An Objective Look at the Riverhead IDA

This is the first of three essays on the Riverhead Industrial Development Agency, by an agency watchdog and former member. Read the second essay here and the third essay here.

Part 1: Projects

I’m as pleased as anyone that the CAT/Triple Five fiasco appears to be over, but I find it hard to feel celebratory. The town wasted over 5 years, easily burned 6 figures in outside counsel fees—even though Riverhead was out-lawyered at every turn—and has absolutely nothing to show for it.

The worst part is that no one in charge has a viable plan for how to put this huge asset to productive use.

Remember the ski mountain folks were quick to ridicule? That was far less scary, far more entertaining, and Phil Cardinale’s deal netted the town $4 million in up front payments Riverhead got to keep. In sharp contrast, Sean Walter’s contract requires that the town return every nickel of Triple Five’s deposit.

I mourn the money, time, and especially the opportunities lost.

I agree the IDA made the right call on EPCAL. However, this decision is so far removed from their routine “bread-and-butter” activity that this question still needs to be asked: “Does the IDA deliver any net benefit to Riverhead?”

The agency has a long history of rubber-stamping applications for tax relief. A recent article in these pages by Arabella Saunders was completely on point, and provided excellent examples (particularly the aquarium/hotel complex—which enjoyed generous tax abatements, then got still more tax breaks (twice!), thus postponing for 20 years the day on which the owners will honor their promise and begin paying their fair share of taxes.

(What does it tell you that the aquarium—long before their tax breaks expire—started arguing for more IDA tax abatements because the new buildings taxpayers helped them erect are already getting old and starting to deteriorate?)

Does the IDA consider all applications fairly and equitably by applying rigorous fiscal standards? Does it ensure strict compliance with applicable laws, clawing back tax abatement awards when promised jobs and other benefits to the town aren’t delivered?

Or—perhaps EPCAL was an aberration, in which IDA Board members simply read the room (literally—those signs!) and feared they’d be tarred and feathered if they found in favor of CAT.

A look at a few examples will help readers decide.

The Brewery

One of the first cases I heard as an IDA board member was for a brewery, and I raised a technical issue with IDA board Chairperson Tom Cruso well before the hearing. I was concerned because the applicants had secured the property and were marching full-speed ahead with construction and brewing equipment; they hardly needed incentive to invest in Riverhead, and were already fully committed to the project. Plus—they told us Riverhead was the best place logistically from which to serve their existing wholesale customers. They weren’t going anywhere else; nothing would be gained by a subsidy (which effectively raises taxes for all other taxpayers.)

I didn’t voice this concern to Tom. Nor did I mention that the applicant: a) had owned the vacant parcel for decades and would be the brewery’s landlord; b) told the press they’d build even without IDA assistance, but needed tax incentives to give the building “cutting-edge design,” which wasn’t defined or quantified; c) submitted a personal financial statement showing millions of dollars more—in liquid assets alone—than the project’s entire budget; d) was self-financing the brewery for her sons; yet e) claimed “Financial assistance is needed for sales tax exemption for building material and PILOT program to leverage the opportunity to grow.” There was zero documentation or reasoning to support this claim.

I believed all these things should be raised at the public hearing, and later did so.

What I instead pointed out to the IDA chair was that the applicant sought only the “usual“ benefits (the press reported applicants said they were “seeking the IDA’s standard benefit package,” including “a partial real property tax exemption that starts at 50% of the value of the improvements in year one.”) Yet, the IDA was proposing a “double benefit” exemption—starting at 100% of property tax in year one. The agency wanted to give the applicants twice the tax relief they said they needed.

The stated reason for the double exemption is that this was a “manufacturing” business…even though it failed to meet strict standards for a manufacturing exemption laid out in IDA operating guidelines. I told Tom that before relaxing those guidelines, we’d have to discuss the matter publicly and vote to change the rules; we certainly couldn’t extend this extra benefit to the present applicants first, as they simply didn’t qualify. Tom replied: “I see your point, and I agree with you.”

