City weighs tax-incentive changes

STABLE ENVIRONMENT? Steve Durkee, principal at Cornish Associates, stands in front of the Kinsley Building on Westminster Street in Providence. Cornish Associates bought the Kinsley Building from Johnson & Wales University in 2012, but has been waiting for a decision on whether it will get a tax-stabilization deal before turning it into apartments. / PBN PHOTO/MICHAEL SALERNO
STABLE ENVIRONMENT? Steve Durkee, principal at Cornish Associates, stands in front of the Kinsley Building on Westminster Street in Providence. Cornish Associates bought the Kinsley Building from Johnson & Wales University in 2012, but has been waiting for a decision on whether it will get a tax-stabilization deal before turning it into apartments. / PBN PHOTO/MICHAEL SALERNO

Editor’s note: This is the first of a two-part series on Providence’s use of tax-stabilization incentives. Next week’s story will explore the challenges for property owners and occupants if the incentives don’t continue.

At the Foundry complex in Providence, owners are poised to fill the remaining vacant portions of the historic former Brown & Sharpe Mill with luxury apartments.
A few blocks southeast on Westminster Street, Cornish Associates is ready to make the Kinsley Building its latest office-to-residential conversion in a $10 million project creating 44 units of in-demand, midrange housing.
Both projects would provide a welcome economic boost for their neighborhoods, but are on hold until their owners can reach a tax-stabilization agreement with city officials to limit their future property tax bills.
Tax-stabilization agreements, the preferred local economic-development incentive in Rhode Island cities and towns, have been a part of virtually every major downtown Providence building project over the past two decades.
From the corporate headquarters of Italian lottery giant GTECH S.p.A. on Memorial Boulevard to the Monahasset Mills artist lofts on Kinsley Avenue in the Valley neighborhood, stabilizations have taken on even more importance since the city’s commercial property tax rates have risen to among the highest in the nation.
As with many tax breaks, however, tax stabilizations are currently drawing attention in Providence and other communities about how they’re awarded and whether they are too generous, or too stingy, toward developers.
Historically, the city has reached tax agreements with developers on an ad-hoc basis, with different terms for different properties subject to fractured, often minimal monitoring.
In some cases, property owners have gone directly to state lawmakers to extend stabilizations, complicating the landscape further.
At the same time it is reviewing the proposed agreements for the Foundry, Kinsley Building and two more properties, the Providence City Council Ways and Means Committee is also working on recommendations to reform the stabilization review and monitoring process.
City Councilor Sabina Matos has proposed a freeze on any new stabilizations until the end of the year, or until the entire system can be studied and overhauled.
“We cannot pretend we don’t know there are problems with the tax-stabilization program,” said Matos, who added she doesn’t want to see the program ended permanently. “I would like to see a process that is clear and transparent and gives everyone opportunity to apply.” But while nearly all city officials acknowledge there have been problems with the way tax incentives have been administered in the past, many real estate professionals say without tax incentives, the city’s recent renaissance would never have occurred and is in danger of crumbling if no new stabilizations are allowed.
“I think there is a lot of confusion that tax stabilizations are gifts or something bad,” said Arnold “Buff” Chace Jr., managing general partner of Cornish Associates, which owns the Kinsley and four other Westminster Street properties with agreements set to expire by the end of 2016. “The fact is there is very little capital inflow into downtown Providence, and if these provisions encourage reinvestment, that would be very good.”
The Kinsley proposal was tabled by the City Council Ways and Means Committee in March over lingering concerns by councilors. Mayor Angel Taveras’ office last week couldn’t say whether he supports the proposal.
As some leaders look to pause or scale back tax stabilizations, a task force appointed to study economic development pointed to tax stabilizations as the city’s most powerful tool to encourage growth and recommended extending the length of deals from the current 12-year model to a 15-year template in a report submitted to the City Council in April.
Offsetting the greater length of stabilizations, the task force recommended requiring owners to pay “base tax,” or what they are paying before work begins, for the first five years instead of the current model collecting no tax for the first three years.
That change would benefit projects on vacant lots or properties moving from nonprofit to for-profit status (such as the Kinsley), but potentially work against rehabilitations of buildings with significant current tax liability, such as 111 Westminster St.
The longer tax stabilizations would be open to projects with an estimated cost of $500,000 under the task force recommendation, instead of the current $100,000 minimum.
To mitigate concerns about political interference, the task force recommends taking both the City Council and mayor’s office out of the approval process and making it completely administrative.
The Council has yet to take up the task force’s recommendations. A separate report by council Internal Auditor Matthew Clarkin Jr. cited “nonexistent or deficient” compliance monitoring of stabilizations and recommended management of them be under the director of planning.
City Councilor David Salvatore expects the four stabilization proposals pending before Ways and Means will be considered while reforms are weighed.
Along with the Kinsley and Foundry, those deals include a proposed amendment of the agreement for the Capitol Cove student-apartment complex and a potential agreement for Roger Williams Medical Center if it is sold to a for-profit.
One challenge with setting any policy on tax incentives is figuring out how important they are in determining whether each project goes forward.
Providence’s tax stabilizations have, with a few notable exceptions, been designed to preserve vacant, historic buildings in the urban core that would otherwise remain uneconomical.
“On the Kinsley, no taxes were being paid before, and the city leverages private investment of more than 10 to 15 times what the [stabilization] is,” Chace at Cornish said.
The proposed Kinsley agreement, as presented to the Ways and Means Committee, would roughly follow the current 12-year model favored by Taveras, although in years four and five it provides maximum bills of $20,000 and $30,000 respectively.
Cornish bought the five-story building from tax-exempt Johnson & Wales University last fall for $1.2 million and Chace said without the tax stabilization, no lender will finance the rehabilitation project.
In support of the task force recommendation to extend stabilizations to 15 years, Chace said Center City Philadelphia’s 20-year tax treaties have helped builders create up to 5,000 new housing units.
East Providence recently overhauled its tax-stabilization program to set up two tiers of incentives, a six-year deal for projects worth more than $150,000 and 10 years for projects worth more than $5 million.
And Pawtucket – which has nine active stabilizations dating back to 2004 – is currently in the process of a similar rewrite to make its program more predictable and include a three-tier system.
“A lot has to do with letting people know going in what to expect with something that is clearly understandable,” said Pawtucket Planning Director Barney Heath. “For investors or businesses, they can have certainty on property tax and that is helpful in financing.” •

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