Michigan moves forward with place-based investment

Michigan is targeting investments in places with the highest returns, especially downtowns, urban centers, and mixed-use corridors. Birmingham is a suburban city north of Detroit that has seen substantial mixed-use development in recent years. Photo by Michael Campbell.

Note: This article appears in the May-June 2014 print issue of Better Cities & Towns.

A new tool for financing place-based development has been created in Michigan — expected to generate $15-$100 million in the coming year, and $100 million a year thereafter, to be used for revitalization of downtowns and main streets.

In April, Michigan created a statewide “EB-5 Regional Center” to attract foreign investors. The center is now up and running. The EB-5 program allows foreign nationals who invest between $500,000 and $1 million into the US to gain permanent residency. 

Michigan’s program stands out in that it will specifically support mixed-use development in “centers, nodes, and corridors.” Most of the money is going into downtowns in Michigan’s 14 largest metro areas, which generate 85 percent of the state’s economic activity. The framework for that approach is the rural-to-urban Transect, according to Joe Borgstrom, the director of Michigan’s EB-5 Regional Center. 

With expedited permitting from the US Customs and Immigration Services in late March, the Regional Center was created by Gov. Rick Snyder as part of the Michigan Community Development Corporation, staffed by the Michigan State Housing Development Authority (MSHDA).

Michigan is specifically targeting 26,000 international students at 12 public universities including the University of Michigan and Michigan State. Borgstrom anticipates that 100 to 200 people will invest this year. These are highly educated young adults from wealthy families, mostly associated with universities, who want Green Cards — and many would like full US citizenship. Although Borgstrom doesn’t use the term “creative class,” these investors share a taste for urban living and the high education of that demographic.

Foreign-born entrepreneurs represent a quarter of US patents. “The benefit to Michigan is to acquire more foreign capital, to create jobs, and to retain these folks as residents,” he says.

The EB-5 financing program is part of Michigan’s comprehensive place-based initiative, which is guided by Transect-based planning and development. The state is working with nonprofits and private firms in a program called MIplace, directed by a public-private consortium called the “Sense of Place Council.” The goal is to focus public and private investment in areas with the highest economic development return. 

The research shows that the highest returns come from place-based development in centers, nodes, and corridors, according to James Tischler, director of MSHDA’s community development division. 

Since 2012, MIplace has developed a comprehensive curriculum on placemaking that has trained 9,000 people across the state including multidisciplinary professionals, elected officials, appointed officials, trade organizations, and even citizens. Now the state is moving into implementation with EB-5 and other programs.

Michigan has more than enough willing investors in EB-5, who are mostly motivated by the permanent residency benefits. “The primary type of project is mixed-use development in downtown Detroit and other urban markets, usually within two to three miles of a university campus,” Borgstrom says. 

Due diligence is more time consuming than finding investors. MSHDA, which has been involved in community development for a half century, must ensure that the developer has site control, that the pro-forma “pencils,” and that the capital is adequate. Additionally, each project is analyzed to make sure that infrastructure is in place, entitlements are likely, and that the form and structure of the buildings are appropriate to the Transect zone. 

Each investor must create at least 10 jobs. “As regional center, we are allowed to count indirect jobs. If the first floor of a building has a restaurant or a coffee shop, we count those jobs — but we can also use an economic model based on how many dollars are pumped into this area because of the development.”

Housing tax credit tied to Walk Score

Also in the area of place-based finance, Michigan has been using Walk Score (walkscore.com) as a criterion in qualifying projects for Low-Income Housing Tax Credits (LIHTC). Michigan was the first state to do this starting early in 2012 and Illinois recently followed suit. Now Michigan is proposing to increase the weight of Walk Score and add other place-based criteria.

Walk Score currently represents 5-10 percent of the point system for qualifying projects. According to the proposal, Walk Score would rise to 20 percent of points while other place-based criteria — such as location in a central city, proximity to transportation, and location in a neighborhood revitalization zone — would account for an additional 30 percent of points. Place-based criteria would amount to half of total points for qualifying projects.

Walk Score is a website that applies a score of walkability to any location nationwide. It is a “dashboard of urbanism” that is correlated to good urban form, Tischler says. In fact, it measures the “affects of urban form,” which is increased economic activity in a concentrated area. 

Low Income Housing Tax Credits determine where subsidized low-income housing is built — across the US such housing is often built in drive-only locations with no transit service. That can add many thousands of dollars to a household transportation budget, negating the cost savings from subsidized housing. Michigan’s program, run by MSHDA, steers LIHTC units toward mixed-use centers, nodes, and corridors. 

So far, the experience using Walk Score as a criteria for the tax credits has been positive, says Andy Martin, LIHTC analyst with MSHDA. One problem is that Walk Score is not totally accurate. There might be a new restaurant or grocery store that  the website has missed — usually, these inaccuracies do not affect the score enough to change whether a project qualifies, Martin says. To correct such problems, Michigan developers can work with Walk Score directly. 

Most states have statewide criteria for LIHTCs, and could use a system that incorporates Walk Score, Martin says. Some states already have some kind of place-based criteria.

Developers who are awarded the credits sell them at discounted rates to investors, who can apply these tax credits to any part of their federal tax bill, wrote Matt Lerner of Walk Score.

Hearings were held on the expanded criteria in April 2014, and were scheduled to go to the MSHDA board.

Robert Steuteville is editor and executive director of Better Cities & Towns.