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Use of controversial tax break by developers in Buffalo continues to grow

Use of a controversial property tax exemption for commercial projects in Buffalo keeps growing, according to a new report by a government watchdog group that has criticized the way developers have used the lucrative program.

The Public Accountability Initiative projected the total value of the 485-a tax break in Buffalo at $66.9 million between this year and the end of 2030, based on the 96 properties that have received the incentives. That's up from $63.5 million over 12 years when the group first reported on the program a year ago.

The nonprofit group said 11 projects were awarded the lucrative tax break in the past year, in amounts ranging from $34,500 to just over $1 million.

Beneficiaries include major developers like Ciminelli Real Estate Corp., Benderson Development Co., Ellicott Development Co., Signature Development Buffalo and Savarino Companies, as well as smaller players like Amy and Mark Judd, Lazarus Properties, St. Paul's Episcopal Church, Collision Masters, architect Steven Carmina, and Christopher and Thomas Juliano.

Those property owners would have paid more than $450,000 in property taxes this year if the properties were assessed at their full value of $15.6 million. Instead, they paid less than $90,000, the Public Accountability Initiative said.

That difference, the group asserts, is passed on to other property owners and renters in Buffalo, who effectively make up the difference in municipal budgets.

"Without intervention from the city or state governments, people in Buffalo will be forced to continue paying tens of millions of dollars to increase the profit margins of luxury developments," the Public Accountability Initiative said in a report it planned to release Monday.

Developers reject the criticism, saying the Public Accountability Initiative and other activists don't understand how important the program is for the city.

“This is an important tool in the financing stack to make these projects work,” said Rocco Termini, owner of Signature Development Buffalo. “You have to realize what it does to a neighborhood. Where would the city be without all these benefits? You think you would be in this renaissance now? You wouldn’t. Nothing would be happening in the city.”

He said property values around the Chandler Street projects that he has done have gone up, while he also cleaned up the properties as part of the development projects.

“Everybody thinks developers are making millions and millions of dollars on these projects. Some of these projects just barely squeak by with a return,” Termini said. “You’ve got a few do-gooders out there who think it’s not necessary and people are just taking advantage of taxes. They’re not.”

The 485-a program – named for the section of the state real property tax code that authorizes it – was created by the State Legislature in 2002 to encourage the adaptive reuse of vacant or underutilized commercial and industrial buildings in cities. In particular, it was supposed to provide an incentive for mixed-use projects that incorporate both residential and commercial tenants.

The legislation authorizes an exemption only on the increase in property value that results from redevelopment. 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 tax-exempt for the first eight years. Full taxation takes effect after the 12th year.

Developers and city officials say the program has helped advance projects that created valuable benefits for Buffalo, by restoring dilapidated buildings.

And, they add, the incentive is needed to make many projects financially viable in Buffalo, where the property values and rents aren't high enough to support the projects. The 485-a exemption has been used more in Buffalo than in any other city in the state.

Developers also say they routinely evaluate the funding options that are available for each project – including tax credits, tax breaks and grants – and just follow the program rules and eligibility requirements set by others.

Benderson, for example, used the 485-a benefit when it converted what Vice President Eric Recoon described as "an antiquated and functionally obsolete 50-year-old Holiday Inn" on Delaware Avenue into a new extended-stay Residence Inn with a Starbucks and four garden-style apartments in the lower level. The apartments were rented within the first month and "are proving to be a valuable housing option for the nearby burgeoning medical campus."

"This Residence Inn project is a textbook example of a successful adaptive reuse," Recoon said. "The rules are established by others, and we follow them strictly."

Developers also note that the program is not a cash grant, but a delay in the full application of the increased property taxes that the project owner must eventually pay. The base tax from before is still paid in full, regardless of whether the project occurs.

But the watchdog group contends the law has been "twisted and misused to apply to developments well outside the law's original intent, and often outside even its technical requirements," according to its report. As a result, "tens of millions of dollars of property tax liability" have been shifted away from "the wealthy developers who can access the program," it said.

The group also has denounced what it calls the "Benderson loophole," referring to the One Canalside project in which Benderson Development used the law's vague wording to qualify for a $5.9 million tax break by putting a single 900-square-foot apartment alongside a Courtyard by Marriott hotel and the Phillips Lytle law firm's offices.

The organization identified two other properties – Mark Croce's Curtiss Hotel at 210 Franklin St. and Frank J. Todaro's Collision Masters building at 292 South Park Ave. – that have received $1.3 million in exemptions using the same technique.

The developers behind at least three other projects have stated their intention to do the same – Croce and McGuire Development Co.'s Emerson School of Hospitality at 75 W. Huron St., Rachel and Ryan Heckl's conversion of a former church at 467 Richmond Ave. into an arts campus, and Uniland Development Co.'s proposed new Hansa co-working facility at 505 Ellicott St. Each project would have one apartment.

The nonprofit group had called on the city to "opt-out" of the program, and urged state lawmakers to repeal the program or at least tighten the rules and oversight to "curb its most egregious abuses."

But a proposed city ordinance has been tabled since July 2018, while a state bill in Albany has languished in a Senate committee after unanimously passing the Assembly, the group said. The proposed state bill would mandate that projects must be at least half residential and 15% commercial to qualify, would prohibit the exemption on new construction, and would require clawbacks if a project is later found not to qualify.

The group noted that State Sens. Chris Jacobs, R-Buffalo, and Tim Kennedy, D-Buffalo, received $153,915 in campaign donations from developers like Nick Sinatra, Randy Benderson and Paul Ciminelli. Jacobs also owns Avalon Development – which has received $800,000 of 485-a exemptions for two projects in which he is a partner – while Kennedy's father was Buffalo's tax commissioner for 12 years.

"As a developer I have utilized the 485-a exactly as the law was intended," Jacobs said. "These formerly vacant properties are now paying far more in property taxes and related sales taxes than they were prior to renovation and have contributed to the revitalization of downtown Buffalo."

Kennedy spokeswoman Molly Hirschbeck dismissed the criticism. “Senator Kennedy voted in favor of the state bill to revise the program and close the loophole in the Rules Committee in June, so his support shouldn’t be questioned,” she said.

Termini said the problems cited by the group could be easily solved if the state Legislature would make the 485-a program consistent with the similar 485-b program for businesses. The only difference between them, he said, is the duration of the benefit, which is longer for 485-a projects.

“It’s a simple thing,” he said. “If you made them the same, you wouldn’t have everybody trying to put the round peg in the square hole. Everybody would be on the same footing. They would opt to use 485-b.”

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

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