Charge Filed in Michigan Film Studio Case

Published August 19, 2010

Michigan’s attorney general has filed an “attempted false pretense” fraud charge against Joseph Peters, a principal in the Grand Rapids-area Hangar42 movie studio.

As trumpeted by Gov. Jennifer Granholm (D) in her 2010 State of the State speech, the project had been in line to receive a $10 million “assignable” tax credit as part of the state’s film subsidy program.
The law authorizing this tax credit was passed by the Michigan Legislature at Granholm’s behest early in 2008, hard on the heels of $1.4 billion in personal income and business tax hikes lawmakers imposed late in 2007.

The law includes subsidies of up to 42 percent of the expenses incurred in the production of a film in Michigan, plus “assignable” tax credits equal to 25 percent of a film infrastructure investment. The assignable credit can be sold, making it another form of cash subsidy.
Center Launched Investigation
Hangar42 would have been the first project to qualify for the infrastructure credit, but it never came about, largely due to reporting by the Mackinac Center for Public Policy, a free-market research institute in Midland, Michigan.
The charge was filed August 2 after an investigation led by Kathy Hoekstra, an in-house investigative reporter for the Center. She and a public policy colleague discovered the property that was to become the Hangar42 studio had been listed for sale at $9.8 million just days before it supposedly sold for between $40 million and $45 million.
“We could not fathom what caused such a leap in value, and began asking around,” said Hoekstra. The team also wanted to know how the alleged purchase was financed, and how much was actually spent converting the former auto parts plant into a studio. No party to the transaction would answer their telephone calls, however, not even to say “no comment.”

All told, Center staff called the purported buyer, seller, and state officials 11 times.
Principals Clammed Up
The financing was a critical element because one source had suggested the possibility the deal was put together with a “land contract.” This meant a buyer could technically purchase a property without putting any money down, then turn around and ask for a tax credit based on a $40 million investment. If the project failed, ownership would revert back to the seller.
Research by the Center and a title company could find no record of a recent transfer of that property, raising red flags.
With all the principals refusing to speak, the Mackinac Center raised these questions in public in a May 20 press release and video report. The result was an explosion of media and official attention, including a series of stories in The Grand Rapids Press and, ultimately, a decision by Attorney General Mike Cox to investigate the deal.
Newspaper Started to Dig
In particular, reporter Chris Knape at The Grand Rapids Press began to dig, producing a series of articles that, among other things, led to the forced resignation of an influential aide to State Rep. Robert Dean (D-Grand Rapids).

The resignation came after an audio recording of a speech the aide gave in Chicago was uncovered. The speech included hints regarding his own involvement in a deal that sounded similar to Hangar42. Here’s an excerpt as published in The Grand Rapids Press:
“I’m buying a building from one of my partners for $50 million. To get the building costs us $4 million. The 20 percent tax credit will provide us with $12.5 million. So how much did the building cost us? We made a profit off the state, and you get the $12.5 million when you sign the paper.”
Because he was being term-limited out of the state House, Rep. Dean sought the Democratic Party’s nomination for a state Senate seat. His bid ended on August 3 when he was defeated in the Democratic Party primary. He blamed the loss in part on the negative attention from the Hangar42 flap.
Felon Nearly Snagged $9.1 Million
As if the Hangar42 episode weren’t embarrassing enough for state economic development officials, it followed another debacle that happened in March: A $9.1 million refundable tax credit deal (that is, at least a partial cash subsidy) was offered to a company formed by a convicted felon on parole for financial fraud.
Under the terms of his parole, Richard A. Short wasn’t even allowed to possess a credit card, yet the state offered a subsidy for what appears to have been a phantom company he concocted. Adding to the embarrassment, Gov. Granholm touted the subsidy at a press conference following the state’s regular monthly approval of targeted tax breaks and business subsidies.

Short even appeared on the dais with Granholm, and apparently his parole officer spotted him on the evening news coverage of the press conference.
“We’ve long known the ‘jobs’ programs of the Michigan Economic Development Corporation don’t really create many jobs, if any at all,” said James Hohman, fiscal policy analyst at the Mackinac Center. “If 10 years of economic decline in Michigan isn’t enough reason for the Legislature to kill these programs, perhaps a few scandals will be.”
Michael D. LaFaive ([email protected]) is director of the Morey Fiscal Policy Initiative at the Mackinac Center for Public Policy in Midland, Michigan.