New Haven Independent

posted by: disconnect on September 5, 2012  7:51am

“Alderman Elicker suggested that the vote to kill the “fix” actually “adds predictability for developers.””

Agreed. If you do business with New Haven, I predict you’ll take it in the shorts. BYOL (bring your own lube).

posted by: HhE on September 5, 2012  8:56am

“God is love, but get it in writing.”  There is no love in New Haven, so make sure you get it notarized too.

posted by: robn on September 5, 2012  8:58am

“When the city administration originally drew up the deal with 360 State and shepherded it through public approvals, it estimated that 360 State would pay $1.4 million a year in taxes after a five-year phase-in.“NHI

The city did NOT estimate the taxes. They repeated the Becker estimates to the BOA to get their sign off on the publicly funded incentive of free land and a 5 year phase in. ANDERSON SCOOPER put it best; Becker was well equipped to do the math on the value of his property and come up with a proper number for his pro-forma. If anything, his investors should be asking him hard questions, not the city administration.

Regarding the BOA union supermajority’s decision not to intervene; this is no act of bravery. They have no legal framework to intervene; its a matter which can only be legally settled by state tax court.

posted by: darnell on September 5, 2012  9:04am

No debate. Unanimous vote. Sounds familiar. “The more things change, the more they stay the same.” - George Bernard Shaw’s ‘Revolutionist’s Handbook’ (1903).

posted by: Anderson Scooper on September 5, 2012  9:21am

With no tax deal in place as part of the 360 State development, (fwiw, the BofA wouldn’t have approved one given the land deal and all the other millions of public subsidies),—Becker then led MEPT to believe the $180 Million project would be valued at a mere $50 Million?

Hard to swallow, but maybe it is true.

Also, could the NHI fact check the purported $5.7 Million tax bill? (my math has a $180 Million fair market value at a 70% assessment, times the current 38.88 mill rate yielding a tax bill of $4.9 Million. A $5.7 Million tax bill would only come from a valuation of $209 Million.)

posted by: darnell on September 5, 2012  9:23am

To be clear. I would have voted with the majority and against special treatment for this developer, but I would have made sure to put in the record why, so that the citizens of this city understood…and I would have defended my proposal to the end, even if I were the only vote to do so.

posted by: DingDong on September 5, 2012  9:23am

I really respect that Becker refused to play DeStefano’s game.  Probably the first power player in town who has done so.  Maybe Becker should run for Mayor. 

The corruption surrounding this tax assessment makes me want to vote for anyone but DeStefano.

(By the way, excellent reporting, Paul).

posted by: SaveOurCity on September 5, 2012  10:04am

Another one bites the dust.  Obviously, the building can’t be moved so now while this plays out in court, the costs for 360 State will skyrocket (via a combination of higher taxes and substantial attorney’s fees).  The Union pensions will see a lower payout, Devil’s Gear will likely be forced to find another home and Elm City Market will either shut down or have massive price increases to generate money to pay the taxes. 

I just love the idea of paying 50% more for Bell Peppers so that money can filter through MPET to City Hall and DeStefano can use it to buy more votes.  ARGGGH!

For more detail on this issue see;

http://www.360statetaxproblem.com/

posted by: jeffreykerekes on September 5, 2012  10:09am

Why did the NHI break from its policy to not include anonymous sources, especially when the comment come from our elected officials?  A time to break from that policy comes from bigger news, no?  I hope Paul will respond as this is a big change from its policy.

[Editor: Thanks for the question. We never had a policy of avoiding anonymous comments in all cases in all stories. Instead we try to avoid them for the most part. When we feel the person has important factual information as opposed to ad hominem attacks or self-interested opinion—and we’re confident the information is important to the story, accurate and coming from a legitimate source; and we believe there’s a completely understandable reason for the person to offer the information anonymously—we may include it. I do think the media too often lets people hide behind anonymity and use that anonymity to further an agenda, so it’s important to don’t allow anonymous quotes often and without good reason. In this case I felt the aldermen had received legal advice to stay quiet and obviously couldn’t say that on the record because that would negate the reason for the advice in the face of an actual lawsuit; and I felt the information was crucial to understanding what was happening under the surface at this meeting, rather than merely quoting what was not said on the record.]

posted by: anonymous on September 5, 2012  10:09am

Thank you to the Aldermen (and journalists) who have brought this issue into the public eye. 

