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These tax breaks are popular with developers, but are they misused?

Some of Buffalo's biggest and most active real estate developers are among the largest beneficiaries of a special city property tax exemption — one that is frequently used in Buffalo, but is not well-known, understood or monitored by taxpayers.

That's the conclusion of a new report by an advocacy group, which is raising concerns about the lack of oversight and potential for abuse in a statewide program that is used more in Buffalo than any other upstate city.

The Public Accountability Initiative says the "485-a" tax breaks are benefiting wealthy developers, subsidizing luxury apartments and driving up rents. That, in turn, causes gentrification at the expense of lower-income residents, while leaving other property owners to make up the gap in the city budget, the group added.

The 485-a program — known for the section of the state real property tax code that authorizes it — was designed to encourage the adaptive reuse of vacant or underutilized commercial and industrial buildings in cities.

But the Public Accountability Initiative contends the law is being misused. The advocates document examples in which they say lucrative tax breaks were awarded on projects that qualified according to the letter of the law, while flouting lawmakers' intent. In one case, they note, a project to turn an eight-story former state office building into a hotel and offices qualified for the tax exemption because of a single apartment.

The study, released Tuesday, concluded that developers in Buffalo have cut their property taxes on at least 85 properties by more than $63.5 million over the 12-year life of the exemptions. That means developers are still paying taxes, but much less than they would otherwise.

In the 2018-19 fiscal year, the program's tax breaks will equal 4.3 percent of the city's entire tax levy, the group said.

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"These exemptions do not benefit the vast majority of Buffalo residents, and indeed cost them money," the report said.

The group urged the city to "simply cease giving out the tax break" or at least ensure more reporting and oversight. It also encouraged the city or state to require rent control or inclusionary zoning as part of the exemption.

"There’s no accountability mechanism," said Kevin Connor, the group's co-director.

City officials said the program has sufficient oversight.

"At no time has there been a project approved for this exemption that was not eligible for the exemption," said Martin F. Kennedy, Buffalo's commissioner of assessment and taxation. "We cannot pick and choose according to our likes and dislikes."

Developers said they had no objection to more disclosure, although they cautioned against imposing too many conditions.

"I don't have a problem with oversight," said Karl Frizlen, another developer, with three 485-a projects. "I just fear that in the future, if they put more layers of bureaucracy on top of that, that a project might be not financially feasible anymore."

But some of the developers also contend the Public Accountability Initiative fails to understand how the city budget and taxes work, asserting that neither the city nor other taxpayers are harmed.

NAIOP, a commercial real estate development trade group, questioned the study's findings and called it a "cloaked attempt" by "extreme anti-business interests to influence public opinion on policies they seek to change."

It also said PAI's claims of rising rents and displacement of people are "a blatant attempt to manipulate the residents of Buffalo into thinking that programs designed to spur economic development are windfalls for developers instead of acknowledging that public assistance is required to revitalize the city."

U.S. Rep. Brian Higgins, D-Buffalo — who sponsored the state legislation creating the tax break in 2002 — called the overall program a "resounding success," citing the conditions along major city streets today compared to 20 years ago. (Mark Mulville/News file photo)

Letter versus spirit

Developers and city officials say the development projects have had a valuable benefit for Buffalo, by restoring dilapidated or neglected buildings, instead of leaving them to languish and bring down a neighborhood. That generates more taxes than before on the same properties, they say.

A 2015 examination by U.S. Rep. Brian Higgins, D-Buffalo — who sponsored the state legislation creating the tax break in 2002 — found the 485-a tax incentive resulted in $91 million in new taxes for Buffalo on 46 properties — even after taking out the taxes that were not paid because of the abatement.

The legislation authorizes an exemption only on the increase in property value. That means the original assessment prior to redevelopment is not discounted, and taxes are still paid on that.

Under the law, the full amount of the increase is exempt for the first eight years. Full taxation takes effect after the 12th year.

Supporters say those tax breaks are essential for making the financing work on many of the projects. That's because state taxes are high, while the property values and rents that developers get in Buffalo aren't enough to overcome the costs of adaptive reuse, they say.

