Some Debate Value After Tax Breaks Given to Data Center

Some West Michigan residents — while pleased a new industry has breathed life into a once-vacant building — say the center has yet to live up to the high hopes it was greeted with when it announced it was coming.

by Brian McVicar, MLive.com / November 22, 2019
Shutterstock/Timofeev Vladimir

(TNS) — When Las Vegas-based data center operator Switch announced it was coming to West Michigan in 2015, the company drew waves of enthusiasm for promising to create the largest data center campus in the eastern United States.

Switch said the development of its data center, located about 20 miles southeast of downtown Grand Rapids at the former Steelcase Pyramid in Gaines Township, would result in a “transformation of Michigan’s positioning and future in the global economy.” The company also said the project would generate a $5 billion investment and, between Switch and its clients, create 1,000 jobs over the next decade.

Nearly four years later, after the state Legislature and Michigan Economic Development Corporation rolled out millions in tax breaks for the company, has Switch lived up to expectations?

It depends who you ask.

Switch says the project is on track to meet all job creation and investment goals. To date, the company says it has created 74 full-time jobs at the pyramid, invested more than $150 million in the building and created 800 construction jobs since it began renovating the site.

However, some residents — while pleased a new industry has breathed life into the once-vacant building — say Switch has yet to live up to the high hopes the company was greeted with when it announced it was coming to West Michigan.

“I think there’s a disconnect between what people were expecting and what we’ve actually seen in terms of total jobs produced,” said Justin Buiter, co-founder of Railtown Brewing Co., which is located about a mile from the Switch pyramid. “A lot of the headlines were big numbers and that’s not really the reality of the situation.”

Questions over the company’s investment and job creation totals come as Switch pushes for an additional tax break.

The company is seeking legislation that would exempt it and its clients, whose equipment is located within Switch’s building, from personal property taxes related to school debt and millages. Switch says it initially thought a state incentive agreement signed in 2016 exempted it from those taxes but in 2018 learned that was not the case.

Job creation requirements

While officials touted the 1,000 jobs and $5 billion investment Switch said it would bring to West Michigan, there’s no formal agreement holding the company to those numbers.

Legislation requested by Switch and signed into law in 2015 by then-Gov. Rick Snyder exempted Switch and all co-located data centers from sales and use taxes. The law requires all data centers, not just Switch, to create at least 400 new jobs in Michigan by 2022 and 1,000 jobs by 2026 for the tax breaks to continue.

The Michigan Department of Labor and Economic Opportunity will be tasked with verifying those job numbers once they’re submitted, said department spokesperson Erica Quealy.

Switch also signed a 15-year Renaissance Zone agreement with the Michigan Economic Development Corporation in 2016.

The agreement exempts Switch and its clients from most real and personal property taxes. The exemption is projected to save Switch $1.1 million annually in taxes. The company must create 103 full-time jobs and invest $151.2 million in the pyramid by Dec. 31, 2021 for the tax exemptions to remain in place.

Switch is required to annually report to the MEDC its job creation and investment totals at the pyramid. The company’s latest report, for 2018, shows Switch has hired 49 people and invested more than $150 million in the building.

The average weekly wage for the Switch’s jobs at the pyramid is $1,064, according to the company’s report, obtained by the Grand Rapids Press/MLive.com through a Freedom of Information Act request.

Natalie Stewart, Switch’s vice president of public and government affairs, said Switch’s job creation total has since increased to 74.

The projection that 1,000 people would be employed to work at the Switch pyramid in 10 years was included in a press release issued by the company in November 2015.

Stewart said she wasn’t working for Switch when the legislation and renaissance zone agreement were signed and therefore couldn’t say why the 1,000-job projection wasn’t included in either one. She said Switch is pleased with its investment and job creation numbers and is on track to meet all its commitments.

“With Switch’s direct employees, the Michiganders who are employed building out our campus, and the employees of customers who are deploying gear to the Pyramid campus from around the state, we are on track to have 1,000 data center or data-center related jobs by 2026 just as the law requires,” Stewart said in a statement.

She did not respond to questions about how many of the 1,000 projected jobs would be comprised of Switch employees or contractors based at the pyramid on a permanent, full-time basis.

“Unlike traditional manufacturing companies, Switch’s business model includes shift workers as well as people who come and go as needed throughout a 24 hour period, seven days a week, 365 days a year,” Stewart said. “As a result, the number or employees on the campus at any one moment fluctuates greatly.”

Expectations met?

Residents, business owners and elected officials say they’re pleased Switch located in Gaines Township and breathed new life into the former Steelcase pyramid. Steelcase moved out of the building, located on an 87-acre site near Gerald R. Ford International Airport, in 2010.

However, some say Switch has yet to live up to initial expectations surrounding the company’s expansion into Gaines Township.

Gaines Township Supervisor Robert DeWard said the township has yet to see “a tremendous amount of growth” because of Switch. But he remains hopeful that will change, and he says the company’s decision to locate here has brought positive attention to the region.

“I think people may have expected more sooner,” he said. “I’ve learned over the years sometimes you have to be patient.”

Brent Kilmer, the owner of Velocity Motors, a used car dealership and service station, said there “was definitely an excitement” in the community when Switch announced its plans to build its data center in Gaines Township.

“I don’t have strong feelings either way, but I would have a hard time saying it’s been transformative,” he said.

The pyramid is one of four sites in the United States from which Switch operates large-scale data centers that store and process data from large customers such as Google, Amazon, Sony and Boeing. Tax records show Switch has at least nine clients at the pyramid, including Cisco, Dell, IBM and several Michigan-based firms.

Stewart said Switch is in the process of “building out” the last remaining space at the 660,000-square-foot pyramid. Next spring, the company plans to begin construction on an up to 400,000-square-foot external data center building adjacent to the pyramid, she said. Switch has room for two other similar buildings on its property.

