Energy And The Onus of Design Standards For Publicly Funded Projects

As the Michigan legislature debates– and will invariably pass- a bill that will open the floodgates for massive public expenditure on private development in downtown Detroit, it is time we start demanding increased accountability in the sustainable execution of these projects. My proposal? Energy benchmarking for every commercial, industrial, or mixed-use development that receives public subsidy or tax abatement, say, with a total development cost of over $250,000. In my ideal world, we would be requiring benchmarking of everything, forever and always, but I’ll take what I can get. The failure of the more aggressive Community Benefits Ordinance last November– but the passage of the other- indicates that this is feasible in the current market.

Super-TIF

SB 111-115 is essentially a kind of super-TIF, and it was cleverly crafted exclusively to fund a three quarters of a billion dollar development of the Hudson’s site (but could easily be used for future projects as well, and only in Michigan cities over 600,000 population). TIF, or Tax Increment Financing, is a tax capture method used to offset the high cost of new development. Simply put, it is a way to incentivize private development in a specific area by providing a subsidy, grant, or other cash payment to cover a portion of the development costs, and that payment comes from projected future returns. Borrowing on the future sounds risky, but that’s essentially what a bank loan is. The different is that this is public money.

At its best, it can be used to transform neighbourhoods, remediate blight, improve commercial corridors, and develop disinvested districts by helping finance new development, thereby reducing risk. TIF’s are often applied to districts (theoretically), which means that they can, again, theoretically, be used to improve entire areas as opposed to subsidizing a single developer. But at its worst, TIF is essentially applied by cherrypicking development projects and giving monolithic handouts of taxpayer money to mega developers. For projects that, you know, might not ever happen (remember Paul McKee’s Northside Regeneration in North St. Louis? Now he wants in on that damn soccer stadium).

There are, depending on how you count, ten pieces of legislation governing TIF in Michigan, dating back to 1975, a full six of which have been created in the past thirteen years. A small minority of the 600-some TIF plans in the state actually report to the state, a perfunctory point of non-compliance that Chicago’s Civic Lab has also pointed out as a problem.

Do we even need Super-TIF?

It is debatable that we even need this kind of massive public subsidy when the residential real estate market can support rents at $2.00 per square foot, as apartments are now renting for in neighbourhoods like Corktown and Woodbridge, where supply is severely limited, as well as downtown Detroit, where plentiful supply is quickly being absorbed– even at $2 a foot (as of mid-May 2017, they weren’t biting as far as the $2.25 a foot at Briggs Houze). $2.00 a square foot isn’t much less than some of the hottest markets in the United States (I pay about $1 a foot in Corktown).

Napkin math: $2 per square foot gross, $24 per square foot per year gross, and you mean to tell me you can’t afford to build a building that costs even a couple hundred dollars a square foot without up to $40 million a year in subsidy?

Chicago’s Civic Lab has explored the use of TIF’s extensively and concluded that, while plenty of TIF money goes to public infrastructure and development, a lot of it goes straight into the pockets of corporations. Michigan’s Super-TIF bill would not only fund the development out of sales taxes but also income taxes. And, here in Detroit, we are less abashed about the whole corporate subsidy, since Dan Gilbert is, after all, the Great Saviour Of Our City. Or Mike Ilitch, I can’t remember anymore.

But whether or not it’s a good idea to give hundreds of millions of dollars in handouts to billionaires like we did to Mike Ilitch (it isn’t, by the way), it’s important for us to ask questions about how to make that public investment a lasting one. Because it is going to happen.

Demanding Resiliency and Fiscal Sustainability

Publicly funded projects should be held to high standards of quality and design. What is good design? Frankly, I don’t care how it looks, though Bedrock’s proposed flashy envelope, more glazed than a Krispy Kreme, is attractively shiny in the renderings. And invariably, anything that is proposed for the Hudson’s Site will elicit screeches that we aren’t providing enough parking, that we need more parking, more parking is needed. But I’m thinking beyond parking and more in the realm of energy usage.

Just as energy is a critical concern, as I’ve explored before, for tenants and homeowners, so, too, is it a critical concern for property managers and commercial building owners. DTE should be invested in this since they’ve had to eliminate a quarter of their generating capacity and are just slowly catching up to the novel notion of energy conservation as virtual generation.

Benchmarking– And Onward

Energy benchmarking is a process that involves tracking a building’s energy and water usage over time to encourage conservation among occupants and tenants and to reduce operating costs for building owners. EnergyStar Portfolio Manager, offered through the Department of Energy, is more or less the industry standard for how these things get done.

Mandated benchmarking for large commercial buildings has been explored in a number of jurisdictions including Chicago and, starting in 2018, New York. Chicago even has an extensive system of incentives and bonuses for sustainable development.

The Institute for Market Transformation has noted in a number of case studies that benchmarking can reduce energy consumption by 20, 30, or 40%, in many cases, simply by identifying energy usage in a more visible format. Even at two dollars a square foot, energy bills are a substantial portion of the annual cost structure, and are a huge portion of the physical operating costs of the building.

Markets are often transformed disruptively, a.k.a. “lower-cost product changes the game,” and are sometimes transformed by regulatory nudging, which, depending on how strongly it is done, may elicit kicking and screaming, as it did in Michigan’s adoption of modern energy codes. in Detroit, anecdotal evidence I’ve heard from folks who have worked with Dan Gilbert’s Bedrock and Fams (the FoC or “family of companies,” as they lovingly call it) suggests that Bedrock is more interested in technological glamour than the nitty-gritty, under-the-hood details. So, it wouldn’t be a stretch to suggest that they wouldn’t like benchmarking, but if they were required to comply with it, it’s also not a stretch to suggest– based on hard data- that it would have a positive impact on their bottom line.

Regulatory incentives toward LEED development arose in the 2000’s, and LEED v4 even has some parameters that might actually make buildings more sustainable. I make no secret of my skepticism of LEED, but it is a universally recognized standard– and it’s important for us to think about how when we are investing public money, we should be demanding some kind of independently verifiable standards. But energy benchmarking is easy.

Bottom line: If you’re trying to demand 50% of the income taxes of anyone who lives or works within this district for the next 20 years, shouldn’t we think about stepping up our demands as well?