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Title: Rich Take From Poor as U.S. Subsidy Law Funds Luxury Hotels
Source:
Bloomberg
URL Source: http://noir.bloomberg.com/apps/news ... 0601087&sid=amq1qzjbQ1Us&pos=7
Published: Feb 8, 2011
Author: By David Dietz
Post Date: 2011-02-08 11:18:04 by Brian S
Keywords: None
Views: 889
Comments: 2
Feb. 8 (Bloomberg) -- The landmark Blackstone Hotel in downtown Chicago, which has hosted 12 U.S. presidents, opened in 2008 after a two-year, $116 million renovation. Inside the Beaux Arts structure, built in 1910, buffed marble staircases greet guests spending up to $699 a night for rooms with views of Lake Michigan. What’s surprising isn’t the opulent makeover: It’s how the project was financed. The work was subsidized by a federal development program intended to help poor communities. The biggest beneficiary of taxpayer help for the Blackstone revamp was Prudential Financial Inc., the second-largest U.S. life insurer. The company got $15.6 million in tax credits from the U.S. Department of the Treasury for helping to fund the project, according to Chicago city records, Bloomberg Markets magazine reports in its March issue. JPMorgan Chase & Co., the second-largest U.S. bank by assets, also took in money by serving as a lender and the monitor of Blackstone construction financing, city records show. Since 2003, some of the world’s biggest financial companies, including Goldman Sachs Group Inc., U.S. Bancorp, JPMorgan Chase and Prudential, have taken advantage of a federal subsidy that will cost taxpayers $10.1 billion -- and most of the public has never heard of it. Investors have used the program, called New Markets Tax Credits, to help build more than 300 upscale projects, including hotels, condominiums, office buildings and a car museum, on streets far from poverty, according to Treasury Department records released through a federal Freedom of Information Act request. Against Intent Money spent on high-end development could have been used to build more than 1,000 job-training centers, medical clinics and schools. The program, endorsed by Republican Senator Rick Santorum and House Speaker Dennis Hastert and adopted by Congress, was signed into law by President Bill Clinton in 2000. Building high-end commercial projects goes against the intent of the New Markets program, says Cliff Kellogg, a former senior policy adviser at the Treasury Department who helped design New Markets. “Things like luxury hotels are entirely contrary to what we set out to do,” says Kellogg, who’s now a bank consultant. “Some hotels may create jobs and spur other nearby investment, but you have to ask if these projects prevent worthwhile ones from getting done.” Some of the subsidized luxury projects may not have required federal aid at all, the Government Accountability Office found in a 2010 study. ‘Severe Pressure’ “This underscores the need to ensure the program is operating as efficiently as possible at a time when the government is under severe pressure to address the growing federal budget deficit,” says Michael Brostek, GAO’s tax issues director. The Blackstone adjoins Chicago’s cultural hub, one of the most vibrant in the nation, and is miles from the city’s neediest neighborhoods. Prudential invested $9.3 million and made $30.4 million in loans, according to Chicago records. Under New Markets rules, firms get a credit of 39 cents on the dollar, paid over seven years, for cash or loans they put in. For its contribution, Prudential collected $15.6 million in credits, according to a July 2008 JPMorgan project oversight report filed with Chicago. Prudential spokesman Simon Locke declines to answer specific questions about the Blackstone project. ‘Help the Community’ “We do not comment on individual transactions or discuss our clients,” Locke says. JPMorgan spokesman Tom Kelly also declines to discuss specifics. “We think these projects help the community,” Kelly says. The Blackstone says it hired more than 200 workers when it opened in 2008. Clinton regarded New Markets as a way to spur development and create jobs in communities held back by high unemployment and lagging business growth. He touted the program on a six- state tour in 1999. “This is a good business opportunity here,” he said at a cabinet factory in Clarksdale, a Mississippi Delta town with a per capita income of $12,611. “If we can’t fully develop the Delta now, with the strongest economy, when will we get around to it?” Clarksdale has received no benefit from the tax credit program, Treasury Department records show. President Barack Obama has endorsed New Markets to help ease the effects of the longest recession since the Great Depression and proposes increasing the tax credits. In December, Congress extended the program for two more years. How It Works The Treasury controls who gets tax credits money and how the subsidies can be