I hope the issue can be resolved as a compromise without too much in the way of legal fees.

In contrast to some of our Aldermen, DeStefano and the Board of Aldermen “leadership” seem to want to sweep everything under the rug - unlike the world-class Mayors who spoke at the DNC convention, they clearly doesn’t value transparency.  This same story is repeated in virtually every city project.

posted by: Noteworthy on September 5, 2012  10:10am

This is the proper decision but it shows a lack of backbone when the one proposing the solution doesn’t vote for it. Count on him to throw you under the bus when the tide runs the other way.

That said, the BOA should demand Mayor DeStefano do a couple of things, the first of which is to issue a reprimand to those responsible for such an irrational and undervalued property tax projection. It is laughably outrageous and no amount of spinning and excuse making paints a better picture. It was done to induce Becker et al to build 360 and it provided a comfort for the developer that the tax issue was in fact, not going to be a problem.

This practice of low-balling property tax projections on development projects has to stop and the economic development office needs to get its professional standards in place so that its projections in fact, have some resemblance to reality. One can understand being off by 10, 15 or even 20 percent. There is absolutely zero excuse for an error of 400%.

The BOA should also demand that the mayor settle this case - that a reasonable and proper assessment be done and that it be comparable with other properties. Taxpayers always lose in litigation - either because of the ultimate judgment or because of the monster legal bills of which the city’s account is always in the RED.

And one final note: The election year whopper of a tax increase for this developer played a starring role for DeStefano’s re-election propaganda. Was the assessment done for political purposes?

Becker’s refusal to bundle contributions or bend to an even modest shakedown by the mayor is because he is a man of principles. He also refused to contribute to DeStefano’s challenger. Becker likely felt he got shaken down enough by the city’s requirement that he hire New Haven cops to protect what didn’t need protecting; and to needlessly steer traffic around a site at a cost of more than $500,000.

Others who do business with the city should grow a similar spine which makes me wonder what kind of property tax deal Winstanley has on College Street since his views on this largess are quite different.

posted by: Bruce on September 5, 2012  10:33am

Some seem to be forgetting that the residents will be the ones coughing up the tax money.  This includes the amazing co-op, who apparently received an unexpected $100,000 bump in their tax bill after their first year of operation. 

Regardless of who came up with the original assessment, the new assessment seems to completely out of line with comparable luxury apartments in the area.  $10k per year in taxes for a tiny apartment is unreasonable.

If this ends up being some tit-for-tat because of campaign support or behind the scene union negotiations, then that is absolutely shameful.  The conflict is quite clearly damaging to future development.  Nobody in their right mind would consider a construction project in this city.

posted by: anonymous on September 5, 2012  11:07am

“Nobody in their right mind would consider a construction project in this city.”

Exactly.  Thank you, Mayor DeStefano and staff, for taking the only relatively prosperous city in the State of Connecticut, and permanently crippling it. 

For the good of the State’s economy, it seems like Governor Malloy should intervene here, as soon as possible.

posted by: PH on September 5, 2012  1:58pm

I cannot believe how much whining people are doing on behalf of a developer and an investment fund.  These people are COMPLETELY capable of negotiating a deal in their best interests, and COMPLETELY aware of when something is a mere estimate as opposed to a number put into a contract.  The notion that these wealthy and savvy businessmen deserve to be bailed out for not getting as much return on their investment as they had expected is galling.  They are not going broke, they are just getting less profit than they had dreamed of.  Why does every corporate entity think that they should get a better deal when every average citizen must bear the ebbs and flows of markets, or tax assessments?

MEPT may be having a case of buyer’s remorse, but it is not the job of the city’s legislature to make them feel better about their business decisions.  Go to court and make a legal argument, if you have one.

posted by: hdavid on September 5, 2012  2:21pm

I have stayed away from commenting on this 360 STate Street story as I was loath to take the time to do the basic research without which comment is unproductive.  I would have loved to see the income statement and pro-forma’s provided by MEPT at the time of project approval and more recently. In the absence of such hard income and cost information the following analysis is somewhat speculative and approximate.

