We’ve talked a lot about how our local communities are squeezed by Michigan’s failed municipal finance system: that our primary revenue stream, property taxes, is designed to fall behind; that the state has plundered our second largest funding source, revenue sharing, to the tune of $8.6 billion and counting to patch its own budget; and how the dominance of public safety costs and statutorily required duties absorbs nearly all remaining budget.

Between our constitutional revenue limits and the state's underfunding of revenue sharing, Michigan local government budgets are in last place nationally.

Between our constitutional revenue limits and the state’s underfunding of revenue sharing, Michigan local government budgets are in last place nationally.

But as we work with communities around the state on securing development that meets local goals, we are finding that the state’s broken municipal finance scheme additionally inhibits local efforts at self-help: nearly all of the tools communities have available for economic development assume adequate funding, especially from property tax. Like Lucy holding a football for Charlie Brown, the state has enabled a broad array of local development tools that many local governments can’t use effectively.

Due to the state’s constitutional limits on property tax revenues, the only way municipalities can even keep up with inflation over the long run is by “additions” of taxable value–that is, new construction.  Traditionally, this has supercharged what Strong Towns has termed the “growth Ponzi scheme,” a pressure for constant new development to pay for the maintenance of past development: with Headlee and Proposal A causing our tax revenues to fall off even more quickly than they would otherwise, the perverse incentive of building ever outwards to maintain local budgets has contributed to our expansion of infrastructure and urbanized area across the state even while population has been flat–we have so much difficulty fixing the d*mn roads (and sewer mains, water lines, etc) because we have so many more of them per capita than we did 40 years ago.

While our population growth has been sluggish over past decades, we've spread out rapidly, taking on massive infrastructure maintenance costs (also known as "potholes") in the process.

While our population growth has been sluggish over past decades, we’ve spread out rapidly, taking on massive infrastructure maintenance costs (also known as “potholes”) in the process.

The League has attempted to refocus attention and investment on existing places through our placemaking initiatives, and in our work with the state’s Redevelopment Ready Communities program: to reinforce and support existing community investments instead of the build-and-abandon cycle. But city and village attempts to take this path are constantly bumping up against basic math. Outside of a handful of hot markets, infill development in Michigan requires the local government consider incentives to bridge the gap between construction costs and local market conditions.

Public incentives for private development can support important community goals such as remediation of toxic contamination, affordable housing, living wage jobs, or preservation of historic landmarks. But our broken municipal finance system often closes off the additional benefit of ongoing tax revenues. (Incentives can also be used badly, of course, and I always encourage doing the math!)

Nearly every community economic development tool allowed to our cities and villages prevents a construction project from fully contributing to the local budget: they reduce property tax payments, as in PILOT agreements for affordable housing; they divert revenue for particular purposes, such as brownfield TIF for site remediation; or they waive new tax revenue for a period of time, such as abatements for obsolete property renovation.

And, thanks to our broken system, by the time the property is fully contributing property taxes at the end of the abatement period, its value is likely to have been artificially depressed by Prop A and Headlee, slicing off long-run benefits that development might otherwise bring. (Obviously the value of a property can change over the course of a decade regardless and fiscal forecasts should plan accordingly–our system just puts a heavy thumb on the negative side of the scales.)

For municipalities to truly leverage our array of property tax-based development tools, they have to be large enough or wealthy enough that they can absorb any incremental service demands while not collecting tax revenues–meaning they’re not necessarily the communities with the greatest need for effective tools to support development. (The 20-some cities with local income taxes are a special case, as most of the property tax-based programs allow the municipality to collect revenue from new residents or employees via this income tax to contribute towards costs of services.)

Relying on property tax incentives for local development support is extremely limiting in a Headlee-constrained world.

Relying on property tax incentives for local development support is extremely limiting in a Headlee-constrained world.

Sometimes the idea of “spin-off benefits” or “multipliers” arises as a way that tax-abated development can indirectly support local budgets–this is less likely than it intuitively seems.  If a new development makes surrounding homes more appealing, driving up home values, Prop A caps the taxable value of each home, and as sales trigger “pop-ups” of individual home values, Headlee rollbacks prevent the local government from seeing any new revenue. Similarly, nearby businesses might see more foot traffic, but since that business activity is not subject to local taxation, the municipality again sees no budget benefit from that activity. Until the point where resident demand is driving new housing construction or major renovation, or where business growth leads to physical expansion–“additions” under Headlee”–tax revenue does not increase.

Economic development activity may have very visible effects in the community--without contributing to the municipal budget.

Economic development activity may have very visible effects in the community–without contributing to the municipal budget.

