Cleveland OKs Unprecedented Subsidy? For Rich Developer? Take it to the (Flats East) Bank.

click to enlarge Cleveland OKs Unprecedented Subsidy? For Rich Developer? Take it to the (Flats East) Bank. (2)
Photo courtesy of k_e_lewis via Wikimedia Commons
True to form, the sound and fury of Cleveland City Council's dismay over an outrageous piece of legislation signified nothing.

Council voted 14-2 Wednesday to extend by 30 years an existing 30-year Tax Increment Financing arrangement for the Flats East Bank project. Ward 16 councilman Brian Kazy and newly appointed Ward 15 councilwoman Jenny Spencer voted against the emergency measure.

The extension will allow the Flats East Bank's developers — the Wolstein Group and a hornet's nest of subsidiary LLCs — to forego non-school property taxes on the 23-acre parcel of prime Cleveland real estate until 2071.

Twenty. Seventy-one.

(Deep breaths.)

If that sounds patently ridiculous, that's because it is. The ponderous term of the subsidy is unprecedented in the history of Cleveland governance. But the legislation's purpose, relayed with no shame whatsoever by the city's economic development director David Ebersole and two financial consultants for Wolstein, exposes what should be a familiar subservience to private real estate interests. 

That purpose — this is almost too embarrassing to repeat — is to help the developers with a cash flow problem. 

Council's basic function in recent decades has been to maximize the flow of public dollars to private entities. And while the current extension is certainly among the more garish examples of that prerogative — to reiterate: It will abate all non-school taxes for a $500 million Class-A development until long after most of city council's current occupants are dead — it is merely the latest in a series. Lest we forget, council voted in 2015 to grant these same developers taxing authority, which would have led to increased taxes in their special district to pay for so-called "maintenance and upkeep" of the project's "public infrastructure." That deference to the developers was a bridge too far even for Mayor Frank Jackson, who vetoed the legislation

But with respect to cash flow: Wolstein now gets to refinance the whole kit and caboodle, taking advantage of current low interest rates, and then borrow against what is now a juicy additional revenue stream: 30 years of taxes that the project would have paid to the City of Cleveland and Cuyahoga County from 2041-2070. (This should make your head spin.) Those funds will be loaned upfront to Wolstein to pay down existing public debts, including a $30 million HUD loan in the City of Cleveland's name. Wolstein has been behind on these payments since 2017, per Ebersole, and council huffed and puffed but ultimately voted in agreement that extending a generous subsidy by 30 years was the appropriate solution to get a very rich man current on his bill.

(Deep breaths.)

Ebersole, who works for the city but might as well be a spokesman for the developers, recommended repeatedly that council authorize the TIF extension. He claimed that he and the rugby squad of Wolstein accountants had been meeting for two years to iron out potential alternatives. Go figure, seeking the maximum possible TIF extension now permitted by Ohio law was deemed the only viable option.

It came to light, though, that there was one other strategy out there: simply collecting the money owed. This is a strategy which has been on the table in literally every private financing arrangement in the history of commerce, but which Ebersole nevertheless kept trying to radicalize by calling it "aggressive collection." He warned that pursuing this strategy would set a "dangerous precedent" for future development in the Flats East Bank and for Cleveland's development scene writ large. (More on this in a sec.)  

Councilman Brian Kazy, during a lengthy and sometimes heated Q&A, summed things up succinctly when he surmised that "we have a big developer here who's gotten into some financial trouble, and they're looking for the city to bail them out." He recalled a recent series of committee hearings in which the wisdom of long-term contracts was often questioned. His personal belief, he said, was that a sixty-year TIF was just way too long.

Council President Kevin Kelley intervened to correct what he viewed as a mischaracterization.

"This isn't a bailout," he said. "We're not giving [the developers] any money. We're not providing anything. We're allowing a tool so that they can pay us back the money that is owed to us. We're still going to be paid back according to schedule. None of that changes. It's just this tool that changes."

(Deep breaths.)
(This is for me.)

Mother of God. 

Just for clarity's sake, abating taxes on a project lowers the total cost for the developer and diminishes the income for the taxing authorities, (which in this case are the city of Cleveland and Cuyahoga County.) With all due respect, that is the definition of giving the developers money. Kelley referring to 30 new years of tax abatement as merely a tool, not a subsidy itself — "We're not providing anything!" — is depressing beyond belief. These are the antic ravings of a bought man.

The situation is more or less as Kazy described. But the TIF extension also provides the developer instant liquidity which theoretically creates momentum for the development of additional phases in the Flats East Bank. Whether Wolstein actually required that liquidity to move forward with these new phases or merely said he required that liquidity (in effect, holding the city's economic development department hostage), he now has it, thanks to the obedient council. 