Of course, as a property owner myself, I selfishly prefer that someone else pay more of the tax burden so my share is reduced!! Ideally, the City would control spending so that the tax burden is minimized, but that is not likely without seismic changes in the topography.

Based on my “back of the envelope” analysis, it does seem that the $5.6 MM tax assessment is well above what is reasonable and will result in requiring apartment pricing significantly above current already stratospheric levels, OR, significant reductions in the returns on investment for the developers.

This project always had an air of unreality from the start and the numbers only generated a positive return on investment if property taxes were reduced in perpetuity to generate such returns. The developers may have relied on good faith projections which did not pan out for reasons only alluded to in the NHI story.

Here are some stats. Very approximate but somewhat useful for this purpose.

1.  $200 million development cost for 500 apartments equals $400,000 per unit, the majority of which are under 1,000 square feet. I realize that the $200 MM pertains to the entire project including the commercial spaces/parking, etc., and not just to the residential uses.
2.  $200 MM to create 400,00 sq ft of space comes to about $500/sq feet of developed space.
3.  Rents seem to be about $27/feet for the larger units and closer to the mid-$30/ft for the smaller units.
4.  At a tax assessment of $1.4 MM, the tax bill comes to $2,800/unit/year or $3.50/ft/year. At $5.6 MM this jumps to $14.00/ft/year which may represent 35-50% of estimated income of $27 -35/ft. No property can absorb this level of taxes relative to rents. Either the developer tries to jack up rents by $10/ft/year—approx 35% of current rents—which the market may not sustain, or the developer shells out the added $10/ft in taxes out of returns on investment.
More to follow….

posted by: hdavid on September 5, 2012  2:33pm

5.  The $5.6 MM for the projected taxes represents about 2.5% of the entire property taxes collected from all New Haven properties.  AT $1.4 MM this would still be a 0.63% of total property tax collections (assuming about $220 MM/year)

6.  I have heard comments that commercial properties should be valued by the income approach.  I don’t have enough info on net income to do this but the proposed new assessment seems very high relative to other properties in the area.

7.  The developers may have splurged on costs—sustainable energy, affordable housing 10% set aside, ccommitmentto prevailing wages, etc.,—in the expectation that the City would compensate with generous tax abatements as was done so often in the past. Even getting the land for $1 amid much opposition did nothing to create a return on Investment for this project without the big prize of $4 MM a year in tax abatements. MEPT may have calculated that they would get some value from the union jobs created, etc.

8.  This whole saga will dampen any future developers enthusiasm for similar projects without iron clad perpetual abatements. This lot was vacant for about 50 years until MEPT came along.  One has to wonder where the next MEPT will come from given this sorry history.

9.  If litigation is the only recourse then the developers will have to pay up during litigation and take their lumps—I doubt rents can rise to the occasion in this case.  The biggest damage is to any future development in New Haven.

Please note that the above are rough numbers and make no claim to precision.

harry

posted by: bert on September 6, 2012  9:17am

PH writes, “The notion that these wealthy and savvy businessmen deserve to be bailed out for not getting as much return on their investment as they had expected is galling… Why does every corporate entity think that they should get a better deal when every average citizen must bear the ebbs and flows of markets, or tax assessments?”

This is wrong on several major points. First, how in the world does a union pension fund qualify as a “wealthy and savvy businessman”?? Again and again commentors speak as if Becker owns the building. He doesn’t. He merely built it—for a union pension fund! People seem either unable or (more likely) unwilling to grasp this simple point. THe tax quadrupling will be paid for by UNION WORKERS IN NEW HAVEN AND ELSEWHERE!

