After taking three years to wind its way through the Ohio General Assembly, Senate Bill 39 may pass out of the Legislature by the end of the year. The Bill would create a “Transformational Mixed-Use Development” (TMUD) tax credit. The TMUD tax credit provides a 10% tax credit for documented development costs. If the project is certified as eligible, the property owner can sell or transfer the rights to the tax credits to insurances companies. The insurance companies can use the credit to offset premium taxes paid by the insurance company to the State of Ohio if the companies invest in major, mixed-use developments. The tax credit will help developers raise upfront money to help fund their project.
The bill was most recently amended by the Ohio House of Representatives’ Workforce & Economic Development Committee. Under the amended legislation, only certain types of projects would quality:
- Transformational- Will have a transformational economic impact on the development site and the surrounding area.
- Mixed use Project- Integrates some combination of residential, retail, offices, recreational and/or structured parking;
- Cost of the Project- If located in a major city (population greater than 100,000) then the project costs must exceed $50 million dollars;
- Size of Major City Projects- If the project is located in a major city, then the project must include one new or previously vacant building that is fifteen or more stories in height or has a floor area of at least 350,000 square feet, or after completion will be the site of employment accounting for at least $4 million in annual payroll, or including two or more buildings that are connected to one another, are located on the same parcel or on contiguous parcels, and that collectively have a floor at least 350,000 square feet;
- Size of Non-Major City Projects– If the project includes one new or previously vacant building that is two or more stories in height or has a floor area of at least 75,000 square feet or two or more new buildings that are located on the same parcel or on contiguous parcels that collectively have a floor arear of at least 75,000 square feet;
- Tax Benefits Outweigh the Cost of Tax Credits- Developer must demonstrate that the state and local taxes that will be gained (versus no development) from when the project is certified to five years after completion of the project (called the “completion period”) will be greater than 10% of the development costs (amount of the tax credit).
The TUMDs end after June 30, 2023. The TMUD tax credits are capped at $100 million per fiscal year from 2020 through 2032. Each project is capped at no more than $40 million of estimated tax credits.
Up to $80 million of the credits can be located in or near a major City. The remaining $20 million in tax credits are reserved for project outside of Ohio’s major cities.
If the State receives applications for more than $80 million in tax credits for projects located in or near major cities, then the major city projects will be ranked in order. If applications exceed $20 million for projects which are not in a major city, then the State will rank the non-major city projects against one another. In ranking the projects under each category (major city and non-major city) the State will use the following criteria:
- The increase in tax collections during the completion period as a percentage of the total of tax credits that would be allocated to the project;
- The impact of the project in terms of architecture, accessibility to pedestrians, retail entertainment and dining sales, job creation, property values, and connectivity;
- How quickly the project will be completed.
After approval the project, within twelve (12) months the developer must provide the State with an updated schedule for the completion of the project and demonstrate construction on the project has begun. If the developer fails to make the proper demonstration within twelve months, the TMUD tax credit will be rescinded.
Passage of the TMUD tax credit before the end of 2020 is critical for Ohio
Prior to the global pandemic, one of the most significant development trends was the “back-to-the city” movement by young people. Not just large cities saw a huge increase in the popularity of urban living. Smaller cities like Cleveland and Columbus were experiencing it as well. Cleveland saw transformation of historical office space into apartments and condominiums. The desire by young people to live downtown also created a gravitational pull attracting businesses to move back into the city.
Then COVID-19 occurred forcing many businesses to have employees work from home. Much has been written about how the pandemic may have the unforeseen effect of eliminating biases employers historically held toward having its employees work from home. In fact, working from home has been hailed by some commentators as the trend of the future.
With today’s technology, businesses have seen that in many cases workers can be just as productive working at home. One estimate said that 40% of US workers (largely from the higher educated quartile) can do their jobs from home. In light of the recent trends, many businesses are evaluating current leases for expensive downtown office space and considering reductions or elimination of space.
Even if some of these forecasts regarding the work from home movement overshoot the mark, there is likely to be a near term chilling effect on urban development in Ohio. In addition, Ohio’s economy will likely take time to recover from the serious blow COVID dealt. Ohio’s major cities are already facing significant budget shortfalls from the economic downturn brought on by the pandemic.
In 2021, Ohio will be looking to jump start its economy and breathe new life back into its cities. Spurring interest in urban development through new major incentives, such as the TMUD tax credit, is exactly what Ohio needs to do in order to invest in its cities, combat urban sprawl and restart its economy.