By Tom Perkins and Violet Ikonomova
In the face of pushback over a proposed $60-million tax abatement for downtown Detroit’s Hudson’s site, Mayor Mike Duggan’s administration and Dan Gilbert’s Bedrock last week justified the incentive with claims that the building will draw nearly 2,000 new full-time jobs and generate tens of millions in new tax revenue.
But the job projections are overly optimistic and unlikely to fully materialize, economists who reviewed the proposed deal tell Deadline Detroit. They argue that office buildings don’t create new jobs on their own, many jobs may move from within the city, Detroit’s commercial real estate market is currently saturated with unused office space, and much of the new job creation would happen even if the Hudson's project didn’t exist.
“If Gilbert himself is not going to create 2,000 actual new jobs, then his job-creation claim is laughable,” said Greg LeRoy, director of Good Jobs First, a non-profit that analyzes tax incentive deals.
The job numbers are important because the income tax revenue the jobs create accounts for about 75 percent of the city’s expected $71 million estimated tax benefit during the building’s first decade. Without that return, the deal makes much less financial sense for the city.
The latest Hudson’s site plan call for a 49-story tower with a 225-room hotel and 100 upscale condominiums, and another 12-story midrise with about 500,000 square feet of commercial space. City Council last Tuesday delayed until today a vote on the $60 million incentive so the city could educate residents. But today once again council postponed the vote until next Tuesday so it could have more time to review the issues.
The incentive, called PA 210, is in addition to a nearly $200 million “transformational brownfield” that allows Gilbert to collect state income taxes from employees in the building, among other breaks.
The incentive’s supporters say it’s needed to offset higher construction costs and maintain the current scale of a state-of-the-art building they claim will draw jobs and residents from outside the city.
In a statement to Deadline Detroit, the Detroit Economic Growth Corporation, a quasi-public agency that negotiates incentive deals for the city, pointed to a list of Michigan companies that relocated from the suburbs, national companies that operate offices here, or startups that launched and grew in Detroit over the last decade.
It said it “rejected” the idea that its new job creation claims are “laughable.”
The proposal’s critics point to the most fundamental issue with subsidizing real estate developments for jobs: Unlike a factory, office buildings largely house existing jobs instead of creating new ones.
“Jobs don’t materialize simply because there is new space to house them,” LeRoy said.
Though the city will collect income tax revenue from the building’s new jobs, only those that are new to Detroit will generate new revenue. The city receives no new economic benefit if a job moves to the Hudson project from another location in Detroit. In such a scenario, the “net effect would mainly be to cannibalize” the job’s economic impact, LeRoy said.
City economic development officials disputed that notion in a final-hour virtual public education session held Monday evening.
“Our projections are based upon new jobs coming into the city, and new business coming into the city, not just a reshuffling of jobs in the city,” said Kenyetta Hairston-Bridges, an executive at the DEGC.
No prospective office tenants have been named. In an interview with the Detroit News last month, Steve Morris, principal of Axis Advisors LLC, a commercial real estate service firm in Farmington Hills, said finding those willing to pay above market rate at a time of continued remote work would be difficult.
Detroit’s office vacancy rate is on the rise as many employees, including those who work for companies with downtown Detroit offices, continue working from home. About 500,000 square feet of commercial space at the GM RenCen, the most comparable building to the Hudson’s, is vacant, and the latter will add over 500,000 square feet to the mix.
While the city and Bedrock’s job claims assume full occupancy, LeRoy cautioned that “creating supply doesn't create demand.”
“Subsidizing new office space at a time when commuting versus working at home is still an unresolved issue is risky business, especially in any market that already has high office vacancy rates,” he added.
The city and Bedrock’s math also doesn’t account for companies that would have moved to Detroit whether the Hudson's building is there or not, noted James Hohman, fiscal policy director for the Mackinac Policy Center, which opposes tax incentives.
If the Hudson didn’t exist, a company might move to the RenCen instead, and the city would receive the economic benefit without the new abatement.
“The incentive’s supporters tend to count every job in the building and multiply the benefits without considering what would have happened without the building or the costs of assistance,” Hohman said.
The same principles apply to the Hudson’s residential and hotel portions. While residential downtown occupancy is improving, hotel occupancy remains about 36% below its 2019 level, according to the Downtown Detroit Partnership.
But the DEGC touts plans for a “highly amenitized” building that doesn’t exist in the downtown market.
“The type of office space being built at the Hudson’s site reflects exactly what is needed to attract companies in the post-COVID office world,” the statement read.
At Monday’s council education session, officials with the body’s Legislative Policy Division said they’re able to hold developers who fall short of their promises accountable and have written at least 13 resolutions to revoke tax abatements in the past.
Using library money?
The other prong of Bedrock and Duggan’s public relations push is the claim that “taxing units” like schools, libraries, museums, parks and others won’t be impacted. But a closer look at the deal shows that to be a bit misleading.
Since the project is in Detroit's Downtown Development Authority district, the local taxes that would have gone to schools, libraries and others instead go to the DDA to be used to improve downtown, or are distributed to businesses like Bedrock via tax incentives. In the case of the PA 210 abatement, Bedrock is exempt from taxes that would have gone to the DDA. With the transformational brownfield incentive, which Gilbert secured several years ago, local taxes that should’ve been paid to taxing units are collected by developers.
Gilbert can claim schools and other taxing units aren't impacted because the DDA loses the money. That is partially true, but since its 1978 creation, the DDA has received money that would go to schools and other taxing units if it didn’t exist, so the ultimate source of the funds is still the taxing units.
That raises the question of whether the DDA and Bedrock need the money more than schools, parks, libraries and other taxing units, and that’s a debate that many who are fed up with the high number of tax incentives the city hands out may be willing to have.