Syracuse Post-Standard , November 18th, 2006
Communities Sell Empire Zone Rights to Companies for Millions
New York state officials allowed a Rochester mall owner to buy Empire Zone tax breaks while thousands of other state businesses were excluded from the program.
Wilmorite Inc. agreed in 2002 to pay at least $1.5 million to the city of Geneva to expand the boundaries of the city’s zone to include a business that isn’t even in Geneva. The Eastview Mall sits 31 miles away in the town of Victor in Ontario County.
It was a good deal for Wilmorite. Those mall tax breaks are worth about $14 million. State taxpayers are on the hook to reimburse the mall owner for its property taxes for 10 years.
Meanwhile, other businesses outside of the state’s 72 Empire Zones were out of luck.
Few businesses knew about the tactic used by Wilmorite and a handful of other companies. In fact, legislators who wrote the law, local officials who run the program and accountants who study it said in interviews they didn’t know New York let a company buy its way into an Empire Zone.
Across New York, businesses left the state, prospective employers chose other states and buildings sat empty — all without the interested parties knowing that lucrative Empire Zone benefits could be had for the right price.
State Sen. Liz Krueger, D-Manhattan, said allowing companies to buy a ticket into the zone perverts the program’s original purpose: to create jobs in targeted impoverished areas.
“We’ve bastardized that concept pretty far,” she said. “This would be taking a giant leap forward into ‘What the heck are we doing?’”
Officials in Pennsylvania and Michigan, which run similar business incentive programs, said companies outside their targeted zones cannot pay their way in. By 2005, New York had changed the law to ban the strategy, but Wilmorite and other companies are still free to keep their tax breaks for more than 10 years.
Here’s how the program works: The state’s political leaders assign Empire Zone acreage to local governments in regions with the greatest economic needs. Local officials designate those acres where they want. The state approves that decision.
In the North Country, Potsdam and Lewis County agreed in 2001 and 2002 to accept as much as $12.5 million combined to re-draw their zone boundaries to include hydropower plants for Reliant Energy of Texas. Potsdam stands to receive up to $11 million of that.
In return, Reliant was awarded tax breaks that could be worth more than $72 million over a decade, state records show.
The village and town of Potsdam sold about 35 acres from its zone ration to include 21 Reliant plants. Most of the dams are along the Raquette and Oswegatchie rivers, which snake south outside of Potsdam across St. Lawrence County.
In the end, millions of state dollars intended to nurture new and expanding businesses in Potsdam are going into the pockets of out-of-state hydropower companies for properties that aren’t in Potsdam. Seen another way, the local officials could trade $5 in state taxpayer money for $1 in money they could keep at home.
Potsdam Village Administrator Mike Weil defended the deal, saying the village has used the Reliant money to buy a fire truck, build water and sewer projects, roads, an office park and to renovate the civic center.
Kimberly DesChamp, Potsdam’s economic developer, said she knows people criticize the decision to include the hydropower plants. She said the economy is struggling and local officials do what they can to improve it.
“We can’t help the fact that we have corporations and companies that try and take advantage of what’s available through the Empire Zone,” she said. “Certainly, our area benefits on the whole from having those businesses here.”
Syracuse lawyer and Empire Zone expert Kevin McAuliffe represented Reliant in both deals. The company sold its hydros in 2004 to Brookfield Asset Management Corp. of Toronto, which now collects the benefits. Reliant and Brookfield would not comment.
A Wilmorite official said it wanted zone breaks so Eastview Mall could compete with the Destiny USA resort proposed by The Pyramid Cos., Wilmorite’s Upstate competitor.
Wilmorite officials feared Eastview would lose 10 to 15 percent of its sales if the Carousel Center mall in Syracuse were expanded into Destiny.
The only zone in Ontario County was in Geneva. The state had awarded the city 1,280 Empire Zone acres — the same amount it gave Potsdam and big cities such as Rochester and Syracuse. After most of Geneva’s businesses were placed in the zone, the city had acres left over, an official said.
Wilmorite asked to get in. City officials demanded that the developer pay, said Rich Rising, city manager.
“We needed to be true to the zone program and make sure there were benefits for the zone residents,” Rising said.
Their deal required Wilmorite to pay Geneva $150,000 a year for 10 years. So far, that has earned Geneva $600,000. The deal also requires Wilmorite to pay an extra $1 million if Eastview attracts a new department store.
The state gave Geneva zone acres because 14 percent of the city’s families live in poverty. In Victor, where the mall is, 2 percent of families are poor.
Wilmorite spent $27 million to expand Eastview by about 5 percent in 2003, Vice President Dennis Wilmot said. Wilmorite couldn’t have done the expansion without the tax breaks, he said.
