Why I voted against the proposed property tax abatement for 3800 Park East Drive
At this week's Council meeting, we were asked to approve a 10 year property tax abatement for 3800 Park East Drive that will lower their annual property tax bill by $258,773 for the next 10 years, decreasing the amount the School district would receive by $165,789 a year. Here is why I voted against it.
First some quick background information about this property.
Until February of 2019, 3800 Park East Drive was a skilled nursing home with over 100 employees, valued on the property tax rolls at $14.5m, generating over $250k a year in revenue for the school district.
In February of 2019, the current owners purchased the property for $4,871,659 and gave the legally required 30 days notice to the Ohio Office of Workforce Development that the nursing home would be closing. Shortly after purchasing the property, they sold the nursing home bed licenses, recouping approximately $2m of the purchase price, lowering their cost to acquire the property to near or below $3m.
After the property was purchased, and the nursing home bed licenses were sold, the current owners successfully petitioned the County Board of Revisions to decrease the property’s valuation from $14.5m to $2.8m, lowering the revenue to the school district to $50k a year from $250k.
On August 5th, 2019, Council unanimously voted to change the zoning allowing the property to convert from a medical facility to apartments after the owners convinced Council that despite there still being a market demand for this property to remain a medical facility, the market demand for their proposed apartment plan was much stronger.
Their argument for the property tax abatement and flawed math.
On June 15th and July 27th of 2020, there were committee meetings where the owners of 3800 Park East Drive pitched the merits of the property tax abatement they were seeking. Their main argument was that after they purchased the property and Council approved their requested zoning changes, they realized construction costs were underestimated by $1.3m and they wouldn't make money unless their annual property tax bill was cut by $258k for ten years, decreasing the amount that would go to the schools by $165k a year for 10 years.
Needless to say, a developer losing money because they underestimated construction costs shouldn't be a compelling reason to take away over $1.6m from the school district over a ten year period. Even more troubling is this contradicts their own documents and doesn't seem to be true, but no one else has a problem with this.
Their own documents they provided the City in the CRA application process project the property will be worth more than $21m after their total net investment of $17m to purchase and convert the property into apartments. I am not passing judgement on whether they should be satisfied with a projected return of $21m on their $17m investment, but if they aren't, they shouldn’t have purchased the property. It isn't the City's responsibility to make up that difference by cutting their annual property tax bill by $258k for ten years especially when $165k of that would have gone to the school district.
Even if it is true that the developers can't make this project profitable without a $2.58m subsidy over 10 years, no one forced them to pay $4.8m for the property and they shouldn't have bought it unless they could have gotten it for $2.58m less. Why would we set this precedence that a developer can overpay for a property they want to redevelop and expect the City to bail them out and make up the difference with a tax abatement giving away mostly school district money?
City Council's initial reaction to the request for this property tax abatement.
Last summer when this property tax abatement was first proposed, I was against it for the same reasons I am today but hardly spoke at last summer's meetings as others on Council were not shy to explain why they were strongly against granting this abatement. Even though very little of significance has changed from last summer, on February 16th, 2021, Council voted 6-1 to grant this tax abatement. Here are some of the reasons Councilmembers provided last summer for why they were against granting this tax abatement, but just voted to do so.
Councilman Berns was the most vocal in his opposition saying, “if we go ahead and approve this at this point, we are setting a precedent for every future project in this city. Beachwood is better than this, we shouldn’t have to do this. And you guys should have enough confidence in your product, whatever it is that you want to sell. I think it’s unfair and it puts us in a really bad situation for future projects.” Justin voted for the tax abatement.
Councilman Isaacson said he was against the property tax abatement because it shouldn't fall on the City or School district to help the property owners out of a financial bind because they underestimated construction costs. Alec voted for the tax abatement.
Councilman Pasch said he was against the property tax abatement because he felt property tax abatements should be used for large transformative projects like Top of the Hill in Cleveland Hts., or the Eaton and Omnova headquarters and he didn't want to set a precedence that the City will grant property tax abatements on smaller projects like this. A few months ago, when Council voted to expand the CRA to include every commercial property in the City, James pointed out that this doesn’t mean the standard for granting tax abatements has changed, and as an example cited how last summer Council decided against granting a tax abatement to 3800 Park East drive because it didn’t make sense.
