“Rent-to-Own” Office Space Deal Bad for Taxpayers, Analyst Says
For Immediate Release
MIDLAND—A lawsuit was filed Monday in Ingham County Circuit Court that would stop a $130 million “rent-to-own” construction project. April’s announcement for the construction of a new state building was the latest in a string of deals in which Michigan’s executive branch bypasses legislative scrutiny while costing taxpayers more in the long run, according to an analyst at the Mackinac Center for Public Policy. The lawsuit may prevent the state from erecting a joint State Police/Military and Veterans Affairs headquarters until it has undergone the same legislative scrutiny given to most capital outlays.
All government building projects—executive, legislative and judiciary—should get full review under the regular capital outlay process, which involves scrutiny at every stage by the Joint Capital Outlay Subcommittee, according to a manual published by the Mackinac Center last May entitled, “Keeping Michigan on Track: A Blueprint for a Freer, More Prosperous State.”
The Mackinac Center manual lists other recent examples of the practice—in which the state doesn’t do the building itself, but signs a lease with a private developer, who is the builder and owner—including the $200 million Anderson House Office Building, the $300 million Department of Environmental Quality building, and a $240 million deal for the former General Motors building in Detroit. This newest deal is for a building that would have cost approximately $130 million if the state were to build and own it, according to the House Fiscal Agency.
“These projects have circumvented the full legislative review process, in which the Joint Capital Outlay Subcommittee is supposed to approve a number of specific steps in construction planning and cost authorization,” the manual states. “By contrast, [rent-to-own] leases have been sent to the committee ready made, for a simple up or down vote.”
The Mackinac Center manual contends that this process creates “a potential breeding ground for corruption and influence peddling. That is why the law requires a regular capital outlay process with full legislative oversight and accountability at each step.” Currently, the full authorization process required for executive department construction projects under the Management and Budget Act is not used on rent-to-own deals, and does not apply to legislative or judiciary branch construction projects at all. The Mackinac Center recommends that the law be amended to make all these deals subject to full legislative scrutiny.
The Engler administration contends that the rent-to-own route allows projects to be completed more quickly, and avoids additional costs resulting from delays caused by the regular process. But according to Mackinac Center Legislative Analyst, Jack McHugh, the law establishing the capital outlay approval and oversight process was rationalized and streamlined in early 1999, eliminating many of the alleged bottlenecks.
In addition, “Keeping Michigan on Track” states that the executive branch’s rent-to-own arrangements are a bad deal for the taxpayers. “If the state owned the buildings outright, it would not pay property tax to local governments, and finance costs would be at a lower tax-free municipal bond rate. Moreover, the profits generated by the real estate developer would not be included in the price paid by the taxpayers. Under such deals, the state’s lease payments must be large enough to cover the developer’s profit, local property tax payments, and interest costs above the tax-exempt bond rate. None of these costs apply if the state builds and owns the buildings itself.”
“It is difficult to believe that the costs to the taxpayers described above are outweighed by the time saved—and the cost-savings thus claimed—by the administration,” the manual says.