Kevin Kelley knows precisely what's happening, by the way. He's savvy enough to frame the issue in pragmatic terms for his colleagues, who, through no fault of their own, tend to be in way over their heads on this stuff. (In one of the quotes of the day, Councilman Tony Brancatelli referred to the original deal as a "baklava" of funding sources. The accounting jargon can be a real bear to decode, is the point.)

Kelley distilled the vote for his colleagues as a response to the simple question of debt collection. Getting "our money" back was the important thing, in this narrative. Council members would have to make a tough choice: Would they pass the distasteful TIF extension to guarantee that the City gets its overdue payments when refinancing closes? Or would they vote no and attempt to collect those payments in the traditional way, (by legal action if necessary), thus imperiling the Flats East Bank development by means Ebersole and Kelley never did specify. 

It was obvious which way Kelley was directing the body, but he got his Majority Leader and Whip, Blaine Griffin and Phyllis Cleveland, to offer final comments in praise of the legislation anyway. Griffin tossed a softball as gently as softballs can be tossed to Ebersole, asking how the TIF extension would affect development in other parts of the city. This was so staged and cringeworthy that I honestly had a hard time watching, but Ebersole said voting in favor of the TIF would send a "positive message" to the development community, a message that the city of Cleveland was willing to "share risks" on big projects like this one.

Griffin nodded contemplatively. He said that while he appreciated the tough line of questioning from some of his colleagues, (Joe Jones, Brian Kazy, Jenny Spencer, Charles Slife and Kerry McCormack, all of whom had gone to town on Ebersole), he was concerned about inaction. 

"Sometimes there's a cost to inaction," he said. "The cost of inaction is a challenge for me."

In prepared remarks, Phyllis Cleveland said much the same. The "greater risk," she'd decided, (referring to Kelley's two choices) would be inaction by voting no. "We are at a point where we've got to do something. It's better do something than punt down the road."

Do something about what, though? What was the big problem here?

That's the question that Jenny Spencer and Charles Slife seemed most keen to answer. Wasn't the Flats East Bank doing well? Indeed, it was revealed that with new leases, the project will be inching toward 100% retail occupancy and has hovered in the "mid-80s" for residential occupancy for several years. The gleaming Ernst & Young office tower and Aloft Hotel properties were both described as "sound." 

Why is this successful project, then, in desperate need of a new long-term subsidy which, stacked atop the existing subsidy, will deprive the public of critical revenue for the next fifty years?

(The actual answer, remember, is that it isn't. Wolstein simply wants more money, and the city does his bidding, providing instant cash by allowing him to borrow against future taxes, thereby paving the way for additional development. Not that this came up Wednesday, nor does it matter to the dishonest brokers at City Hall, but Wolstein has already announced that he planned to break ground on the next phase of the Flats East Bank in 2021. Kerry McCormack, inaccurately as it turns out, said in October that the TIF extension and the next phases of development had "nothing to do with each other.")

The justifications provided Wednesday, at any rate, were a joke. Among other things, the parking revenues have fallen $1 million short of projections. That does little to explain why Wolstein is now $6.5 million behind in his loan repayments to the city.

One possible reason is that Wolstein is behind for reasons external to the project in question. Another is that he's simply unwilling to contribute personal resources to pay back his debt. Either way, as Councilman Slife noted, "any average citizen" knows that if they are behind on their car payment, they can't go to their lender and demand to double the length of their loan. (That's an imperfect analogy, but the point stands!) The implication was that the city should not be responsible for dealing with the developer's financial problems.

Never mind the fact that the money owed to the city — the lynchpin of the legislation, in Kelley's version — is HUD money! It was loaned to Wolstein with the city serving as intermediary. What that means in practice is that the city has voted to forego 30 years of future tax revenue from an enormous project in order to collect, with a bit less friction, delinquent payments on a HUD loan. This is suicidal fiscal policy.

(Deep breaths.)

Kazy and Spencer, who both acquitted themselves honorably via Zoom, should be commended. Spencer, in particular, stuck her neck out in the first controversial vote of her fledgling tenure.

In a series of pointed question, she wondered why council was being presented this piece of legislation as an emergency measure, without having had the opportunity to hear from the developer himself, and after council's own Development, Planning and Sustainability Committee had voted 4-2 the previous day to delay the vote, pending additional information. A looming Dec. 31 deadline for the TIF extension was the culprit. Spencer asked, in that case, why no one had known about this all-important deadline? And might a special meeting be called before the end of the year to more fully vet the issue? Kelley said council can do "whatever we want," but such a meeting would be "unusual," and held the vote anyway. Spencer followed her objections to their logical conclusion and voted no.

