Bishop: 38 Stabilizations - Neverending Prov Tax Giveways are 38 Studios Redux

Thursday, January 07, 2016


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38 is about how many Tax Stabilization Agreements (TSAs) there are currently active in Providence. But other than the number of deals, what do these TSAs have to do with 38 Studios? Don’t we have something to show for them? Isn’t there some renaissance in process? These aren’t failed ventures are they?

Well, to hear developers tell it, they are failed projects, or will be if the city doesn’t bail them out again!
These giveaways were meant to enable projects that would not otherwise be built by abating their taxes for a decade, after which, they would pay significantly more taxes than the property would have otherwise commanded. Even taxpayer advocates in Providence didn’t necessarily think that was a bad idea. The Governor and the I-195 commission are still pushing these agreements like they are going out of style. That may be good for the state, but it has done little for the city.
Here’s the problem: These 10 year agreements have somehow managed not to expire! In an insider oriented end run, all were extended for five years in 2010 by the state legislature. That’s right, the state legislature giving away Providence’s taxes for projects already completed and scheduled to increase the city’s tax base. Like connected interests whose behavior helped lead to the real estate bust, these developers got a government bailout while the rest of us shouldered the full burden through the recession.
But now, after 15 years of the taxpayer biting the bullet, these projects will finally start paying their taxes.  Not so fast.  As of this date, the holders of 9 of these agreements have petitioned the Council for yet another 5 year extension. This time they are willing to pay a little more, about half the bill, rather than the 10¢ on the dollar or less they have been paying. Four developments associated with rich Providence developer Buff Chace already received extensions from the lame duck Council a year ago.  And now, 5 more buildings are before the Council offering no new construction, no jobs, nothing. They just don’t want to pay high taxes. Ditto for every taxpayer in Providence, welcome to the club.

The excuse they offered at a recent council hearing: It’s the city’s fault. By allowing their taxes to be so low for so long they had gotten used to it. Despite the clear contractual obligation to pay full taxes when their TSAs expired, they aren’t ready for it and need to ease into tax payments.

Making the Many Subsidize the Few.

But if these projects don’t pay their full taxes, it raises everyone else’s.  In 2010, the brunt of the giveaway was borne by small apartment buildings when then-Mayor Cicilline closed the gap created when the state extended these giveaways by increasing non-owner occupied taxes by 50% in one year rather than see a homeowner increase while he was running for Congress. So these TSA projects that were attracting renters away from the city’s existing apartments were actually being subsidized almost wholly by their competitors. Nice work if you can get it.

But this is not an issue just for apartment owners. The city council has made clear that the price of these latest extensions is likely to fall on single family homeowners, with both Council President Aponte and various state observers suggesting that an increase in homeowners taxes is the low hanging fruit to stave off state oversight and balance the budget.

Schilling and Corso’s Comments Show Why This is 38 Studios Redux.
Of course its popular to malign public/private ‘partnerships’ by comparing them to 38 Studios. But there is a very important similarity between 38 Stabilizations and 38 Studios that city policymakers should keep in mind.

In some of his first public comments since the 38 Studios bankruptcy, Curt Schilling maintained that RI romanced him and not vice-versa. And he deflects questions about crony corporatism by arguing that no one would turn down a capital infusion for their startup, regardless of the terms or possible conflict with the notion of markets free of government favoritism.

Well that is evident in Providence, where all developers claim they can’t build without giveaways. Providence taxes are high, but they should be lower for everyone, not the few. And the City fathers simply do not have the capability to vet these projects, many of which could be built without such subsidy. But Schilling’s point is, if these are being given out like candy, developers would be stupid to turn them down.
And Michael Corso, the poster child for highly paid consultants who intend to enrich themselves at taxpayers expense through these deals, has recently suggested that the state’s failure to throw good money after bad in film tax credits for 38 Studios is a breach of promise. It certainly was a comeuppance for lobbyists like Corso who are used to driving what happens. But by seeking the credits in the first place, with 38 Studios teetering on bankruptcy, the implication is: once the state subsidizes a project, it has a duty to continue subsidizing.

Consultants Say We Must Subsidize These Projects Until They Tell Us We Can Stop.

