DEVELOPERS ASK FOR $30 MILLION TAX BREAK

Each new parking spot will cost taxpayers upwards of quarter of a million dollars

Kingstonian Developers Belly Up to Cash Bars — Where Investors Are Served Cash and the Public Picks Up the Tab

July 12, 2020

Kingston, NY – The Kingstonian developers pleaded their case at a public meeting of Ulster County’s Industrial Development Agency (IDA) Wednesday, July 8, as to why their proposed multi-use development in Uptown Kingston should receive $30.7 million in tax breaks, effectively shifting the bill to the rest of Kingston’s taxpayers.

Handouts sought by the developers appeared to total $28.9 million in a Payment in Lieu of Taxes (PILOT) spread out over 25 years; $1.48 million in sales tax, and $325,575 in mortgage recording tax.

Builder Joseph Bonura said that without a PILOT, the annual tax bill would be $932,000. Instead, he offered to pay what the landowner Jordan family pays now — $28,488. (The developers have since upped their offer to $40,000 a year.) This means that for 25 years, the investors would get a free ride worth $892,000 plus 2% annual increase at the expense of Kingston’s non-homestead taxpayers. It was not immediately known what additional costs would eventually make their way onto taxpayer bills. (See Fun With Numbers sidebars for a closer look at the real costs to the people of Kingston; the developer’s rosy projections for benefits to local economy, and an estimate of profits for investors.)

Another potential double whammy for city homeowners concerned the property’s low assessment. Bonura said the city had assessed the development at $19 million, even though its estimated price tag was more than triple, at $57.8MM, according to the application. It was not clear why the assessment was so low. Several methods of valuing property are available, and it is possible that Kingston assessor Dan Baker used the income method, which as the name suggests values property by projected income. This valuation method, with an annual increase of 2%, would produce a tax bill in Year 1 of $932,000 and a total PILOT of $30 million. This would be more palatable than a cost valuation using anticipated total costs of $57.8 million, which would produce a starting tax bill of around $2.8 million with a total PILOT around $100 million. It was not clear how much the assessment could rise over time with the income valuation method, or whether the income method of valuation could be switched to the much pricier cost method, or whether special assessments could be slapped on later.

The IDA application was dated June 29, 2020, but did not reach The Hudson Valley Vindicator until July 7, leaving less than 24 hours to pore over the document, which left much financial information blank. It was unclear whether the document was made available earlier, but a release as close to the presentation as possible would be in keeping with the investors’ and Kingston mayor Steve Noble’s well-coordinated strategy to sideline public comment. The presentation clarified some details, but only those that painted the developers in a favorable light.

Throwing hamburger to the guard dogs while you rob the bank 

In keeping with builder Joseph Bonura’s breathtaking self-promotion skills, the presentation hyped $20,000 internships and a $50,000 scholarship fund dangled to secure the Kingston School Board’s approval, plus moveable kiosks with local promotional brochures – swag with costs so minimal by comparison with the total project they would probably be considered immaterial and not required on financial statements. (See Satire.)

The Kingston School Board’s approval is needed because the giveaway is a so-called deviated PILOT that in this case will wipe out the developers’ obligation to pay property taxes for 25 years, instead of the usual ten, shifting the burden to Kingston’s other property owners. Approval also must be granted by the Ulster County Legislature as well as the IDA itself.

Bonura also claimed the developers would sustain an annual “loss” of $97,000 from the 14 workforce housing apartments in the complex. He failed to mention that these 14 apartments were added to the original plans, which called for 129 apartments, after public outcry about the absence of affordable housing. While they might not bring in market rent, it was unclear whether this could be viewed as a true loss. Also, while these 14 apartments can technically be called affordable housing, Bonura failed to mention they were reserved only for the higher-earning tranche of affordable housing candidates, ie. those who earn 60-110% of AMI, which according to this chart is $83,700 per family. That can more accurately be called workforce housing; it rules out the elderly who live on Social Security and single individuals earning less than $35,160.

Like the one-time inducement to the School Board, this yearly $97,000 “loss” pales by comparison with total gains, and if factored in to include exit strategy gains could amount to less than 1% of the final kitty.

Bonura spent much of his presentation breaking down costs of the garage. Altogether, the project may earn a double digit return on the rents, but the parking flim flam is the path to the PILOT and subsequent redistribution of the tax burden onto Kingston’s homeowners. (See “Mirage for the Math-Challenged” sidebar for a realistic look at how many new spaces the air-conditioned garage will provide.) As it stands now, the public has access to open-air parking on the proposed development site, for free at certain hours, for $1 an hour during daytime, or for $100 a year. Bonura asserted that were it not for his development, Kingston taxpayers would have to pay $1.5 million a year for 30 years for a similar parking structure, but it was not clear what would tempt taxpayers to pony up that much for an air-conditioned garage that would also raise parking rates. (A coming sidebar will look into the builder’s explanation of losses inherent in building the garage.) Bonura stressed he wanted the public to see those losses.

