By: David A. Smith
In yesterday’s Part 4 on Chapter 121A abatements, we saw that assessing the value of a Chapter 121A abatement depends on precisely what ‘market failure’ the subsidy aims to help cure: derelict property, current tax-exempt (or non-revenue producing) use, or prevention of jobs emigrating to lower tax states.
Sources used in this post
Streets of Hope: The Fall and Rise of an Urban Neighborhood 1994; red font.]
Recent Decisions by Owners in Expiring Use Housing in Massachusetts, May, 2008; blue font)
All these are potentially valid reasons to agree on an abatement, yet the Globe observes that those making the case – pleading poverty, as it were – invariably seem to be doing well themselves. Should the public be giving incentives to people or companies that evidently have plenty of walking around money?
Motivate me; I need incentives
5. Does Chapter 121A ‘reward the wealthy’ (i.e. is it deadweight)?
This must have been the hook that the Globe intended for its piece, for it made the claim even though it offered no actual source saying anything like this. The best the paper could manage was a combination of circumstances:
- Many real estate developers or development companies are rich.
- Many of these companies are seeking or obtained chapter 121A agreements for particular large flashy high-end properties they did.
Context is everything, isn’t it?
From these two sets of juxtaposed facts, the Globe hoped its readers would infer the connection and causation, but it didn’t even do as good a job as Shirley Kressel on Open Media Blog (February 26, 2014; green font):
One of the recent 121A projects is the Landmark Center, built in in the Fenway in 1997, which is about to be massively expanded. Billionaire developer Jeremy Jacobs was granted a 121A tax break for building the new Boston Garden (now TD Center) 18 years ago, and another 121A was just approved for the billion-dollar three-tower project on the old Garden site in which Jacobs partners with Boston Properties.
The Globe’s reports undoubtedly noticed that all of the applicants securing Chapter 121A agreements over the last decade of the Menino Administration were large-scale, well-heeled, sophisticated real estate developers, but that correlation overlooks a more fundamental point:
To develop a large property in Boston, you have to have deep pockets.
That’s quite a bulge you’ve got there
It’s simple: between the cost of acquiring the land or the property, and then the agonizing multi-year public review and approval procedure, you’d best bring a big wallet and be prepared to dip into it continuously. Don Chiofaro’s development company bought the Atlantic Avenue garage in 2007 for $155 million, and today – eight years later – still hasn’t been able to develop it, having been blackballed by Mayor Menino’s BRA, and having been before Mayor Walsh’s BRA for ‘only’ twelve months so far, though he appears on the verge of preliminary approval.
And look at the sites developed:
Other 121A projects include the Prudential Center, Post Office Square garage, Christian Science Center, all three Commonwealth Flats seaport towers, Harvard’s Medical Area Total Energy Plant (MATEP), One Beacon Street, Marriott Hotel Long Wharf, Genzyme Allston Landing, New Boston Food Market, the Devonshire tower, Lafayette Place Mall in Downtown Crossing, and One Summer Street (Macy’s).
MATEP got a Chapter 121A
Who has deep pockets? Who can take really big risks? Why yes, those are rich developers!
Unfortunately for us and for its readers, the Globe asked the question badly: The right question is this:
Are Chapter 121A tax incentives awarded only when they are cost-effective, and only in the amount needed to be cost-effective?
In economic parlance, ;’deadweight’ is an incentive or cost that adds nothing to the final product, and of course in policy deadweight is what private parties like (free money whose cost to obtain is less than the cash got) and public watchdogs seek to sniff out.
Waste, fraud and abuse over here
For any given property, that question can be further divided into two parts:
- ‘But-for’ incentive. Does the Chapter 121A real estate tax concession move development forward where otherwise it would not?
- ‘In exchange for’ incentive. Does the Chapter 121A agreement translate into ongoing public benefit (e.g. affordable housing, public amenities) that would have been omitted without it?
Neither question is answered in the story; in fact, neither question is properly asked. Instead, we get speculation – plausible speculation, to be sure, but that’s not reporting, it’s just speculation.
It could be a lot, it could be a little
“When you see [the breaks] showing up in premier development sites,” said Gregory Sullivan of the Pioneer Institute, “your question is whether this is just an inside ballgame where the BRA gives away money that’s not needed as an incentive.”