Again, the economics of development mean that public support is often needed, especially to secure public goals like environmental cleanup or affordable housing: increasing local tax revenues is not the only metric to be used in evaluating incentive programs.  Ideally, though, the local toolkit would be large enough to also allow communities to use incentives in ways that better support their budgetary ability to provide basic services.

(This post is adapted from a pair of presentations Murph gave recently on municipal finance for planners and economic developers, intended to help those practitioners understand the math that their city managers and elected officials are grappling with.)

League staff have recently helped educate legislators on the need to reinstate Michigan’s historic tax credit, which could have broad applications for multi-unit rental housing in historic buildings, upper story residential in downtown cores, adaptive reuse of underutilized buildings, and rehab of existing single-family housing. Accessible to both commercial rentals and owner-occupied residential, it would be one more excellent tool in the toolbox, and not only encourage reinvestment in our existing downtowns and already-built-out neighborhoods, it would reduce the ecological impact of building demolition in Michigan landfills.

Related to this push is the demand for a certain kind of housing – think smaller (2,000 sf or less) missing middle – in the workforce price range of 80 to 120% of Area Median Income (AMI). This demand is far outpacing current supply in cities. Part of the problem a lack of multi-family housing options. Part of it is our aging single-family housing stock, a lot of which desperately needs upgrades and repair. Many people don’t buy those older homes in our city centers because of concern over the hassles of fixing up an old house and a dearth of skilled contractors. (Again, this is where the historic tax credit would be tremendously helpful in increasing the relative affordability of this work.)

We also know that new construction costs the earth to build, so the luxury market is where the majority of new builds are happening. Another way to address the housing mis-match could be a loan fund for homebuyers that would allow them to gain access to the capital needed for immediate improvements upon purchase, because many people barely squeak through closing with enough money to buy curtains, much less a new HVAC system.

But even if we get that Michigan historic tax credit back, and we start addressing capital needs in creative ways, we’re still going to need new construction and a skilled labor force to meet our housing demands.

Quickly. And on a budget.

The Need for Skilled Trades

One proactive step could be to address this need by putting a big investment in building out the trades apprenticeship programs. The Michigan Historic Preservation Network created a rather successful program last year doing trades training, and there are other small scale apprenticeship programs out there, but those programs striving to train a dozen people are no match for a statewide initiative that could be created if the resources of a larger government department or non-profit foundation were tapped.

Another way to incrementally expand the skilled trades professions could be to develop dedicated factories for modular housing, therefore creating reasonably permanent construction jobs in a geographically stable area.

Schematic drawings for new homes being constructed in Grand Rapids by Kent County Landbank

Schematic drawings for new homes being constructed in Grand Rapids by Kent County Land Bank

“But, Modular Housing. REALLY?”

Yeah, really. What we really need is a variety of solutions – not one or two good ideas will solve our housing needs. Particularly in the more rural areas of Michigan, those with flat to limited new housing activity, this kind of model would provide the consistency needed for keeping skilled tradespeople engaged in steady work.

Let’s now address the elephant in the room: perceptions of quality. We’re not talking cheap construction, not cookie-cutter plastic houses that all look like they came from Playskool. This kind of housing is known as “indoor stick built” and it isn’t your grandmother’s double-wide trailer. These housing units are widely customizable, and are constructed in sections of moderate to high grade materials such as metal stud walls, integrated insulation and mechanicals, double or triple paned windows, and fiber cement board siding. The built sections are then trucked from the factory and assembled on a foundation already prepared on site. They are available in a variety of configurations to avoid nauseating repetition. This method of construction is, on average, cleaner and more efficient than standard new construction methods, and it minimizes waste.

What are we talking about for prices? According to our recent research with the Michigan Landbank Fastrack Authority, cost for construction is $110 to $115/sf, which is tracking at about $170,000 for a 1,500 sf home, plus land and site work. Some of these units are already being built in Michigan, with a new project led by the Kent County Landbank in Grand Rapids to do infill construction in existing neighborhoods by constructing homes on vacant parcels. And many more Michigan communities are expressing interest.

This also not the first time that this sort of idea has come into vogue in Michigan. As discussed in Mid-Michigan Modern, a 2016 publication by Susan Bandes of Michigan State University, modular construction was one of the ways communities responded to the market demands for workforce housing in the immediate post-WWII era. There are still a lot of mid-twentieth century neighborhoods across our state that were built with modular construction. They just don’t look like it. Consider also the Sears Kit Homes that got built here in the mitten. These beloved homes were products of a factory system of mass-made, high quality homes delivered from the warehouse. Or, closer to home, the Bay City-based Aladdin Homes chosen from pattern books and “Built in a Day.” Only a few steps away from current-era indoor stick-built homes.