Consultants in the Corso mold are telling us precisely the same thing about 38 Stabilizations. Once the city gave the first tax break, they are compelled by this reasoning to give breaks until the project is profitable. If the projects are never profitable then these breaks should continue perpetually. Otherwise, this raft of well paid consultants tells us, these projects, and Providence by association, will look like failures.

These buildings aren’t going to be closed and boarded up. If they have to pay taxes like everyone else and experience cashflow problems, there might be renegotiation with lenders, or some ownership reorganization. The only failure that could really be alleged would be the city’s failure to prop up connected developers. Those are the kind of failures Providence’s taxpayers, existing businesses and legitimate businesses that would think of locating here should celebrate.
And in many cases these buildings seeking extensions were sold as condos to individual owners before the recession, with sales beginning in 2004! So it is actually condo boards asking for the extensions! How could buildings that were completed a decade or more ago, having sold for good money, possibly look like failed undertakings that could hurt Providence’s reputation?

Real Question Is Not Should We Extend, But Were These Even a Good Idea In the First Place!

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Not only is it utter nonsense to suggest that the rest of the city’s taxpayers should pick up more of the tab for folks who haven’t been paying their share for 15 years, the very idea that these subsidies were a good idea in the first place is open to question. This is a critical point as the rumor mill suggests that, having lost their authority over the TSAs on the I-195 land, the city will now be besieged by many other downtown real estate owners seeking deals for parity with the I-195 land.
At a very real-politic level, unless there are significantly more permanent jobs created than residences under these programs, we have no hope of attracting new residents to the city. Thus these residential projects don’t reliably increase the city’s tax base even if they ever get around to paying taxes. Without a growing economy, these developments poach residents from the existing tax base. One proponent of continued tax favoritism for these projects boasted of leaving the east side for his subsidized adventure. When enough people leave the neighborhoods and traditional housing base for subsidized buildings, that reduces the value of the existing tax base! Even the vaunted east side is feeling the effects of this competition with higher vacancy rates.
If you, as a Providence taxpayer or a state taxpayer, are tired of subsidizing developers who simply don’t want to pay their property taxes, you can join the Stop Tax Evasion in Providence (STEP) coalition at Providence City Hall tonight, Thursday, Jan 7th at 6 PM. We want to let the mayor know he’ll be on Santa’s naughty list if he keeps supporting these extensions. Indeed, Golocal covered recently released footage from the campaign that shows the mayor promising to aggressively hold the line on these agreements and make sure that the projects compensate the city adequately in other ways. Why has that resolve crumbled?

And we’ll meet the City Council to warn them that coal could be in their stockings next Christmas – or worse, next election -- if they fall in with the mayor to give away $3 million to 5 projects with the city facing high deficits and high taxes. If you can’t make city hall tonight, you can join by SIGNING THE PETITION opposing these giveaways and our Coalition committed to Stopping Tax Evasion in Providence will make sure to deliver your concerns to the Providence pols.

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Brian Bishop is on the board of OSTPA and has spent 20 years of activism protecting property rights, fighting overregulation and perverse incentives in tax policy. 


Related Slideshow: Seven 38 Studios Facts You Would Not Believe

Here are the seven facts that you would not (want to) beleive about the 38 Studios deal.

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Meetings Started a Year Before When We Were Told

The first story was that Governor Carcieri went to a fundraiser for a WWII Veteran’s event at Curt Schilling’s home and that served as the spark to a meeting between Keith Stokes and the 38 Studios officials to try and lure the company from Massachusetts to Rhode Island.

Then, it was disclosed that meeting Speaker Fox had had meetings earlier in the spring through his relationship with his close friend Mike Corso.

In the documents released Thursday, Bill Murphy attested to how he sat in on a meeting with Corso, Fox and Curt Schilling while he was still Speaker.

But now, emails starting in July of 2009 between Corso and 38 Studios’ Tom Zaccagnino show the wheels were put in motion even earlier than we thought.

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If Not for RI, 38 Studios Would Have Closed Within 1 Month

If RIEDC had turned down the deal in July 2010, documents released showed that 38 Studios would likely have missed making payroll the next month.