At the follow-up hearing, I was stunned when a resolution was nonetheless presented which included the doubled manufacturing exemption, with 100% of property tax initially abated. I objected and said the benefit was not in compliance with existing rules; we could either vote on the standard exemption, or postpone the matter.

My protest was ignored, and the IDA voted 4-1 to award $266,000 in tax relief to a multimillionaire who was building on Riverhead land she already owned, had no incentive to locate elsewhere, and had not even hinted at a reason this public subsidy was needed. And—it was far more than she’d asked for.

To be clear—the brewery owners did nothing wrong. The IDA should have discouraged their application, rejected it promptly if submitted, and never have mentioned—let alone offered—double tax benefits.

The Medical Center (Twice)

In 2011, a multi-national corporation bought the old PC Richard property on Route 58. In 2013, they leased it to an oncology business which operated similar locations in 15 states, and began converting it to part medical center, part offices. With renovations well underway, owner and tenant applied for tax breaks.

Many spoke against this award, and the loudest voice was Ann Cotten-DeGrasse. I didn’t agree with the ex-school board president on much, but I endorsed her position here. Her focus, however, was on relieving taxes for all IDA applicants (school taxes then—as now—comprise about 60% of the tax bill for most town residents.)

In contrast, my focus was highly specific. A Riverhead property was purchased, a lease signed, and construction of the specialized facility had begun. The fact that they wanted to locate their oncology center a stone’s throw from PBMC was obvious to all. Why did either landlord or tenant need incentives to continue building this project, already underway?

There was no answer and no justification. This was another six-figure handout by the IDA, plain and simple, delivering no benefit to the town.

In 2015, the oncology business was sold. The new owner acquired it in an arm’s-length transaction—without first seeking to extend the non-transferable tax abatements. Further—IDA lawyer Dick Ehlers said the original grantee defaulted on the IDA agreement by not informing the agency of the sale. Without action by the agency, the new business would simply pay its entire tax bill, starting immediately.

Instead of doing nothing and letting the town start collecting full taxes, the IDA decided to award the new owner—which had already bought and was operating this highly location-sensitive business—a continuation of the same tax breaks the original owner enjoyed.

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IDA Economics Primer

In considering the implications of these and other examples, taxpayers should keep in mind:

• the IDA charges modest fees for applying, but also takes a percentage of all tax breaks awarded;
• the IDA budget is funded by this income—if the agency doesn’t award tax breaks, it can’t operate;
• the biggest IDA expense—by far—is the executive director’s salary.

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The Hotels—Round 1

On Feb 5, 2007, the IDA approved tax abatements for Browning Hotel Properties, which was building the Hilton Garden Inn. As the resolution—which was attached to the meeting minutes—isn’t included in online agency records, I can’t list the amount; I’m told tax abatements for the Hilton totaled in the hundreds of thousands of dollars.

The Hotels—Round 2

Though this action was by the Planning Board and Town Board, it must be considered when evaluating subsequent IDA awards to the same property, for a complete picture of how Riverhead taxpayers (and farmers) have subsidized Lee Browning’s business.

In 2006, Browning was approved by the Planning Board to build two hotels, provided he buy 71.8 development rights credits from farmers in the Agricultural Protection Zone. He did not protest this condition at the time.

In 2009, Browning proposed to the Town Board that it change the definition of “floor area ratio,” or FAR, which determined the number of development rights required to be purchased and transferred …but only for hotels. The Cardinale administration ignored Browning’s proposal.

Town Hall changed hands, and Supervisor Walter was soon arguing in favor of only counting hotel guest bedrooms in FAR size calculations, excluding bathrooms, closets, and hallways because they “don’t produce the revenue.” (Would you stay in a hotel without them?)

The motion passed in May 2010, and had the effect desired by the hotel owner of making his new Marriott much smaller…though only in terms of the farmland development rights calculations. Browning would now only have to purchase half the development rights (36.2) than his original site plan approval required.