used. The agency bases decisions on census tracts, which are supposed to have common economic standards. Only tracts with at least a 20 percent poverty rate or with a population earning 20 percent less than the median family income of the surrounding metropolitan area qualify for subsidized projects. The numbers are from the 2000 census. The 2010 count hasn’t yet been used. The 15-block tract that’s home to the renovated Blackstone -- census No. 3206 -- qualifies because it had an individual poverty rate of 26 percent in 2000. A closer look at the demographics tells a different story and shows how investors can game the system, says Janet Smith, who lives in the Blackstone tract and teaches urban planning at the University of Illinois at Chicago. Student Population The tract’s New Markets poverty qualifications don’t reflect gentrification that has been going on in the neighborhood and the broader South Loop region since the 1980s, Smith says. The poverty profile reflects the large number of students who attend two schools -- Columbia College Chicago and Roosevelt University -- in the area, she says. Among families, the poverty rate is just 3.9 percent, according to the census. The tract already had a major hotel -- the Hilton Chicago across the street -- before the Blackstone reopened. It also had a high-rise condominium, with units selling this year for up to $1.3 million. And it includes a chunk of Grant Park -- designed by celebrated urban architect Daniel Burnham -- where Obama celebrated his 2008 election victory. “I wouldn’t say this is a needy tract by any means,” Smith says. “You have to make a distinction between family- level poverty and individual-level poverty. The problem with a subsidy program like this is that we give away money where we don’t really need to and usually in markets where development is already there.” Truer Picture It’s common for a tract to have diverging poverty rates for individuals and families, Smith says. Accounting for both measurements yields a truer picture of whether a tract needs New Markets help, she says. The program’s standards open up some of the nation’s wealthiest areas to development, according to Treasury records. Taxpayers have subsidized projects in tracts with median family incomes as high as $200,000, records show. A total of $7.4 billion of the $16 billion already spent under New Markets, or 46 percent, has gone to tracts with family poverty levels ranging from zero to 19 percent, Treasury and census data show. Those communities include areas of California’s technology-rich Silicon Valley. The program’s definition of poverty tracts --which include just individual rates -- show that $3.6 billion, or 23 percent, went to areas with less than a 20 percent rate. Those tracts qualify under other eligibility criteria, primarily low median family incomes, says New Markets spokesman William Luecht. ‘Cherry-Picking’ “The way the rules are written, it’s allowing a kind of cherry-picking by financial institutions to find favorable census tracts,” says Virginia Parks, a social services professor at the University of Chicago. “It’s so easy to qualify that all you need to do is hire a good demographer. It’s not rocket science.” Scores of New Markets projects have benefited poor communities. The program has helped develop job-training centers, charter schools and housing in severely impoverished locations stretching from the Watts section of Los Angeles to Appalachia in Kentucky and other states. From 2003 to 2008, 25 percent of project investments, or $3.9 billion, went to tracts with family poverty rates above 30 percent, according to Treasury and census records. Using individual rates alone, Treasury calculates that figure as 49 percent, Luecht says. ‘Feel Good’ “Many desperately needy communities for the first time have gotten access to capital and technical advice,” says University of Michigan law professor Michael Barr, a former assistant Treasury secretary who was the program’s chief developer. “We feel good about that.” Goldman has used New Markets to build an affordable-housing project with shops and a community center in what had been Brooklyn’s run-down Bedford-Stuyvesant neighborhood. U.S. Bancorp helped create 1,300 jobs in financially distressed Dubuque, Iowa, by converting a former department store into a service center for International Business Machines Corp. Goldman targeted tracts on the upswing in Pittsburgh and Portland, Oregon, when the firm got its first New Markets investment authorizations in 2002. In Pittsburgh, $30.5 million of a $75 million Goldman investment authorization went to a shopping center in the East Liberty neighborhood. The mall’s tract was in the midst of recovery with city renewal efforts that had already helped lure a Whole Foods Market Inc. grocery store. Fees: $9 Million Goldman brought in PNC Financial Services Group Inc., the sixth-largest