In a July 7 email from Rick Wester to Tom Zaccagnino, he wrote, “The latest would be the August 15th payroll at this point. I’m having doubts we can get through the 30th."

The RIEDC board approved the $75 million in bonds on July 26.

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The Original 38 Studios Deal Was Small and Inexpensive

An internal email at 38 Studios dated February 18, 2010 outlines a Rhode Island staffing plan starting at 10 employees in 2010 and increasing to 40 in the future.

However, RIEDC mandated a high staffing level and thus a high burn rate. 

For 38 Studios to receive its last payment the RIEDC agreement required staffing to elevate to 450 headcount.

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38 Studios Knew RI Money Was Not Enough to Fund the Company

An email exchange between top 38 Studio leadership and Mike Corso, confidant to Speaker Gordon Fox, in preparation to meeting with the RIEDC Board led by Governor Don Carcieri showed that 38 Studios wanted to keep certain financial realities under wraps. 

Tom Zaccagnino wrote to CEO Jen MacLEan, CFO Rick Webster, and Corso, “I really don’t think we should highlight the fact we might be undercapitalized…won’t go over well with staff or board."

Two and a half weeks earlier EDC Board gave preliminary approval and on July 26, the RIEDC Board gives final approval to the $75 million.

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Style Over Substance

In October of 2010, RIEDC was preparing a public relations strategy because “the Gubernatorial candidates have politicized the 38 Studios deal.”

The Strategy document outlined the key messages, and the need to  “accelerate development of an in-depth Providence Journal story, including offer of access to Board members. The Providence Journal team will be Andy Smith, Paul Grimaldi and Business Editor John Kostrzewa — we will push for Neil Dowling’s inclusion.”

At the same time as EDC was rolling out its PR strategy to sell to the public value of the 38 Studios deal, 38 Studios internal documents showed that the company was tittering on financial collapse.  In fact, a demand for payment from Speaker Fox’s confidant for a $500,000 payment could not be met because it would cripple payroll.

An October 27 internal memo from CEO Jen MacLean to Schilling, Zaccagnino, CFO Rick Wester, and COO Bill Thomas said, “After running payroll, we have less than $500K in our Maynard accounts. We simply can’t pay Mike before the bonds close, no matter how much he might wish otherwise.”

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The Deal Was Done Before Anyone Could Imagine

How deep were top EDC staff in on the deal to fund 38 Studios?

In an April 12 (2010) memo from RIEDC’s Michael Saul to Mike Corso and RIEDC’s attorney Rob Stolzman, he proposes “Determine whether any local institutions (RISD endowment, RI Foundation, Hasbro, Brown endowment, State Pension fund, etc) would commit to purchase a share of bond issue.”  This is just one of ten “to do’s.”

EDC’s top staff were strategizing on how to sell the bonds, months before the bill ever hit the House floor for consideration. 

This April 12 strategy session was supposedly just a little over a month after Governor Don Carcieri and Curt Schilling met and two months before the loan guarantee program is signed into law.  

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Did Rhode Island Pay for Improvements at Corso's Bar

In one email in May 2011, Mike Corso alerted top 38 Studio officials of over $600,000 in change orders to the build out of the Empire Street 38 Studios’ offices.

The change orders Corso pushed for increased the cost of contractor Nappa Constructions’ project cost from $10.9 million to $11.6 million. As GoLocal reported in 2014:

A former subcontractor for 38 Studios is alleging that his firm was ordered to work on former Speaker of the House Gordon Fox's business colleague Michael Corso's bar as part of their contract - and has produced what he says is documentation to prove it.

Project manager Michael Rossi with SyNet, Inc. has revealed a budget for work which he says shows at $25,000 line item for work to be done at Corso's Tazza Cafe in 2011 -- under a job order for the failed 38 Studios.

Warwick-based SyNet bills itself as "the premier design-build low voltage contractor of structured cabling, access control, surveillance and audio visual systems in the Northeast."

"I'm changing everything on job -- these were all no bids. Nappa construction picked Rossi Electric. I realize the job can't be done the way it's designed," said Rossi. "The money was getting kicked back in the form of goods and services to Corso and Fox. I said I'm not doing this. I knew I was getting set up for jail with this. I went out on sick leave, I was done."


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