James voted for the tax abatement and one of the reasons provided for his position change is that even with this tax abatement, the schools will receive 4x the amount it currently receives from this property and after the 10 year abatement expires, they will receive 7x the amount they currently receive from this property. This logic would be similar to trying to convince an apartment building owner that filling vacancies by offering a 10 year leases at half the market rate is smart because it would generate more revenue than a vacant apartment currently brings in.
This isn't the first time.
Less than two years ago, Council voted to grant a tax abatement to a property in Commerce Park under the CRA program claiming it would incentive a Mayfield Hts. company to move to Beachwood and make improvements to the property. I pointed out how illogical this was since the company purchased the property 7 months earlier, canceled their lease in Mayfield Heights, already moved in and were seeing patients out of the Beachwood property. On top of that, the renovations to the building were already underway and were necessary to operate a physical therapy business out of it.
This was ignored and everyone congratulated each other for successfully incentivizing this company to move into Beachwood that was already here. It is bad enough when we make irresponsible financial decisions with city money but worse when we make decisions like this with school district money.
The impact and precedence this sets.
If the city reacted to the 2008 financial crisis, with this current strategy offering 10 year tax abatements on 50% of increased value from improvements to commercial properties, I am sure the owners who developed the VUE and Astor apartments would have qualified and taken advantage of this. These two properties were only generating a combined $79k a year for the school district before they were converted into apartments. Now the school district receives over $2.1m a year from these two properties. That's a $2m increase that would be in cut half, costing the school district $1m a year, if our current strategy was implemented after the 2008 financial crisis.
The main reason I was very vocal and public in my opposition to the 2019 rezoning, which is also the main reason for my opposition to this proposed property tax abatement.
Despite Covid, the apartment industry is doing very well in North East Ohio. In Cuyahoga County, vacancy levels are near historic lows at 6% for suburbs of Cleveland. However, Beachwood’s 2,435 apartment units are at 10.1% vacancy, the highest among suburbs in the county with more than 200 apartments. It has taken longer than expected for the market to absorb the 697 new apartments added in Beachwood since 2013, a 40% increase, that doesn’t include the new apartments nearby at Van Aken, Pinecrest, and Lux in Pepper Pike. These challenges with vacancy levels will likely continue and even increase with another 225 apartments planned for Van Aken, 261 at the Top of the Hill in Cleveland Heights, and another 203 at the University Square project by the Target in University Heights.
During the rezoning debate in 2019, I advocated that the City should be doing everything in it's power to help existing apartment owners with these challenges and not change zoning to allow more apartments until vacancy levels decreased, unless something was unique or extraordinary about the circumstances. I pointed out there was nothing extraordinary about this proposed project of a restaurant and 146 apartments, mostly studio or 1 Bedroom apartments between 400-800 square feet, especially considering their own market research study concluded there was a market demand for the property to remain a medical facility. However, Council voted to approve their requested zoning change in August of 2019.
Why should this apartment complex be given an annual $258,773 subsidy when all the other apartments buildings in Beachwood they will compete against pay their full property tax burden?
The 2019 zoning change allows the owners of 3800 Park East to convert the property from a medical facility into apartments. If they choose to do so, why should we give them an annual $258,773 subsidy to compete with every other apartment property in Beachwood, already struggling with vacancy levels that pay their full property tax burden?
The Aster apartments’ owners invested over $40m to transform that property from a closed Bally’s gym generating only $38k a year for the school district, into 206 high end apartments now generating $811k a year for the schools. They shouldn’t have to compete with 146 new apartments just a few hundred feet up the street that have the unfair advantage of an annual $258,773 subsidy equating to $1,772 a year, or $148 a month per apartment for the next ten years.
Only a few months ago, the consensus of City Council, which I shared was that property tax abatements should be reserved for big transformative projects, such as the Pinecrest or Van Aken developments, or for a large company Headquarters. In Beachwood, if a developer comes to us with a plan to redevelop the Mall property that included a property tax abatement, this is certainly something that should be seriously considered. However, I don’t think it is in the City's best interest to set this dangerous precedent that we will grant property tax abatements on smaller projects which mainly give away tax dollars that are supposed to go to the schools.