Not so with Jones, McCormack and Slife, who all asked a number of detailed questions about the deal's financing — including why the maximum extension was required — but ultimately ratified the proposal as presented.

The temptation would be to celebrate Kazy and Spencer for standing on principle. They have both already been applauded on social media. But the more pressing, and more dispiriting, question is why only two of the body's 17 members (Basheer Jones is in Egypt and did not cast a vote), managed to discern what every conscious human adult understood immediately, without benefit of supplemental materials or team of accountants: this is another grotesque corporate handout.

Were these council members persuaded by Phyllis Cleveland's threat at the end of her comments? "All of us at one time or another are going to have to step up and take a hard vote," she warned her colleagues. "So keep that in mind." (The message they were meant to receive was that council leadership wanted them to vote in favor of the TIF extension, and they had better buck up and do it if they wanted leadership's support for individual ward or pet policy issues in the future.) 

Or were they actually persuaded by Ebersole's dark prophecy about "dangerous precedents" on the development scene? Surely councilman Slife wouldn't have been convinced. It was he who proposed a counterargument: that in fact, council might be setting another precedent. In failing to collect its payments, and failing to effectively use public dollars as both carrot and stick to incentivize private development, the city might not be taken seriously as a financial institution.

Slife was correct, but inadvertently. The city is not meant to be taken seriously as a financial institution. It is merely the spigot. Developers know well that there are occasional spurts — the Jackson veto of the special tax district, for example, darn! — but the flow is generally strong and unperturbed.

Developers have played this game and controlled this system for decades. They know that pursuing "risky" projects like the mega-development at Flats East Bank — with "soft" projections and "thin" margins for error — is usually a great bargain because the public assumes the risk. All the risk. When the projections fall short, as they always do, and the margins for error are eclipsed, as they always are, it is the public coffers that come to the rescue. And when those coffers are exhausted, it is the public coffers of the city council members' children and grandchildren that are plundered next.

All of this becomes much more surreal when the alternative is considered. Kazy asked directly how the HUD loan would be repaid if not for the TIF extension. Ebersole responded matter-of-factly that the developer's own resources might then have to be tapped. That this option is considered out of bounds — an absolute last resort — is one of the reasons this region is so destitute.

Kerry McCormack was approaching enlightenment when he asked Ebersole shortly thereafter if intermediate solutions might be considered. Was there a way, he wondered, for private equity to cover these loan delinquencies? "What's their skin in the game?" He wanted to know. Ebersole responded that the developer has "significant equity" in the project already, and that it would be "better for everyone" if additional developer equity was used to fund future phases of the project.

"Well, this is a private development," McCormack rejoined. "So of course there's private equity in it."

Ding ding ding!

So many of Cleveland's leaders have their heads so far up their butts, and are so wittingly or unwittingly beholden to the chamber of commerce rhetoric about growth and development, that even acknowledging this basic fact can seem insurrectionary. It's no surprise that in that climate, asking a developer to pay back his loans with his own money is an act of transgression among elected leaders. It's totally taboo! Beyond the pale! Future taxes must be surrendered to avoid that disaster!   

But that's the dangerous precedent about which Ebersole was sweating. If council makes Wolstein pay back his own loan, with his own money, what's next? They might begin to intuit the absurdity of their submissiveness to local real estate interests, and begin, slowly but surely, to piece together connections between perpetual corporate handouts and the region's poverty. They might screw their heads on straight and recognize that in the arena of public-private partnerships — the thing they've been taught to exalt — the public shouldn't be required to bear all the costs.

Alas, they are nowhere near that threshold. The 14-2 vote was testament to the chasm yet to be crossed. It was particularly galling, though, a day after council's Utilities committee met to discuss the lifting of the city's shutoff moratorium. There, council members disparaged the "deadbeats" in town who were treating the pandemic as a "utility and rent holiday." They stressed the importance, for those delinquent on their bills, of contacting the city to enroll in affordable payment plans and affirmed that disconnections would be forthcoming.

No such tough love, nor the storied responsiveness of Cleveland Public Power's customer service, awaits the deadbeat Wolstein.

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Sam Allard

Sam Allard is the Senior Writer at Scene, in which capacity he covers politics and power and writes about movies when time permits. He's a graduate of the Medill School of Journalism at Northwestern University and the NEOMFA at Cleveland State. Prior to joining Scene, he was encamped in Sarajevo, Bosnia, on an...
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