[Once again, observe the conflation of ‘inside ballgame’ with ‘giveaway’. The program can be an insider’s game without being a giveaway, and it can be a giveaway without being an insider’s game … but we’ll let this go. – Ed.]
The but-for and in-exchange-for questions are property-specific – they can’t be answered in the abstract, because they depend on the real estate economics of each property at the time the negotiations were held and agreed. So they aren’t necessarily flaws in the program, they’re potential flaws in the administrator.
So we can ask the question the Globe didn’t:
6. Is Chapter 121A being exploited (because the city isn’t doing its job)?
The risk of Chapter 121A exploitation is much greater now, in the fourth era, where the sites being redeveloped aren’t blighted (they’re just obsolete or under-invested in) and the housing affordability is a sliver instead of purpose-built and deeply rent-discounted. And the revival of Chapter 121A now, in a booming real estate economy, and against the backdrop of the city’s aggressive linkage-payment policy, invites the inference that developers pursue Chapter 121As because, as long as they’re stuck going through the BRA mangler, they might as well get a consolation prize at the end.
Just put your hand into our review process … right here …
In previous posts, I’ve explicated that the Boston Redevelopment Authority, which negotiates Chapter 121As and then administers them, is incompetent at keeping track of money, and that it’s still got a leadership vacuum. The Globe found this as well:
Money? Am I supposed to keep track of it?
A Globe review found that city records are incomplete for most of the tax breaks the city awarded during the past four decades.
It appears that only recently did the city begin to project how much deals would cost taxpayers.
Actually, the Globe could have decoupled those two points into two distinct questions:
- Does the BRA do a quantitative cost-benefit analysis before it approves transactions?
- Does the BRA do an after-the-fact evaluation of deals it approved some years before?
The former is negotiation; the latter is administration. Of the two questions, the second one is to some degree irrelevant, because of Heraclitus’ rule of urbanization.
City Hall could provide cost projections for only 10 major tax deals signed since 2008, totaling an estimated $78 million in lost tax revenue.
Argh! The revenue isn’t ‘lost’, it’s deliberately foregone compared to a counterfactual. The money is lost if and only if you believe that the exact same property would be developed in exactly the same way with exactly the same revenue potential even if the city had done absolutely nothing.
Put that way, the statement is absurd, yet the Globe chose to peddle it.
What’s wrong with pedaling absurdity?
Moreover, one of these ‘lost revenue’ properties hasn’t even been developed yet:
These include the $9.7 million awarded for the new State Street Corp. office and adjacent garage on A Street, and $7.8 million for the bottom floors of a tower planned for land next to TD Garden.
By that reasoning, every time I fail to buy a stock that rose in price last week, I’ve lost capital gains.
I coulda been a billionaire, instead of being a blogger, which is what I am
Further, Ch. 121As are “limited dividend corporations”; profits over 8% must go to the City, up to the level of normal property taxes. The multi-corporation structure hides these profits – and if they do somehow appear on the 121A’s books, the corporation keeps them in a “reserve,” to pay back investors for years when profits fall below 8%; this violates the statute, which allows that excess profits pay back previous shortfalls, but does not allow retention of excess profits in anticipation of shortfalls. The Mayor and the BRA never even ask about excess profits, and have never collected any.
I post, but does anybody listen? Shirley Kressel
That’s a legitimate critique, and one that runs directly to the Administration – both the Menino Administration and the Walsh one. And since Mayor Walsh chose the easy way out and after an extensive search, appointed the interim director to the post permanently, director Brian Golden ought to make it a priority.
After the Globe inquired about the city’s incomplete records, the Walsh administration pledged that it would keep better track of the costs of tax deals, almost all of which were signed by previous mayoral administrations.
“There are some longstanding, existing agreements for which the city does not currently maintain estimates due to the amount of personnel and resources it would take to assess these comprehensive parcels,” city spokeswoman Bonnie McGilpin said in a statement.
That’s a total thumb-sucker – a non-story masquerading as journalism.
I can’t afford to learn to do arithmetic
Realizing this, I wondered why the Globe chose to publish something that so fizzled out, but parsing through the detritus of the chunks not yet quoted above, I eventually realized why the Globe ran it – and while that has precious little to do with Chapter 121As per se, it has something to do with journalism and is amusing enough to warrant a few more words – tomorrow, anyhow.
Tomorrow … is another post!
[Continued tomorrow in Part 6.]