“Switch is proud to be in Michigan,” Stewart said. “We love our community here in Grand Rapids and West Michigan, and we’ve been really happy with the growth of our business within the pyramid.”

Kent County Drain Commissioner Ken Yonker was serving as a state representative in 2015 when Switch first discussed coming to West Michigan. He said he doesn’t think it was a mistake for lawmakers and the MEDC to not include a requirement that Switch create the 1,000 jobs the company projected it would bring to the pyramid once its build-out at the site is complete.

“We are bringing companies that otherwise didn’t even know that we existed,” he said. Later, he added: “It’s not only creating some jobs. But the big thing is the marketing factor, and that was probably one of the biggest assets they brought to us.”

Former Senate Majority Leader Arlan Meekhof helped negotiate the legislative tax breaks Switch requested as a condition of coming to Michigan. He said the company’s presence has been “very helpful for our region.”

“We have a great new industry,” said Meekohf, R-Grand Haven. “We weren’t getting any of that prior to the legislative action that we took.”

As Switch pushes for its additional tax breaks, company officials have touted what they say are 800 full-time construction jobs created because of Switch’s investment in Gaines Township.

But all those construction workers are not on site every day, and one state representative questioned whether such positions truly qualify as permanent full-time jobs. “If they’re not working an average of 40 hours a week all year long, then to me it’s not really a full-time job,” said Rep. Steve Johnson, R-Wayland, whose district includes Gaines Township.

Johnson said he opposes the additional tax break sought by Switch because “we shouldn’t be favoring one company over all the other data centers in the state.”

Sen. Peter MacGregor, R-Rockford, said Switch is having a positive impact on the region’s economy.

“These construction jobs are real jobs and they continue to create wealth in the community,” said MacGregor, who sponsored the 2015 legislative tax breaks created for Switch. “They bring in contractors who spend thousands of dollars each week flying in, staying at our hotels, eating at our restaurants.”

Birgit Klohs, president and CEO of The Right Place, a Grand Rapids-based economic development organization, pushed for the 2015 tax breaks that Switch demanded before agreeing to come to Michigan. She declined to be interviewed for this story but in a statement said the company is serving as a “catalyst” for economic growth.

“Its significant capital investments and renovation of the previously vacant Pyramid Campus have spurred the need for hundreds of construction jobs over the course of the build-out, and it has also created growth opportunities for local companies in the form of expanded client bases,” said Klohs, who in 2015 called the Switch data center an “incredibly game changing project.”

“Switch has established West Michigan as a destination where this high-tech industry can succeed, which attracts interest from other high-tech and high-growth potential companies looking to expand.”

New tax breaks sought

Switch’s push for additional tax breaks at the pyramid has sparked controversy in Gaines Township.

Since opening its data center, Switch has operated under the assumption that an incentive agreement it signed with the MEDC exempted it from real and personal property taxes related to school debt and millages.

But in 2018, the Michigan Department of Treasury told Gaines Township — which collects taxes on behalf of the schools — that Switch and its clients were not exempt from the taxes. The township has since collected roughly $625,000 from Switch and its clients.

Legislation approved by the Michigan Senate in late September would exempt Switch and its clients from the real and personal property taxes for Caledonia Community School’s debt millage and Kent Intermediate School District’s regional enhancement millage. The legislation would also require the schools to repay the tax revenue they’ve collected from Switch.

Stewart says Switch is requesting the tax break because the school debt and millage taxes threaten the company’s ability to attract and retain clients. She said the company’s clients could chose to locate in 28 other states where the taxes in question are not levied on data centers.

But Caledonia schools and Kent ISD pushed back against the legislation, arguing it would deprive them of needed revenue. They also said Switch was failing to be a good community partner by not paying its share to support public education.

“I don’t see them as being a partner to the Caledonia Community school system at all,” Caledonia Superintendent Dedrick Martin said last month. “I don’t know of many parents who live in my community and who work for Switch.”

In an effort to resolve the schools’ concerns, Switch’s legislative tax break request was scaled-back.

Revised legislation in the state House would exempt the company and its clients from personal property taxes but require the company to pay real property taxes. The bills were approved in committee and are awaiting action by the full House.

An analysis from the nonpartisan House Fiscal Agency estimates the legislation would initially save Switch and its clients $242,000 in taxes, according to an analysis by the nonpartisan House Fiscal Agency. The amount of foregone tax revenue would rise as investment in the pyramid increases, the analysis says.

The legislation is one piece of a tentative agreement between Switch, Caledonia Schools and Kent Intermediate School District that addresses the schools’ initial opposition to the tax break Switch requested. Another piece of the tentative agreement eliminates Switch’s initial request that the company and its clients be reimbursed for the roughly $625,000 in taxes collected by the schools.

In an interview, Stewart pushed back against the assertion that Switch does not support public education. Since coming to Michigan, the company has invested more than $500,000 in Science, Technology, Engineering, Art, Math (STEAM) programming, an investment that has benefited 62,000 students across the state, she said.

“Switch has always been committed to STEAM education in Michigan, and we will always continue moving forward to be committed to STEAM education here in Michigan,” Stewart said.

Looking forward, DeWard — the Gaines Township supervisor — said he’s hopeful Switch continues to grow. He also said it’s important that the state monitors the status of Switch’s incentive agreements and holds the company accountable if it fails to meet its investment and job creation targets.

“I would hope that the state will hold their feet to the fire,” said DeWard, the Gaines Township supervisor. “Switch has too much to lose if they don’t comply.”

©2019 MLive.com, Walker, Mich. Distributed by Tribune Content Agency, LLC. 

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