U.S. bank by deposits, to help finance the project. PNC invested $30.5 million in equity and loans to receive $11.9 million in tax credits. The subsidy was $1.3 million more than PNC’s cash investment of $10.6 million. Banks, lawyers and consultants took fees totaling $9 million -- 28 percent of the total project cost of $32.7 million, according to city records. Goldman’s share, for overseeing the project’s finances, will be $1.6 million over eight years, according to Goldman spokesman Stephen Cohen. The tract had an individual poverty rate of 20 percent as of 2000, just enough to qualify. Family poverty was at 10 percent. Cathy Niederberger, PNC managing director of community development banking, says the shopping center boosted the neighborhood’s economy. ‘Created Employment’ “The nature of the development has attracted shoppers and created employment,” she says. Goldman’s Cohen says the project was among the few that seemed suitable to the firm at a time when New Markets had just begun. Now, he says, Goldman is putting hundreds of millions of dollars of its own money into New Markets developments in what it calls highly distressed neighborhoods. Prudential has used the New Markets program to finance two luxury hotels. Along with the Blackstone, the company in 2008 helped build the Nines in Portland, Oregon, bringing the firm $27.3 million in tax credits, according to Portland records. A Travel & Leisure magazine guide ranked the Nines 25th among North American hotels in 2010. Prudential spokesman Locke declines to comment on the Nines. He says his firm no longer owns the Portland tax credits. He declines to elaborate. Prudential first invested in the 17-story Blackstone in 2005. The building sits on South Michigan Avenue, four blocks from the Art Institute of Chicago, which is the largest fine art U.S. museum after New York’s Metropolitan Museum of Art, and Symphony Center, home to the Chicago Symphony Orchestra. ‘Hard To Say’ The Art Institute, located just outside Blackstone’s census tract, draws nearly 2 million visitors a year. “It’d be hard to say that a luxury hotel in downtown Chicago is in an impoverished community,” says U.S. Representative Jan Schakowsky, an Illinois Democrat. “Lots and lots of public dollars have gone into a project that I’m assuming can make companies a lot of money.” Prudential collected the Blackstone tax credits through a deal with hotel developer Sage Hospitality Resources Co. of Denver. Sage, which had partnered with Prudential in the Nines project, bought the Blackstone, which had been vacant, in 2005. The developer put a $42 million New Markets award toward reopening the landmark. Sage, Prudential, JPMorgan and the city of Chicago provided $134.5 million for the purchase and renovation. JPMorgan Oversight JPMorgan lent the hotel $26.1 million, according to city records. The firm also oversaw project finances and shared in $5 million in fees paid from project funds, records show. Sage Senior Vice President Kenneth Geist declined to comment. Three miles (5 kilometers) west of the Blackstone, there are no hotels, banks or supermarkets in a census tract in the Kendrie Avenue neighborhood on Chicago’s West Side. Area unemployment there was 35 percent in 2000. The neighborhood, dotted with abandoned homes and trash-strewn lots, languishes without money from New Markets. “Yes, I’m angry,” says Larry Dowling, pastor at St. Agatha, a Roman Catholic parish in the neighborhood. “It was very disturbing to hear that the Blackstone was benefiting from this program. There’s a great need in this community for economic development and jobs.” In Tacoma, Washington, investors found a way to get New Markets handouts in an area with just a 1 percent family poverty rate. U.S. Bancorp and two other investors used a $34 million Treasury authorization in 2010 to finance construction of an antique car museum. Around the Rules The museum, which will house the private collection of Harold E. LeMay, a deceased trash-hauling tycoon, needed creative financing to fit New Markets rules. Companies that operate mostly by exhibiting art or other items don’t qualify for New Markets. So the car museum, which was backed by the city of Tacoma and the LeMay family, wouldn’t have been allowed. To get around the restriction, Minneapolis-based U.S. Bancorp and its partners set up a related company in 2010 to acquire the assets from the museum and then lease back the property. The new company, America’s Car Museum, qualified because a loophole in the rules allows galleries to get New Markets money by using affiliated corporations. The maneuver allowed U.S. Bancorp, which invested a total of $34 million in cash or loans with development partners, to win $13.3 million in tax credits. ‘Bunch of Garbage’ As a result of the deal, federal taxpayers will pick up 39 percent of the cost of erecting a $34 million shrine housing 500 of