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Switch seeks additional tax breaks for West Michigan data center

BY Friday, June 10, 2016 11:05am

GAINES TOWNSHIP — Kent County and other stakeholders plan “two firsts” in providing abatements for Switch Ltd.’s colocated data center in Gaines Charter Township.

On Tuesday, the county’s Finance and Physical Resources Committee recommended the Las Vegas-based company’s request to create a Renaissance Zone at the site of the Steelcase pyramid building in southern Kent County, where Switch has announced plans to build the largest data center east of the Mississippi River.

The move to reduce the company’s tax burden comes despite Switch’s statements late last year that it would not need any further state assistance to locate its data center in West Michigan after lawmakers changed the state tax code in its favor.

Under the terms of the deal — which still requires approval from Gaines Township, the full Kent County Commission and the Michigan Strategic Fund — the pyramid site would be designated a Renaissance Zone for 15 years and make the company exempt from paying most state and local taxes, including real and personal property taxes. The state would reimburse school districts to make up for the lost revenue.

The designation is expected to save Switch $1.1 million annually on its taxes.

Additionally, Switch will enter into a payment in lieu of taxes (PILOT) agreement wherein it will reimburse both Gaines Charter Township and the county to make up for the loss of real property taxes.

Renaissance Zones were a popular economic development tool in the late-1990s and early-2000s, particularly in the downtown Grand Rapids area. Many of them have ended or will soon sunset as the zones by law have a maximum life of 15 years.

According to Kent County Administrator and Controller Daryl Delabbio, the deal marks unprecedented territory for the county, which has never created a Renaissance Zone or used a PILOT agreement.

“There’s two firsts here,” Delabbio told MiBiz, adding that the county believes the amount of investment Switch has promised to bring to the region makes the abatements a good deal for taxpayers.

“This further puts the Grand Rapids area on the map,” he said. “Getting this large of a data center puts West Michigan at a different level than we were previously.”

According to officials at the Michigan Economic Development Corp. (MEDC), the Strategic Fund has only approved two Renaissance Zones in recent years, both in 2015. One was in Detroit and the other was for a project in Grayling Township in Northern Michigan.

Nonetheless, experts in the use of state incentives say a project like Switch is exactly why economic development tools like Renaissance Zones exist.

“Renaissance Zone is very effective,” said John Byl, a partner specializing in economic incentives at Grand Rapids law firm Warner Norcross & Judd LLP. “Our state has been very good at facilitating new development. On balance, this strikes me as a good use of the tool to get this kind of development happening in the state.”


Since announcing the plans to locate at the Gaines Township site last fall, Switch executives have promised to bring 1,000 jobs and $5 billion in new investment, largely in the form of servers and other equipment, which will mostly be exempt from any property taxes.

But based on the numbers included in its Renaissance Zone application, the company may have a ways to go to reach those initial targets.

According to the document, Switch estimates $151 million in total investment and the creation of 103 jobs in the five-year first phase of the development, according to the document.

Additionally, the company anticipates its clients who locate servers at the facility will create 100 jobs and make a “significant” investment in equipment, but those figures were not included in the application because they were not attributable to Switch.

The company currently has eight employees at the site, according to the document.

For its part, the company contends that it will make good on its promises.

“All of the initial benchmarks remain unchanged and they will be achieved in subsequent phases of the development,” said Roger Martin, a Switch spokesperson and a partner at Lansing-based public relations firm Martin Waymire.

However, some in the data center industry are skeptical about the total number of jobs the company touts.

“Michigan Data Centers have over 1,000 Michigan employees at 38 locations today, and we are poised to continue growing and creating jobs in this emerging sector,” said Larry Andrus, CEO of Grandville-based I.T. firm Trivalent Group Inc., in a statement to MiBiz.

Andrus served as a founding member of industry group Michigan Data Center Alliance.

“These are real Michigan jobs at real Michigan locations, not theoretical or projected jobs, which is why the Michigan Data Center Alliance has fought so hard for tax fairness for existing Michigan companies,” he said.

The Michigan Data Center Alliance formed last fall in part in reaction to Switch’s plans to locate in West Michigan on the condition that the state change its tax policy for data centers to be competitive with other states.

One source who works in the data center industry — and who spoke only on condition of anonymity — said that having 1,000 people work at a data center would be “unnecessary,” as data centers do not require much physical manpower once they’re up and running.

For example, the New York Times reported in January that Microsoft Corp. is now testing unmanned, underwater data centers, largely because it would save energy costs.


Additionally, Switch’s request for further tax abatements beyond the change in state law marks somewhat of an about-face from the company’s statements in late 2015.

In Senate testimony in November, Jason Mendenhall, executive vice president of the cloud at Switch, said the company would be self-sustaining and require no further government support if it were to set up shop in West Michigan, as MiBiz reported at the time.

“(Tax policy) is the only thing that makes Michigan unattractive, and it’s unattractive to our clients,” Mendenhall said. “We can’t come because our clients won’t come (unless the legislation passes).”

When asked why the company was pursuing additional tax abatements, Switch spokesperson Martin said that a Renaissance Zone designation is required by law. He directed all further questions and requests for clarification to the MEDC.

According to Amy Lum, corporate counsel at the MEDC, a Renaissance Zone designation makes for a popular economic development tool for companies moving into existing facilities. Additionally, if the company’s goal is to ease its property tax burden, the designation would be one of the only legal avenues it could take to do so.

Read 8661 times Last modified on Friday, 17 June 2016 11:02