With growth in the labor force and manufacturing industry, townships are seeing more interest in tax abatement opportunities. Tax abatements are a reduction of, or exemption from taxes granted by the government. While local tax abatements are limited, there are some state-level tax abatements available under the Plant Rehabilitation and Industrial Development Districts Act, PA 198 of 1974, as amended. Tax abatements provided under the Act are known as the Industrial Facilities Exemption for real and personal property. This month’s E-Letter addresses the Industrial Facilities Exemption, local municipal involvement, and considerations for townships currently engaged in providing Industrial Facilities Exemptions.
What is an Industrial Facilities Exemption (IFE)?
Under the Plant Rehabilitation and Industrial Development Districts Act, PA 198 of 1974, as amended, the State provides specific tax incentives to entities involved in manufacturing and high-tech industries. The Act represents a quid quo pro arrangement. Industries are enticed to renovate and expand aging facilities, construct new industrial facilities and new high-tech facilities. In exchange, the business receives an abatement on ad valorem real and personal property tax based on the amount of investment made in a new plant or an old plant that has been restored.
During the mid-1970s, Chrysler Corporation and state and local governments worked together to resolve solvency issues facing Chrysler. The solution relied upon on enacting the Act and providing tax abatements to Chrysler. In return, the local communities received an investment into local labor and the rehabilitation of an aging Chrysler plant.
The same abatement opportunities apply to other, non-automotive industries. To receive tax abatement under the Act, an Industrial Development District (“Industrial District”) or a Plant Rehabilitation District (“Rehabilitation District”) must be established by a local municipality first. While the Act applies to all local municipalities, we will of course focus our attention in this E-Letter on townships. Once the district is created, a manufacturer may apply for an Industrial Facilities Exemption (IFE) certificate from the township. The township may then approve a request for an IFE certificate and submit its approval to the State Tax Commission (STC). The STC then reviews, and may approve the IFE application and issue an IFE certificate granting the applicant a tax exemption from ad valorem real and personal property taxes for a term generally not exceeding 12 years as approved by the township. We will explore the process in-depth below.
How Does a Township Create a Qualifying District?
The first step in the IFE tax abatement process is creating a qualifying district. An Industrial District or a Rehabilitation District may be created by the township board or upon written request of owners of 75% of the state equalized value (“SEV”) of the property within the proposed district. A significant distinction between creating an Industrial District as opposed to a Rehabilitation District is the requirement that at least 50% of the SEV of the industrial property within the Rehabilitation District is “obsolete.” The tax abatement provided in and the eligible property of a Rehabilitation District, as explained below, are also different.
Occasionally, we see that these districts are formed on an ad-hoc basis where the proposed district solely encompasses an applicant’s property who intends to request an IFE certificate. Other townships have created larger districts upon their own initiative to accommodate future growth.
Once the township board either formally moves to create a district or receives a written request to do so, the township must hold a public hearing on whether to create the district. Notice of a public hearing must be provided to the applicant, township assessor, and a representative of each of the affected local taxing units (such as the county, school districts, and libraries). The notice must also be published in the newspaper before the public hearing.
The township board may establish or decline to establish the requested district following the public hearing. The township establishes the district by formal resolution. In so doing, the township board must make certain “findings” to support the policy decision to establish a district and comply with the Act. See MCL 207.554.
How Does a Township Approve an IFE Certificate?
After the township has approved a certain geographic boundary to constitute an Industrial District or a Rehabilitation District, an owner of eligible property within that district may file an application with the township. The property eligible for abatement includes buildings, building improvements, machinery, equipment, furniture and fixtures. Real or personal property is still eligible, whether owned or leased (provided the lessee is liable for payment of taxes on the property). Some common ineligible property for abatement are casinos, certain property of a public utility, existing buildings or equipment prior to construction of a “new facility.” Eligible property must also be used for eligible industry under the Act to qualify. Eligible industry, includes, but is not limited to: manufacturing, mining, high-technology (as defined by Act), research and development, wholesale and trade, and agricultural processing facilities.
If construction, restoration, or replacement commenced before creation of the district or six months before the township’s receipt of the application for a certificate, it will be ineligible. The Michigan Court of Appeals analyzed when “commencement of construction” under the Act actually begins. Applying ordinary dictionary definitions, the court upheld a ruling that construction commenced when the foundation for the building was completed. Crusader Marine v State Tax Commission, Michigan Court of Appeals (1985).
Eligibility of the property is reviewed by the township, subject to the STC’s final approval and issuance of an IFE certificate. A non-refundable fee must accompany the application to the township for an IFE certificate. The amount of the non-refundable application fee will be the lesser of the township’s actual costs to process the application or two percent (2%) of the total property taxes abated for the term that the certificate is in effect.
The application must be reviewed by the township within 60 days of receipt. The township may approve the application by formal resolution. If the township determines that the application should be denied, the Township must explain its reason within the resolution denying the application. The applicant may appeal this denial to the STC for review. The STC has authority to override a township’s denial and issue an IFE certificate.
Even once an IFE certificate is granted, a similar process is followed to transfer an issued certificate to a new owner or lessee, including approval by the township and the STC. Transfer is neither guaranteed nor automatic.
IFE certificates are a long-term relationship between the IFE certificate holder and the township. In this respect, townships should consider the long-range financial impact and increased demands on public services and infrastructure when determining whether to grant or deny a request for an IFE certificate.