LeMay’s cars in a mostly commercial tract with a 24 percent individual poverty rate. Michael Engel, who manages a Veterans of Foreign Wars hall six blocks from the proposed museum, says the federal subsidy is a wasteful public gift to a wealthy family that can afford to finance most of the development. “It’s a bunch of garbage,” he says. “I don’t think it’s right.” New York-based nonprofit National Development Council; Trammel Crow Co., a subsidiary of CB Richard Ellis Group Inc. of Los Angeles, the world’s biggest real-estate-services firm; and U.S. Bancorp put the deal together, project records show. Those investors collected a total of $1.5 million in fees from the project, according to the records. In addition, Trammel Crow and the council are scheduled to get $665,400 in future fees for monitoring finances. ‘Skimming Off the Top’ Museum booster Karl Anderson, chairman of Concrete Technology Corp. of Tacoma, says the facility, when it opens later in 2011, will aid the city’s economy by creating 90 permanent jobs and drawing 450,000 visitors a year. Still, he says, he believes the project got shortchanged because investors such as Trammel Crow charged too much. “I’ve been upset about the skimming off the top,” he says. “The investors have been able to rake off these big fees.” U.S. Bancorp spokeswoman Lisa Clark says the museum will bring $34 million in spending to Tacoma. Trammel Crow spokeswoman Cynthia Langhorst declines to comment. John Finke, senior Western region director for the National Development Council, says Tacoma needs the museum for the tax revenue. “As someone who has spent 30 years working in Tacoma, I can tell you that the city has struggled to attract and retain businesses,” he says. Historic Armory In Portland, Oregon, Goldman and U.S. Bancorp partnered with city government on another cultural development helped by New Markets. In 2004, the Portland Development Commission was advocating conversion of a historic armory into a nonprofit theater, and the project caught Goldman’s eye, according to city records. The armory, which housed horses and cannons in the 19th century, sat in the city’s Pearl District, a former industrial area enjoying a resurgence with upscale stores and housing. The tract qualified with a 41 percent individual poverty rate because it included one poor neighborhood on its fringe. The family poverty rate was 11 percent. Goldman arranged $28 million in New Markets financing for the theater. U.S. Bancorp put $8.4 million into construction and loaned an additional $11 million. That allowed it to win $10.9 million in tax credits, city records show. Goldman will collect a fee of $1.4 million for tracking finances for the government, according to Goldman spokesman Cohen. ‘It’s Ludicrous’ The 599-seat Gerding Theater opened in 2006. The League of Women Voters in Portland assails the use of federal tax subsidies. “It’s ludicrous,” says Shelley Lorenzen, a former League of Women Voters board member who has studied Portland urban renewal. “The area has become kind of the hottest real-estate market in town, with the best restaurants, art galleries and very high-end condos.” Kellogg, the former Treasury official who helped structure the subsidy plan, says New Markets needs changes. It should divert money away from projects such as high-end hotels and exhibit halls, he says. New Markets should target small-business development in regions that truly need a lift, Kellogg says. After all, he says, that was the point from the start.
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#1. To: Brian S (#0)
Bush years.....
"Keep Your Goddamn Government Hands Off My Medicare!" - Various Tea Party signs.
Yeah, yeah.... Nanny-state government, with politicians from BOTH sides of the aisle. They're a bunch of WHORES, every last damned ONE of them. Only because you're a socialist whore, do you even bother to point fingers. The fact is, it's OUR money, not theirs. Socialists take money by force. Socialist ass-hats think "There will be no more money when the U.S. dollar has no value, until that time we can keep printing more." And yes, that IS from LF's answer to Ben Bernanke, go65, leading disfunctional and delusional socialist of the forum. "Algren: You want me to kill THE ENEMIES of Jappos, I'll kill THE ENEMIES of Jappos... Rebs, or Sioux, or Cheyenne... For 500 bucks a month I'll kill whoever you want. But keep one thing in mind: I'd happily kill you for free." Captain Algren, "The Last Samurai"
Since 2003, some of the world’s biggest financial companies, including Goldman Sachs Group Inc., U.S. Bancorp, JPMorgan Chase and Prudential, have taken advantage of a federal subsidy that will cost taxpayers $10.1 billion -- and most of the public has never heard of it.
#2. To: Godwinson (#1)
Bush years.....
signed into law by President Bill Clinton in 2000.
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