Farmer and Planning Board Member Lyle Wells vigorously objected to the hotel FAR modification, but that board voted 4-1 in favor. Development right credits fluctuate in value, but at the time Browning’s savings were valued at $2.85 million.

Fast forward to 2018. The town quietly restored bathrooms, closets, and hallways to floor area ratio calculations for hotels…but it wasn’t retroactive. Browning got to keep the millions he shaved from his farmland preservation fees.

The Hotels—Round 3

At the first IDA hearing (March 2015) for the new Marriott, owner Lee Browning said: ““I would tell you that the hardest thing in my life is getting financing for these projects. IDA tax breaks are definitely a requirement of the banks.”

Browning’s lawyer added “Every attempt we have made to procure financing in this very difficult environment has been expressly conditioned upon on us procuring benefits from the IDA.” (Note: he didn’t say his client must ask for IDA benefits, but rather that banks require Browning actually receive them.)

I was the only resident to speak on the proposal, and I asked why the developer didn’t include documentation of that bank requirement with his application. When there was no response, I told the IDA Board: “I’m not convinced; you need to know with certainty that this is a requirement. In the absence of anything further, you need to deny the application.”

I also asked whether anyone could state the total value of the tax abatement package. There was dead silence. Neither the IDA executive director, nor any IDA board member present, knew the amount of the massive business subsidy on the table.

That didn’t deter board member Lou Kalogeras, who said, “I’m of the opinion we should pull the trigger now.” Board member Dawn Thomas, to her credit, said the board should wait for more information from the bank, and the meeting closed without a vote.

At the next agency meeting, no further public comment was allowed, but we learned the amount of the IDA subsidy proposed for the Marriott was $1.6 million. After the agency voted to approve the abatements, a FOIL request revealed that the claim Browning’s bank required IDA abatements was wholly unsubstantiated. The only “evidence” submitted was the letter shown here. It’s not dated. It’s not from a lender, but from a mortgage broker who was “working with the Banks” on Browning’s behalf. There’s no indication any actual bank (let alone the also-referenced Small Business Administration) had actually made IDA abatements a loan prerequisite. No bank the broker was “working with” is even named.

Perhaps most significant is that—if IDA support were actually required by a bank before lending the applicant money—the lender would have specified an amount. (Homeowners applying for a mortgage aren’t told “a deposit” is required; it’s always spelled out as a precise downpayment, whether 20% or some other number.)

Browning apparently believed IDA Board members gullible enough to accept this as “proof” that without their abatements, his new hotel wouldn’t get funded…and he was right; they voted unanimously in favor of his project.

The Hotels—Round 4

In July 2017, Browning returned to the bottomless well that is the IDA to ask for yet more subsidies for the Marriott, still being built. He wanted additional sales tax and other abatements, totaling $215,000.

The reason was to add “amenities” to the hotel’s design, and because construction costs of a signaled intersection were higher than expected. This time, there wasn’t even a suggestion that these further investments by the IDA would bring more or better jobs to Riverhead. And the intersection modifications were known well in advance; costs could have been checked with DOT.

Oddly, Browning also blamed increased construction costs on an “improved economy,” as though that would justify the town giving him yet another subsidy.

As I said at the time, “a hotel owner who decides to build a bigger pool and a fancier bar…and who budgeted badly, doesn’t deserve yet another $215,000 in taxpayer help.”

The IDA proceeded to unanimously approve their third round of tax breaks for this project (not counting the millions of dollars in farmland credits saved.)

In total, these decisions allowed Browning Hotel Properties to avoid paying more than $5 million in taxes otherwise due to Riverhead town and school taxing districts. (For this one business, Riverhead would have received additional tax equal to 1/8 of the price the town set for selling all of EPCAL!)

Next: Part 2 — Process

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Larry Simms, a former South Jamesport resident, served on the board of directors of the Riverhead Industrial Development Agency in 2018, after several years as a frequent critic of the agency’s operations. He lives in Pittsburgh, Pennsylvania.