"Without those economic tools, you would not allow developers like us to be able to move forward with projects," said David Pawlik, owner of Creative Structures Services, which has used 485-a tax breaks on three projects. "Something has to give."

One apartment

The program was designed to encourage the adaptive reuse of vacant or underutilized commercial and industrial buildings in cities. Such properties were supposed to be converted into vibrant mixed-use projects, with commercial and residential space as part of the new building.

But that's not always how it's been used, according to the PAI report.

• For example: Benderson Development Co. is getting a tax cut totaling $5.9 million over 12 years for its conversion of the former Donovan State Office Building into One Canalside. The eight-story building now features a four-story Courtyard by Marriott hotel with 96 rooms and a café, plus a Pizza Plant restaurant and the headquarters of law firm Phillips Lytle. It qualified for the tax break only because it also has a single, 904-square-foot apartment.

"The One Canalside project is clearly a project that would not have made economic sense without the use of publicly available programs," said Benderson Vice President Eric Recoon. "This afforded us an opportunity to really dip our toe into the water and determine the interest level."

Kennedy, Buffalo's commissioner of assessment and taxation, acknowledged the one apartment was "for the sole purpose of qualifying for the exemption." Even so, he said, the incentive was valid. City officials even checked with Higgins' office because "we did not know if this was appropriate." They were told that the legislation didn't specify any percentages, he said.

• James Swiezy's Greenleaf & Co. built its high-end Campus Walk student housing complex next to SUNY Buffalo State, creating 80 apartments with three and four bedrooms in each. The $25 million project qualified for $2.6 million in tax breaks.

PAI says this project should not have received an incentive because instead of converting an existing non-residential property — as the law states — Greenleaf had to first demolish 17 two-story, two-family homes. But Kennedy said those parcels were combined with an existing commercial parcel and became entirely commercial under the Green Code.

• Carl and William Paladino's Ellicott Development obtained $1.2 million in tax breaks for 301 Ohio St., a $4.5 million mixed-use project along the Buffalo River, with 21 apartments. But the complex was constructed on six acres of previously vacant land that Ellicott has owned since 1983.

"The program has allowed us to pursue additional projects which otherwise we would not have pursued and completed because financially the costs were too high," said Ellicott CEO William Paladino.

Besides Campus Walk and 301 Ohio St., Benchmark Group's mixed-use development at 766 Elmwood also involved new construction on vacant land. Benchmark President Steven J. Longo declined to comment.

Ellicott Development's mixed-use building at 301 Ohio St., built with $1.2 million in tax breaks, was one of the projects that came in for criticism in PAI's recent report on state tax breaks for Buffalo developers. (Derek Gee/News file photo)

Not intended

PAI argued the tax incentive was not designed for new construction, so the group says those projects should not have qualified.

"This was meant for old buildings to be adapted and turned into mixed-use buildings. What we found is that it's being used a lot for new builds that were just on non-residential lots," said PAI senior research analyst Robert Galbraith. "So basically what you have here is exploiting the fuzzy language of the law to extend it far beyond what it was conceived of."

But Kennedy said the legislation does not state that the conversion must involve a building, and "non-residential property" includes vacant land.

For their part, developers say they followed the rules and complied with the law.

"While I understand that the construction of a single residential unit as part of our mixed-use redevelopment project might raise some eyebrows, we followed the appropriate process," Recoon said of the One Canalside project. "We investigated the tax code. We determined that it was an eligible project, and we were approved."

Swiezy said he has only applied "under circumstances where we believe that we meet established criteria," and "the city has agreed."

Buffalo Common Council President Christopher Scanlon said he doesn't think the kind of abuse that PAI alleges is rampant.

"Anytime I’ve seen it, it’s been a case of a project that’s improving a neighborhood," Scanlon said.

Higgins, who sponsored the law in the state Legislature, called the overall program a "resounding success," citing the conditions along major city streets today compared to 20 years ago. But he acknowledged that "using this program to incentivize a new build on the site of a demolition appears to contravene the letter of the law."

"Certainly, things could be tightened, and I would support legislative or regulatory fixes to that end," Higgins said.

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