In the end, modular housing indoor stick-built housing may not be THE next big housing solution. But it is one more good quality solution that might work for a segment of the population, while we keep working on other fronts, too.

Okay, you’re right. It costs the earth to build new in Michigan or do a significant rehab. But don’t immediately rush to load up the U-Haul and venture off to cheaper climes. All is not lost. The summers are too good here in Michigan, our quality of life is outstanding, we have some of the most highly rated universities in the country, and you’ll really want to hold onto your stake here once you read up on climate change. If you do your research, you’ll also find that it’s not necessarily any less expensive in most places elsewhere. At least for locations that folks might want to choose, and in many cases, you’ll find that costs of living are higher.

Now that we have examined some of the underlying factors contributing to increased construction costs, and determined that staying in Michigan is still a pretty good bet, let’s address some of the challenges facing communities that reflect these factors and provide some strategies for successfully pushing back into the market.

Ypsi_Cycle_Rehab_2018

The former Ypsi Cycle building in downtown Ypsilanti, undergoing a complete gut and rebuild.

Strategy One:
Acknowledge that construction, new or rehab, is going to be expensive.

The first step is always to admit there is a problem. We have all heard the grumblings: “New construction is so expensive, developers are building only luxury lofts to turn a profit.” As discussed in a recent Strong Towns article, acknowledging that something is expensive is not necessarily a criticism. It is, however, a requirement for realistically tackling the problem that even when new housing units are created, they are often out of reach for working Michiganders.

Prioritization of supports to incentivize new workforce housing by reducing land acquisition costs and providing predevelopment technical legwork can help set the stage for the creation of new missing middle housing units. The Michigan Economic Development Corporation’s Redevelopment Ready Communities (RRC) program aims to help get cities prepared to attract and accommodate appropriately scaled development in the heart of cities, with built-in walkability and connections to existing community amenities. The League has provided several cities with predevelopment assistance through this program, with success stories reported out on our Developing Great Places page.

We cannot make building cheaper. In fact, we should advocate for lasting quality of construction in city cores regardless of occupants because of the value of creating a durable building stock which can pivot in use over time. We can, however, also focus on shifting costs such as utility hookups, environmental remediation, site prep, and even in some cases, architectural design work, to public entities to remove barriers for desired development formats in targeted locations in our existing downtowns. We can lower costs to purchase municipally owned vacant or under capitalized buildings. We can incentivize historic rehab of aging building stock with the re-establishment of the Michigan Historic Tax Credit and the upcycling of our aging industrial and commercial buildings to housing use.

As advocated by the National Development Council, we need to persist in clarify public interest in targeted growth, which could be alleviated with the easing of public bonding limitations and the promotion and expansion of housing-focused CDCs. Another tack is to watch as Michigan’s community capital investment scene continues to grow and expand while explicitly voicing our interest in local investment opportunities underwritten by local people, as enabled by Michigan’s MILE Legislation.

In the meantime, while such policies and instruments are being built, we can keep working our local economic development networks to convince those with the cash to free up capital to invest and traditional banking institutions to give developers the financing instruments they need to do the projects we want.

Strategy Two:
Make friends with people who know how to build stuff. Then scaffold your way up and support and advocate for skilled trades training programs.

Get it? “Scaffold” your way up? It was just too good of a joke to plaster over.

Every builder must balance the price of materials with the cost of time and labor. In some cases, the investment is in time and experience through apprenticeship programs and on-the-job training. Even a simple bathroom remodel or rec room addition can bring into stark light the lack of skilled tradespeople in some Michigan markets. Many experts departed our communities in the dark days of the Recession and the gap left behind has not yet been filled.

According to advice from the Incremental Development Alliance, a group of developers working to promote small-scale construction and rehab in existing city centers, working with local community partners for a common vision goes a long way toward cultivating a culture of slow and steady growth in small and medium sized contractor companies.

As shown by IncDev’s work in several cities across the United States, this type of approach works best when projects are patterned after regionally familiar building forms to fit into existing neighborhoods where housing is wanted by the community and called out as desirable in updated master plans. These projects are just-right-sized to get done by smaller crews and provide relatively stable and predictable demand for growing a construction crew one person at a time. And these types of projects tend also to fall into the not-quite-so-scary scale when seeking approval through local planning commissions. In the case of Chattanooga, Tennessee, a rapidly growing tech hub, “city administrators are collaborating to find ways to fast-track the proposed Missing Middle housing and minimize some of the risks and expenses which disproportionately stymie small multi-unit developments.”