Second, fixing the assessment would not at all have protected MEPT from the ebbs and flows of the market - or from changes in the mill rate, for that matter. If the rental market softens, the investment drops—like any other. If the mill rate goes up, the tax goes up.  No, all this is/was about is correcting the egregious and reckless quadrupling of the assessment. This really couldn’t be simpler to grasp: the city held out one price to lure the investors in… then, when the building was done and there was no turning back, they QUADRUPLED it! This is not an ebb or a flow. It’s a bait and a switch!  And anyone who can’t understand that is either blockheaded or willful.

Finally, kudos to the Independent for the excellent coverage. I challenge anyone with an open mind on this topic to look at the six minute video linked in the article above. It makes abudandantly clear—one person after another—that this is an amazing building that has pumped new life into New Haven. This new life exists ONLY because it was underwritten by the city with a good-faith agreement on taxes. Reneging on that agreement is akin to exerting a wish that the building had not been built. And now it looks as if it will be the last one.

THe Aldermen missed a chance to help all New Haven. Now litigation will ensue, parties on all sides will entrench themselves, the lawyers will get rich, and the next project of this quality will be built in Hartford.

posted by: HhE on September 6, 2012  9:39am

Of all the comments on this, I find those by hdavid and bert to be far and away the best.

posted by: robn on September 6, 2012  9:52am

But what HARRY and BERT fail to recognize is that city development officials didn’t make a low estimate and promise it to Becker; they simply repeated Beckers estimates to the BOA so that they would sign off on the free land transfer. Beckers a big boy and he should have calculated his taxes properly according to his construction cost.

posted by: HhE on September 6, 2012  10:42am

robn, I almost never disagree with you, but I am now.

Construction cost is not market value.  Most home improvements will only return 50 to 90 cents on the dollar.

Use my house as an example:  purchased in 2002 for $248k, the insurance appraisers estimated its replacement cost at about twice that.

If city hall is going to parrot a developer’s tax estimate to the BoA to move a sweetheart land deal through, then city hall is giving credence to that estimate. 

Just as what was done to you and other East Rock residents was unfair and shortsighted, this bait and switch will be read by other potential developers as a warning.

In the meantime, you still have a spot on the HhE’s All Stars posting team.

posted by: hdavid on September 6, 2012  11:33am

robn: I do not wish to become polemical, but the key issue here is whether or not the assessment is fair, based on comparables.  If this assessment resulted from some personal/political issue which the NHI story only hinted at—I wonder what Bill O’Brien could tell us if he chose to!!—then this sends a bad signal to any other developers who may wish to invest here.

Perhaps someone with more interest in this issue than I can take 3-5 similar properties and determine the tax assessment/sq ft.

The message may be that tax assessments are not based on generally accepted valuation algorithms—has the City Assessor explained the basis of the $5.6 MM tax bill?—and that developers either operate under the radar or be prepared to pay-to-play to an inordinate extent.

I just find it hard to believe that a property renting for perhaps $30-40/sq ft/year can sustain a tax bill of $11.20/sq ft.  It the owner of any 2-4 family apartment found their tax bill approach 35% of income they would decide they have priced themselves way below market or should find alternative investments.

I have a hard time collecting $12/ft in rents for property that has restored hardwood floors, tin ceilings, all modern appliances and heating plant, etc. Of course, I am not located downtown, but the point remains that the assessment should be based on some income/cap rate approach so that future developers/investors know what to expect. If taxes consume 35% of income—this is my guesstimate not fact—then where is the room for insurance, utilities, etc., beside financing costs?

Harry

posted by: bert on September 6, 2012  12:01pm

Harry… Bingo! And I don’t think the rents at 360 even approach $30/$40 per sq ft per year. I think it’s more like half that. Many of the apts are 700 sq ft. I think they rent for something like $1500. That’s more like $25 per sq ft per year. The tax bill is going to be half that.

Like you, I own a residential rental—a beautiful, renovated, updated old Victorian house. My taxes are ONE FIFTH of the gross income on the building… and what with my mortgage, maintenance, fairly frequent costly updates, etc., I barely make money on it most years as is. Now imagine my taxes get kicked up to one-third to one-half or more! The rental market could never support that, and I’d be forced to sell the place… except that no one would buy it!

