Imagine marketing condominiums with the promise of nearly tax-free living–no property tax and almost no state and local income tax. Sounds like an undeniably sweet deal for the developer and buyers alike, no?

At Union Square, a renovated school in Grand Rapids, Mich., buyers pay no property tax on the stylish condos until 2018.
Alyssa Matthysse At Union Square, a renovated school in Grand Rapids, Mich., buyers pay no property tax on the stylish condos until 2018.

Welcome to Union Square in Grand Rapids, Mich., a 180-unit condominium project created from a 131-year-old school. Built in a state "renaissance zone," a district created by Michigan to encourage residential redevelopment, the condo ownerships come with tax relief that makes otherwise happily settled residents want to pick up and move to Union Square. New owners only pay federal income tax and school bond levies. Such a complex package of financing and tax incentives make Union Square more than just another adaptive reuse project, no matter how charming the nostalgic renovation of the old school might be. By maximizing both state and local programs, the developer was able to build neighborhood goodwill for the project, control costs and sales prices, and provide a unique and powerful incentive for prospects to buy at Union Square.

Critical Incentives

Union Square's advantages certainly got people's attention.

Within days of the project's initial announcement and before the developers even had a rendering to show, people rushed to plunk down a deposit. "All we gave them was a number and a place in line," says Brad Gruizinga, Union Square's developer, which stopped taking names when the list hit 200 people. Then, once the project was able to offer binding purchase agreements, the developers sold 160 units in six months.

"It's easier to sell to residents," admits Jonathan Rooks, who is the owner of Parkland Properties and the marketing partner in the Union Square project.

Whether the rapid sales were a product of prospective buyers desire to escape taxes or because of the appeal of the project itself, the tax incentives have been crucial to the project's success.

"Certainly all the incentives that were available to the project are what made it possible, and made it a success," says Jefra Groendyk, senior vice president and division manager for investment real estate at National City Bank in Grand Rapids, which provided the balance of Union Square's financing and below-market-rate loans to buyers. "It's difficult to take an old building like that and meet your price points."

With incentives, Rooks and Gruizinga could preserve the unique character of the old school, offer a range of amenities, such as a rooftop pool and Jacuzzi and, most importantly, sell the condos at an attractive price. Prices range from $95,000 to $600,000 for a top floor penthouse. With an average price of $165 per square foot, they are the only downtown area condos selling for less than $200 per square foot.

"Our business model is to sell under market price in order to liquidate faster," Rooks says. "Our idea is to do volume. We don't base it on market price. We base it on construction costs and property acquisition costs."

Powerful Combination

With high land, labor and materials costs, selling condos under the market price isn't easy. Add in the tax benefits, and putting together a project like Union Square seems impossible. So to make it work, the developers needed help.

"We've used every tool in the toolbox," says Jay Fowler, executive director of the Grand Rapids Downtown Development Authority. "Virtually every multifamily project, rental or condos, is using a tax incentive of some sort."

(Fowler credits the use of incentives like these with fueling Grand Rapids' current burst of downtown revitalization, which is particularly notable given the current severe decline in Michigan's overall economy. In the past 20 years, the number of condo units in downtown Grand Rapids has more than doubled, to 2,560, according to Fowler. Another 492 are under construction, and 547 are in planning stages.)

At Union Square, the use of such incentive programs was particularly creative. Working with the city, the developers combined brownfield tax increment financing, the renaissance zone, and reduced mortgage rates for buyers through the National City Bank's Community Development program. When the renaissance zone expires in 2012, it will become part of a "neighborhood enterprise zone" that will provide an extension of property tax relief through 2018, but not income tax abatement. The developers also obtained state business tax credits, which they used to help finance the project.

But the developers' most ingenious use of incentives may have been their partnership with the West Grand Neighborhood Organization. Together the two applied to the state for brownfield tax increment financing, which reimburses spending on environmental infrastructure and cleanup. They used the money to pay for beautification and improvements in the neighborhood, including construction of an environmental rain garden.

Gruizinga and Rooks provided the upfront funds, received the reimbursement, and got properties adjacent to the project prettied up. The neighborhood achieved some long-desired goals that had languished for lack of funds and more credibility for obtaining additional funds and grants. Best of all, the partnership built an invaluable reservoir of community goodwill and preempted serious neighborhood opposition to the project.

The upshot is redevelopment that makes a lot of people happy–the neighbors, new owners who can get stylish urban living at affordable prices, the city and, of course, the developers, who are already at work on their next project.

–Nichola Zaklan is a freelance writer in Portland, Ore.