For instance, if the owner of an automotive stamping plant requests an IFE certificate (as Chrysler did in the 1970s under the Act), a rural community should consider emergency medical needs for the type of stamping that is occurring. Are certain chemicals used that will increase the risk of medical responses related to chemical burns or inhalation not previously experienced by emergency personnel? Are emergency personnel trained in this area? Will the tax revenue abated impact the ability for personnel to receive proper training? Is the building size too large for current fire vehicles or staff to handle? If so, how will the township finance the cost of purchasing additional equipment? These are questions and concerns that the township should consider.
What Taxes May Be Abated?
The applicant who receives an approved IFE certificate may receive up to 50% of property taxes (taxes on buildings, machinery, and equipment) abated for new facilities, while the renovation of obsolete facilities are eligible for reduction of up to 100% of property taxes on the value of improvements made to a facility. Generally, the abatement will be in effect for up to 12 years. However, an abatement can exceed 12 years if the new facility exceeds $150,000,000 of SEV.
The tax abatement is not effective until the December 31st following the issuance of the IFE certificate. The STC has also made it clear that applications for approved IFE certificates must be received by the STC by October 31st to be issued before December 31st of that year. Once the certificate is issued, the special tax is collected and distributed annually by the township in the same manner as other ad valorem taxes.
How is the State Tax Commission (“STC”) Involved?
If the township board approves the application for an IFE certificate, the township will forward the approved application to the STC within 60 days of approval or before October 31st of that year. The STC grants the final approval and issues the IFE certificate to the applicant. Any IFE certificate is subject to routine review by the STC to determine that the Act’s requirements have been met.
The STC may also be involved later during the abatement period. The STC may revoke an IFE certificate upon request of the township or IFE certificate holder. Upon receipt of a request, the STC will conduct a formal proceeding to determine whether revocation is proper. Some grounds for revocation include failure to complete a proposed facility, removal of its operations, failure to act in good faith, or breach of the written agreement between the township and the applicant. See Bar Processing Corporation v State Tax Commission, Michigan Court of Appeals (1988).
The STC must revoke the IFE certificate, following a hearing, if it finds that “the holder of the certificate has not proceeded in good faith with the replacement, restoration, or construction and operation of the facility or with the use of the speculative building as a manufacturing facility in good faith in a manner consistent with the purposes of this act.” MCL 207.565(3).
How Can Townships Protect the Community?
The underlying purpose of the Act is to increase economic activity by reducing tax costs. In a perfect world, the taxes forgone by issuance of an IFE certificate are recouped through a greater return on investment for the entire community. One way to ensure protection of the community with the approval of an IFE certificate is the written agreement required between the township and the applicant, which is filed with the Department of Treasury. MCL 207.572
The force of these agreements was recently exemplified by an unpublished decision of the Michigan Court of Appeals. A condition of the agreement reviewed by the court required the business to refund all abated taxes if it closed its facility prior to expiration of the IFE certificate. The parties defined “closing” as the removal of “substantially all of the production facilities” and “substantially all of the jobs.” Despite a challenge by the IFE certificate holder, the Court concluded that the agreement had been breached by focusing on whether removing certain production equipment and eliminating jobs satisfied the terms “substantially all” in the agreement. This decision emphasizes the Court’s focus on the terms of the agreement, the definition of those terms, and the context of the language provided in the written agreement. Because of this, the IFT agreement language must be properly drafted at the outset, since it may not be litigated until 10 or 11 years later. Owens-Brockway Glass Containers Inc. v State Tax Commission, Michigan Court of Appeals (2014).
This decision also emphasizes that the STC has no duty to review the “private agreements” between a township and the facility owner. Thus, a township cannot rely on the STC to assist with drafting or clarifying language or even enforcing it. This also permits a township certain freedom in the conditions that it negotiates with the facility owner in the agreement. Any lack of clarity, however, may increase the costs to enforce the agreement.
We recommend that townships consider the following pointers when negotiating an IFT written agreement:
- Provide the legal description of the property and the proposed use of the facility located on that property as represented by the applicant;
- Define the proposed improvements during the term of the abatement and a proposed time schedule for completion of the improvements;
- Define the duration of the abatement and the termination date;
- Provide the estimated values to be abated and the base-year value as of when the applicant requests the IFE certificate from the township;
- Include the inventory of current machinery or equipment that will be renovated;
- Define any words that have a specific meaning in your IFT agreement;
- Analyze all other words not defined with an understanding that a reviewing court will interpret the words with their commonly used meaning;
- Consider whether the applicant should provide additional reporting metrics to the township for review;
- Define the amount of minimum investment required in the facility;
- Include key performance benchmarks to assess whether the facility owner is complying with the investment promised;
- Set forth the events that will require repayment of the abated taxes or the payment of damages;
- Provide for notice to the applicant if a breach of the agreement occurs and an opportunity for it to cure any breach; and
- Consider any breach of the agreement to cause revocation procedures before the STC to begin.
The STC rules regarding the review and issuance of IFE certificates largely pertain to procedural issues. They can be reviewed here: http://www.michigan.gov/documents/taxes/AdministrativeRulesIFE_423476_7.pdf.
Since, the entire process is subject to review and approval by the STC, the STC has provided generic forms for a township and manufacturer to complete the process. Most of these forms are available here: http://www.michigan.gov/taxes/0,4676,7-238-43535_53197-213175–,00.html.
Christopher Patterson email@example.com
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Fahey Schultz Burzych Rhodes PLC, Your Township Attorneys, is a Michigan law firm specializing in the representation of Michigan townships. Our lawyers have more than 150 years of experience in township law, and have represented more than 150 townships across the state of Michigan. This publication is intended for our clients and friends. This communication highlights specific areas of law, and is not legal advice. The reader should consult an attorney to determine how the information applies to any specific situation.