Doesn’t this show why it makes no sense to use construction cost as a way of assessing this building? It’s worth is all about the income it is generating. At a certain tax level, the building’s real worth drops precipitously.

posted by: Kevin on September 6, 2012  1:01pm

For my friend HhE and hdavid.The law (CGS Sec. 12-63b) requires assessors to consider three factors, to the extent there are applicable, in assessing a rental income property (1) replacement cost less depreciation plus the land (for 360 State this would effectively be the construction cost), (2) net income for comparable properties, and (3) current sales of comparable properties. The law does not specify how much weight the assessor has to give each factor. I would argue that the third factor does not apply, since 360 is basically unique and there have been no recent sales of very large multies.

In the absence of of a formal assessment agreement, a prudent developer would assume that his/her assessment could be close to the one that produces the highest revenue for the city. This is particularly true in this case, since the replacement cost number is very firm, while the net income number necessarily relies on a capitalization ratio that is inherently subjective.

posted by: anonymous on September 6, 2012  1:35pm

Commenters above have hit the nail on the head. Let’s hope the lawsuits are resolved quickly.

In the meantime, DeStefano should issue a formal apology for this problem by paying a personal visit to Becker’s office with his staff.

posted by: hdavid on September 6, 2012  3:01pm

Kevin: I will give you some points for finding and quoting the law. However, your conclusion that the the prudent developer would assume that his assessment would be the one that produces the highest revenue to the city—“since the replacement cost number is very firm, while the net income number necessarily relies on a capitalization ratio that is inherently subjective.’—is totally flawed. 

Of course, the City will seek the highest assessment. However, when that assessment becomes unrealistic, as in this case, and results in either a decision NOT to proceed due to this inflated assessment, OR , post fact, results in capital losses that will discourage future critically needed investment, then it is not reasonable.

Had the assessments been agreed upon before hand this project would not have gone forward, a 50 year eyesore would have remained, and the taxpayer would not have had the $1.4 MM—or whatever final assessment is agreed/litigated—contribution from this investment, not considering the benefits of housing, bike shop, grocery market, etc.

As to valuation methods, the cost/replacement is far less valuable/effective than the income approach. Try to appraise a school or Museum on the basis of costs!!!  This is especially true in this case since the City imposed obligations on the developers that inflated costs and reduced revenues. 

If you believe that the cap rate is inherently subjective then we have no basis for valuation of any commercial development.  Do you think cost less depreciation is less subjective?  Cap rates are based on interest rates that discount the future income stream in perpetuity to the present. What is subjective about this?? These rates are based on prevailing rates and are used by the City’s own appraisers to value property that has no peer.

Ultimately, the issue boils down to predictability for developers and good faith agreements that respect precedents. What is happening here is not sustainable—to pay the additional $4MM rents will have to go up by $8,000 per apartment unit. Who do you think will be asked to pay this?

Of course, renters can decide not to rent in which case the investors will take a big haircut—or salvage their investment by doing what other contractors/developers are expected to do in New Haven.  You can guess for yourself what that is.!!!

harry

posted by: Kevin on September 6, 2012  6:02pm

hdavid

I should have been clearer that the construction method comes up with a firmer number in this particular case since the construction costs are known and recent. I suspect that the city is also using it for Yale’s new construction to maximize its potential PILOT payments.

While the income approach is widely used for commercial properties, there is no magic cap rate and reasonable people disagree on discount rates all the time. There is also no requirement that a municipality use a uniform cap rate for different types of commercial properties.

I do believe the city handled this badly. At the very least, when presenting the project to the alders, city officials should have made it clear that the $1.4 MM estimate was Becker’s and clearly state that the actual taxes could be higher, based on construction costs and other factors.

posted by: hdavid on September 7, 2012  8:06am

Kevin: Noted your comments. Costs may be firm (er) but depreciation is an accounting construct that bears no relation to actual wear and tear.

Cap rates are used all the time to evaluate income producing properties especially when the structure is unique as to location, mixed use, special features, etc. 

Of course the City will use whatever generates the highest assessment.  That does not make it prudent public policy. And if that is the valuation method simple fairness would require this method be used for other similar projects.

Harry