Once developer confidence is built through municipal support and market analysis, sometimes all it takes is to start with one experienced contractor. Bring them in to get started with one site, gradually add team members, and set up a pipeline of projects to keep them in steady work.

Strategy Three:
Know your community’s data and demonstrate pent up demand.

Our state’s demographics are rapidly changing. In 2018, according to the American Community Survey, Michigan’s average household size is only about 2.5 people. Only about 22% of all Michigan households include children 18 years old or younger. To parse it another way, people in their 20s and 30s are choosing to prioritize education or careers and delay or entirely opt out of traditional marriage partnerships and childrearing. In older age brackets, we have a growing segment of longer-living, healthy seniors over the age of 65, many of whom are no longer partnered due to loss, divorce, or choice.

What does this mean? While nearly half of Michigan’s households have two spouses or partners living together, many households have only one adult. Even if you don’t want to live in a small apartment or a modest condo, many people do.

We are experiencing a rising demand for smaller housing options because people simply don’t desire or cannot afford that much space, but they do want to be connected to others in walkable neighborhoods. While a four bed, three bath Colonial with a pool and a 20-minute drive to town may be perfect for some of our households, the data tells us that large-lot, car-dependent housing options are abundant in many markets yet are probably not the best fit for the majority.

As we continue to witness these changes in our communities, in the lives of our own families and friends, we must track and present data on the pent-up demand for the creation of affordable and middle-income housing in walkable, real places. And if they’re connected to public transit to reduce car usage, all the better. When we think of who wants these kinds of housing – your 27-year-old daughter who finally finished school and just getting her career off the ground; your best friend who would rather pour her heart into being a pet parent than manicuring her lawn; your 70-year-old dad who has chosen to buck tradition and not decamp to Florida like his parents did; or maybe just you – we can and will respond to these needs with a more personal urgency.

Keep Thinking About the Why.

By setting proactive public policies and developing incentives to prioritize the expansion of these market segments, we’ll not only be taking care of our economy, we’ll be caring for the people we care about, too.

Yet with these factors in mind, we can continue to focus our efforts on building collaborative relationships with all involved to mitigate the underlying cost factors and make these projects not only worthy of investment but also creatively and appropriately financed. We can accomplish these goals by seeking more accessible financing instruments, encouraging reasonable expansion, holding a focus on appropriate density, elevating examples of right-sized builds, promoting the cultural and ecological sense of building reuse, and helping demonstrate the need for growth in skilled trades programs to carry out this work.

In the end, the most important thing to remember is that when we engage in conversations about the high cost of construction, both new builds and rehabs, there are many reasons behind those price tags. And there is also a myriad of reasons why quality construction needs to take place when thoughtfully building quality 21st Century Communities.

Read more on how to plan and do these kinds of projects in our Placemaking How-To toolkit at:  http://placemaking.mml.org/how-to/

mag cover combinedThe Michigan Municipal League received a statewide honor recently for The Review magazine, which focuses on placemaking activites and programs of League member communities as well as other topics.

The League received a Gold Certificate for its magazine in the 17th annual Diamond Award program in the magazine publishing category for organizations with an annual budget of $1 million and greater. The League’s magazine has been honored multiple times in previous years in the Diamond Award program by the Michigan Society of Association Executives (MSAE).

As part of the contest, entrants submitted two consecutive copies of the magazine. The League submitted the November/December 2017 issue that focused on affordable housing, with additional stories on housing initiatives in other communities and a cover-story profile of 2017-18 League President Catherine Bostick-Tullius, Lapeer city commissioner. View that issue here: http://www.mml.org/resources/publications/mmr/issues/nov-dec2017/Review_Nov-Dec_2017_Final.pdf.

The entry also included the January/February 2018 edition centered around essential building blocks for local government operation, such as improving your budgeting process, gun regulation, and avoiding charter conflicts. On the cover of that issue was Hudsonville officials celebrating the opening of the community’s Terra Square project. The city won our 2017 Community Excellence Awards competition for the creative conversion of an old auto dealership into a multi-use community venue. View that issue here: http://www.mml.org/resources/publications/mmr/issues/jan-feb-2018/Review_Jan-Feb_2018_Final.pdf.

The Review magazine is a nationally recognized example of an outstanding publication to be replicated for its thought-provoking content, overall appearance, and quality. Our members frequently submit ideas for stories on projects, programs, and initiatives in their community that their colleagues can implement in their own cities. It is published six times a year. Find current and past issues here: http://www.mml.org/resources/publications/mmr/mmr-archived.htm.