Providence reviewing millions in tax breaks for developers

City Hall

PROVIDENCE, R.I. (WPRI) – What do the Providence Place Mall and the micro-loft apartments being constructed at the Arcade downtown have in common with an Olneyville nightclub and a now-closed restaurant in Silver Lake?

They’re all among the dozens of projects that have been awarded millions of dollars in tax breaks by Providence over the last 21 years through a special program that city officials now say was overly generous and poorly monitored over the last two decades.

All told, a WPRI.com review of data provided through a public records request shows the city granted 81 tax breaks since 1992 through its tax stabilization program, an economic-development initiative designed to allow developers to gradually increase their property tax payments over the course of 10, 15 and sometimes 20 years in exchange for creating jobs and filling vacant buildings – often in downtown.

The bulk of the deals have accomplished those goals, but many were crafted in a way that never carved out a realistic path for owners to begin paying 100% of the taxes owed based on their property’s actual value, according to Michael D’Amico, the city’s director of administration.

“The purpose of the tax stabilization is to allow development to happen where it normally wouldn’t happen,” D’Amico told WPRI.com. “Whatever the subsidy is, the benefits to the city and the taxpayers need to outweigh the cost of the subsidy. In some cases, the amount of tax subsidy was far in excess of the benefits.”

D’Amico contends that the projected value of many of the deals at the time they were agreed to were woefully underestimated and failed to offer an accurate assessment of how much the city would be losing in tax revenue in the long term.

Providence vs. Buff Chace

Now the city is attempting to take a stand, starting with one of downtown’s most prominent developers.

In an August letter penned to Arnold “Buff” Chace, D’Amico rejected a proposal for a tax stabilization deal for the Kinsley Building on Westminster Street, a project in which Chace wants to invest $10 million. D’Amico also requested that Chace begin reviewing four of his properties that are scheduled to have their tax deals expire by 2016.

Chace – whose family founded Berkshire Hathaway, and whose father sold his piece of the company to Warren Buffett – is widely credited with helping transform Westminster Street into one of the most vibrant sections of downtown Providence. He’s also among the state’s most generous political donors, having hosted President Obama for a private fundraiser at his East Side home in 2010.

Chace’s four Westminster Street properties – the Alice Building, the Peerless Building, the Wilkinson Building and the Burgess O’Gorman Building – make up the majority of the Westminster Lofts, a set of trendy, high-end residences in downtown. All of the buildings came with generous tax stabilization packages that D’Amico said allow Chace to pay only a fraction of what he would owe if he were paying the full tax rate.

In all, the city estimates that at the end of the four tax stabilization agreements, Chace will have paid approximately $940,000 in taxes to the city over 15 years. Without the tax deals in place, Chace would have been required to pay $8.8 million for all of the properties.

D’Amico said he is willing to negotiate “very short extensions” so that Chace doesn’t see an astronomical spike in his taxes, but he indicated that too many tax agreements were designed in a way that didn’t account for a property owner eventually paying their full taxes. Instead, he said many developers have sought – and been granted – extensions to their deals.

In 2010, the General Assembly passed a bill that extended most tax stabilization agreements for five years as a response to the economic downturn.

D’Amico said he is unsure of whether the city has gotten enough bang for its buck out of many of the stabilizations.

“I think the fact that the tax stabilizations are [expiring] and the economy is still sluggish, common sense would tell you that we need to look at a new approach,” D’Amico said.

Mayor wants to freeze commercial rates

That new approach includes Mayor Angel Taveras’s proposal to freeze the city’s $36.75-per-$1,000 of assessed value commercial tax rate, which is considered the highest of any big city in the country, according to a widely cited study by the Lincoln Institute of Land Policy and the Minnesota Taxpayers Association.

Taveras, a first-term Democrat who is widely expected to run for governor in 2014, has asked the City Council to commit to not raising the commercial tax rate for at least seven years in order to offer better predictability to property owners. The council approved the first year’s freeze in May, but the agreement was tied to a substantial hike in residential property taxes.

When the city does offer tax stabilizations going forward, it wants to limit the deals to 12-year agreements that ensure that property owners are paying the full amount of taxes owed by the end of the term.

Zachary Darrow, a well-known lawyer who represents Chace as well as the owner of the vacant “Superman building” along Kennedy Plaza, told WPRI.com the tax stabilizations are one of the few policies that make developing in Providence an attractive option.

“This is the city’s only way to assist major development,” Darrow said. “Tax stabilizations are the city’s contribution toward enabling investment in some areas of the city. [Property owners] would otherwise not be able to develop.”

Chace was away on a business trip Tuesday and isn’t expected to be back in town until Friday, Darrow said.

City removed council from deals

Records reviewed by WPRI.com show that of the 81 stabilizations offered by the city since July 1992, 37 deals were agreed to during the administration of Mayor Vincent “Buddy” Cianci; 22 were awarded while former mayor and now Congressman David Cicilline was in office; and 13 were approved under current Mayor Angel Taveras.

Nine other agreements were finalized while current state Rep. John Lombardi was serving as interim mayor after Cianci left office in 2002 following a conviction on a federal racketeering charge.

While Providence was able to produce paper records of every tax stabilization agreement it has granted, officials never maintained a database that kept track of how much the deals were worth until Taveras took office in 2011. As a response to a request from WPRI.com, the city began researching the values of the agreements dating back to 1992, but the review was not complete in time for publication.

Records show almost all of the city’s major projects over the last two decades have come with tax stabilization agreements, beginning with the Providence Place Mall in the early 1990s and continuing with the GTECH building, as well as many of the downtown spaces that Chace developed.

The Taveras administration has used tax stabilizations to help renovate the Biltmore Hotel as well as for developer Evan Granoff’s effort to turn the Arcade – the country’s oldest indoor shopping mall – into tiny apartments.

Other deals have been more suspect. In 2002, the City Council, which was required to approve all stabilizations until 2011, awarded a tax break to a restaurant on Pocasset Avenue after it was already open for several months. The restaurant was later forced to close following a fire.

More recently, the Taveras administration convinced the City Council to approve an ordinance that allowed up to 10 projects to obtain tax stabilizations without being vetted by the council. In one case, the city awarded a tax break to Fete, a new nightclub in the city’s Olneyville neighborhood whose co-owner defaulted on a Providence Economic Development Partnership loan several years ago.

Other recent deals include the city’s tax stabilization for Hasbro, which resides in a downtown building whose owner pays less than 10% of the taxes it would pay if it were required to pay taxes in full. Granoff, the Arcade’s owner, is currently paying slightly more than 50% of the taxes his building would normally be required to pay without a tax stabilization.

“While we believe that these projects are going to have a significant impact on the city, we think we could have accomplished the same thing with a tax stabilization that wasn’t as generous,” D’Amico told WPRI.com.

Joan Youngman, a senior fellow at the Lincoln Institute of Land Policy, told WPRI.com that one of the great dangers of offering tax incentives is the unknown. She said that while tax stabilizations may result in success stories, the ideal strategy is to “lower tax rates for everyone.”

Youngman said if a one-on-one tax agreement is going to work, the city must set strict rules for the deal and make sure to monitor all requirements closely.

Even then, Youngman said, special treatment is a risky proposition.

“Some of these things work out well, but it’s a hard job to pick winners and losers,” Youngman said.

Dan McGowan ( dmcgowan@wpri.com ) covers politics, education and the city of Providence for WPRI.com. Follow him on Twitter: @danmcgowan

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