The expansion created hundreds of short-term construction jobs. Mall stores added about 450 jobs, Wilmot said.
Wilmorite let Geneva put a kiosk in the mall. Brief videos run continuously on small screens, silently touting Geneva as a good place to live and work. The city paid $45,000 to build the kiosk.
In 2005, Wilmorite sold 13 shopping centers, including Eastview, to a California real estate investment trust for $2.33 billion. Wilmorite still manages the mall.
As it happens, Destiny hasn’t turned out to be a threat to Eastview. Pyramid hasn’t started building it. Yet the promise of Destiny helped Pyramid put Carousel Center in an Empire Zone, too. In 2004, Pyramid began collecting $7 million a year in zone tax credits for its mall.
Rules usually govern how a city gets rid of anything of value. When Geneva wants to sell a dented police cruiser, it auctions the car to the highest bidder.
In general, state law requires cities to hold public auctions or advertise for sealed bids before they sell surplus property. That ensures that municipalities collect the highest price and that everyone has an equal opportunity to buy public property.
When Geneva decided to sell its zone acres, the city wasn’t required to seek bids or hold an auction, said A. Clark Cannon, the city’s attorney. Geneva also did not ask for competing proposals from businesses outside the city with better-paying jobs than a mall could offer.
The city met its legal requirements by holding a public hearing before its council unanimously approved it, he said.
The cost of Empire Zone tax breaks statewide jumped from $30 million in 2001 to an estimated $546 million in 2006.
Yet businesses in many parts of the state still cannot get zone benefits. More than 98 percent of the state’s 544,000 businesses aren’t in an Empire Zone. While Wilmorite and Reliant worked their deals, 11 entire counties and parts of many others were waiting to get zones.
In 2005, the state Legislature agreed to gradually create zones in every county.
State keeps it low-key
The state Department of Economic Development — which oversees the zone program — allowed local communities to charge for access to the state tax breaks.
At the time, the law did not prohibit zone administrators from charging fees, said Jessica Copen, a department spokeswoman.
Geneva officials notified the state about the compensation, records show. They say Fred DiMaggio, then director of the state’s zone program, approved the compensation. DiMaggio declined to talk to a reporter. Randy Coburn, who replaced DiMaggio in 2003, also declined to be interviewed.
While allowing the deals, the state never publicized that such pay-to-play arrangements were legal, Copen said.
Accountant Daniel Fordham of Plattsburgh — who teaches day-long Empire Zone seminars for accountants across New York — said he didn’t know about the million-dollar deals. Nor did some local zone coordinators who gathered at an Empire Zone seminar in October.
A few other sales
A handful of other companies paid their way into a zone.
In deals struck in 2003 and 2004, Columbia County included adjacent Greene County in its zone so the Save-A-Lot grocery store chain and National Bedding Co. could open new facilities.
Save-A-Lot paid Columbia County $350,000 and National Bedding paid $210,000, Columbia County zone coordinator Todd Erling said. The new jobs helped both counties, he said.
State officials knew of the compensation, Erling said.
The state was not accommodating when Schuyler County wanted to give some of its zone acres to businesses in adjacent Tompkins County. The Tompkins County businesses were going to pay Schuyler and Tompkins counties 5 percent of the tax breaks the companies received, said Michael Stamm, president of Tompkins County Area Development.
State officials rejected Schuyler’s request in 2004.
“We had a tremendous amount of opportunities that we were missing because we didn’t have a zone,” Stamm said.
“We had some high-tech companies that we worked hard to help launch and grow and then, when it came time for them to really plant their roots and move into a permanent facility, we lost a few of those to the East Coast and West Coast because we weren’t able to offer the kinds of incentives we needed to offer to keep them here.”
On Sept. 10, 2001, the Guilford Mills textile plant announced it would close its lace-knitting plant in Cobleskill and eliminate jobs for 500 workers.
Schoharie County Planning Director Alicia Terry said she took representatives of at least 20 companies through the vacant building to land a new occupant.
“Typically, the first or second question that anyone asked when we were touring the facility was, ‘Is this property in an Empire Zone?’” she said.
It wasn’t. None of Schoharie County was.
Terry and other county officials thought they might be able to try to squeeze their empty textile factory into an Empire Zone in a neighboring county. Schoharie is nestled between Albany, Schenectady, Amsterdam and Otsego County, which all had zone acres. But Schoharie County officials did not think they could justify it. Would residents of those counties really commute to Cobleskill?
“I just remember thinking ‘That should be illegal’,” said Jody Zakrevsky, the county’s economic developer. “I mean, the whole point is that areas were designated based on need and severity, and so for another county that couldn’t prove that to buy a piece of an Empire Zone, that doesn’t seem right to me.”