Look Here, Not There

What Bonura doesn’t want the public to see is the yearly profit from the rest of the Kingstonian, or the enormous windfall once the development is sold after the minimum holding period of ten years. (See Fun with Numbers – Profit.) Nor do the remaining investors want their names made public. It is not clearly precisely how much financial information, accurate or not, has been presented to the IDA, but at any rate it is more than the public has seen, because Bonura and Jordan have asked that this information be kept confidential on grounds it is a “trade secret.” (See I’ve Got A Secret sidebar, coming later this week.)

If 143 apartments were occupied at an average rent of $1,750, the developers would rake in gross revenue of just over $3 million. With Net Operating Income at roughly 60%, this would mean roughly $1,800,000 in pre-tax, pre-debt profit each year. And this doesn’t take into account the hotel and commercial spaces. According to a recent article in Bloomberg, Opportunity Zones have become a bonanza for investors requiring a 12-16% annual return. Because of the spotty information, everything is speculative, but the application says 20% of the project is being publicly financed. (The later, Sept. 3 application says 60.15% of the project cost is publicly financed.) Assuming the project is worth $57.8 million, a bank construction mortgage is $43 million, grants are $6.8, and private investment is $8 million, the minimum annual return would comport with the Bloomberg article.

The Elephant in the Room

The second cash bar, which boasts the most gargantuan of punch bowls, is the profit investors stand to make if they hold the property for ten years. (See Opportunity Zone sidebar.) In brief, if the investors remain owners for ten years, they can sell and never pay a dime in capital gains tax. Word on the street is the developers intend to flip their property into condos. If they do, perhaps any time after the end of the ten-year holding period required by Opportunity Zone law, tax-free profit could soar. Consider the sale of 143 apartments at an average price of $350,000. Total take: a hair under $50 million. Once again, this doesn’t include hotel, commercial space, and garage. It’s safe to assume that between rents and the sale, the investors are looking to more than triple their money within the decade, a tidy profit funded in part by Kingston homeowners.

Investor Identity Under Wraps: Trade Secret, or Secret Shame?

The developers say their investors and potential profit should remain unidentified because they are a “trade secret.” IRS regulations do not require revealing who has invested in Qualified Opportunity Zone funds. It was not immediately clear how this would conflict with statute or case law concerning transparency and the public’s right to know in the case of the PILOT.

This reporter reached out to two accountants; two lawyers; a tax expert; a developer; a state tax office (twice), and two watchdog organizations. One accountant, one developer and one watchdog organization responded, but would only speak off the record.

Like the littlest matryoshka nesting doll, this exercise in welfare for millionaires is a microcosm of national and even international malfeasance. At a time when the stock market is bumping up against its all-time high, the Brookings Institution recently reported that 14 million American children don’t have enough to eat – three times as many as during the Great Recession.

For those who support LGBTQIA rights and oppose discrimination against people of color but who have joined wholeheartedly in the plunder economy of the past five decades, it is time to wake up. Even Joe Biden is being pushed to a new populism, and not Donald Trump’s fake kind. The curtain is being pulled back on those who pay lip service to politically correct causes but who vote to funnel cash from the many to the ever-narrowing few.

Mayor Noble purports to be the “green” mayor. Today, Tesla has a market cap larger than any other car company; investors have pumped $2 billion into Nikola, another electric vehicle company that to date has manufactured nothing and has no revenue, and a special purpose acquisition vehicle recently doubled in price on rumors – rumors! – that it might acquire Fisker, a bankrupt electric car company. As Felix Salmon of Axios said in a recent podcast, it’s just not right for the financial gatekeepers in Washington to send this type of liquidity gushing into private pockets when 14 million children go hungry. And in Kingston, it’s just not right to send tens of millions of dollars, or perhaps even a hundred million, into private pockets when the real Kingstonians, and the entire nation, need an economy that works for all, not just a few developers and cowardly investors hiding under the false pretext of trade secrets.

Lastly, the architect, who had the audacity to liken redesigning his project to Beethoven’s reworking of his Violin Concerto in D, might want to consider that the great composer wrote another violin concerto, in C, but recognizing that it wasn’t good enough, he destroyed it, and today there remain no fragments of a composition he deemed unworthy.

May the same fate befall this profligate money grab.