Beachwood Incentive Package to Lure Small Company Draws Attention of Former City Council Candidate

On Dec. 17, 2018, Beachwood city council approved up to $86,800 in economic development funds for Surgical Theater, a virtual reality medical company with a $1.7 million payroll and twelve employees. The company had a competing economic development offer from the city of Mayfield, where it’s currently located, but Surgical Theater told Cleveland.com that they were approached by Beachwood property owners interested in housing the tech start-up. The building, located at 3700 Park East, is owned by Jonathan Berns, the brother of Beachwood Councilman Justin Berns.

Mike Burkons, a business owner who unsuccessfully ran for Beachwood city council in 2017, is calling attention to the recent incentive grant and the number of companies that have received such grants that ended up moving into Berns’ building. With the addition of Surgical Theater, the building will become home to five of the fifteen companies that have been approved for economic development grant dollars since Beachwood began offering the incentives in 2013. Two of these grants have been approved since Councilman Berns took office in 2016.

Councilman Berns, a home developer and the son of previous city council member Sheldon Berns, did not vote on the matter at the December 17th meeting. At the meeting the incentive package was approved on a 6-0 vote as an emergency measure, meaning it did not receive the typical rounds of review and potential citizen input.

Incidentally, Councilman Berns’ 2015 campaign finance report indicates that his brother, Jonathan, gave $5,000 to the candidate’s campaign — the single largest donation and an amount that is over a third of the entire campaign contributions. Councilman Berns did not reply to Scene’s requests for comment. He is up for re-election in 2019.

Burkons argues that regardless of whether the councilman voted on the issue, the conflict of interest should have been a matter of public record. Burkons suggests that the City Council members, “made an intentional decision not to mention the building owner,” and while the practice itself might not be illegal, Burkons notes, “I don’t think it’s the city’s responsibility to bridge the gap between what the tenant wants to pay and what the landlord wants to be paid.”

Burkons raises an interesting point. According to recent listings, space in 3700 Park East rents for $20 per square foot per year. To relocate to a new space that is 5,685 square feet, Surgical Theater would be expected to pay $113,700 per year. With the job growth grant from the city, Surgical Theater will receive $40,000 upfront, money that can be spent on their lease payment, reducing their actual payment without any impact on the comparable rental market. With only 15 incentive grants over six years, it’s difficult to make the case that this use of public dollars is artificially inflating the rental market, but that and the question of whether Beachwood can justify spending public dollars on economic development are valid concerns.

The idea that all local efforts to attract businesses are worthy of public dollars is not supported by evidence, particularly when the city is already a prime location for businesses and their CEOs, complete with large commercial spaces, highway access and well-funded public schools. Indeed, just the presence of large spaces gives Beachwood an advantage above primarily residential suburbs, like Cleveland Heights. Simply, the availability of larger spaces creates a market for businesses that are looking to expand. In fact, the Cleveland Heights-based company, Lee Silsby Compounding Pharmacy, recently moved to Beachwood when it sought to expand. And like Surgical Theater, they also received an incentive grant. But if companies are moving because they need a new space, why are public dollars being spent on enticing them?

Councilperson Barbara Bellin Janovitz believes it’s impossible to know whether a company would have come without an incentive but that the city should still be investing in economic development grants anyway. “We have a policy in place to try to attract businesses that will be good for the city long-term,” she told Scene. “We never know if a company would come without the grant, so we use our knowledge to make the best decision with the information we have.” In other words, the city feels an innate need to compete with other municipalities despite any indication that a competitive edge is necessary. Beachwood is competing for the sake of being competitive.

Unlike the residential suburban cities vying for new businesses, Beachwood does not tax the income of residents who work outside of the city.

Beachwood’s income tax rate is 2% for those who work in the city but there is a full credit for those who live in the city of Beachwood and work in another city, such as Cleveland. According to 2015 estimates, 4,574 residents of the city are employed outside of the city of Beachwood. With a 100% tax credit, these residents, who likely have well-paying jobs to support their housing costs, do not pay income taxes to their city.

Councilperson Janovitz says that while she had never really considered it, she would likely not be in favor of a change to the city’s taxation policies. Janovitz states that she, “does not believe that the city should shift the tax burden from businesses onto the residents.” So, who carries the burden of paying for Beachwood’s city services? Those who work in Beachwood, where the average salary is $45,860 a year.

Are economic development dollars being used to strategically place companies into buildings owned by people close to city leaders? Janovitz argues against that logic, and notes that the city is so small and close knit that many people know landlords. However, economic development practices, local tax policies and relationships between city councilmembers and business people are complex issues that can get murky in such small, comfortable suburban municipalities. That’s why, for citizens like Burkons, a move towards increased transparency is essential. “I think the right questions need to be asked,” he says.

This article appears in Jan 9-15, 2019.