit News, citing Realcomp Ltd, reported that residential real estate prices in the 48216 zip code had risen 14 percent to a median sale price of $137,250, compared to $119,500 a year before. Commercial values are also increasing. For example, Phil Cooley, who co-founded the small business incubator, Ponyride, (and Slows BBQ) purchased a building in Corktown for $100,000 in 2011. The building recently sold for $3.3 million.

Less than five years out of bankruptcy, Detroit is still recovering from decades of disinvestment and middle-class flight. Whether it’s a symptom of a market that is relatively weak, or a component of an urban development strategy facing competition from other cities with more prosperous economies, public subsidies will remain integral to development deals that get done in this city.

And that’s likely to be the case for years to come.

Source: Curbed Detroit

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