Monday, February 14, 2011

Rich Take From Poor as US Subsidy Law Funds Luxury Hotels

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Rich Take From Poor as US Subsidy Law Funds Luxury Hotels

By David Dietz - Tue Feb 08 05:01:00 GMT 2011 Renovation at the Blackstone Hotel in Chicago qualified for a federal subsidy due to the neighborhood's 26 percent poverty rate. Photographer: Michael L. Abramson/Bloomberg Markets The landmark Blackstone Hotel in downtown Chicago, which has hosted 12 US presidents, opened in 2008 after a two-year, $116 million renovation. Inside the Beaux Arts structure, built in 1910, buffed marble staircases greet guests spending up to $699 a night for rooms with views of Lake Michigan. What's surprising isn't the opulent makeover: It's how the project was financed. The work was subsidized by a federal development program intended to help poor communities. The biggest beneficiary of taxpayer help for the Blackstone revamp was Prudential Financial Inc., the second-largest US life insurer. The company got $15.6 million in tax credits from the US Department of the Treasury for helping to fund the project, according to Chicago city records, Bloomberg Markets magazine reports in its March issue. JPMorgan Chase & Co., the second-largest US bank by assets, also took in money by serving as a lender and the monitor of Blackstone construction financing, city records show. Since 2003, some of the world's biggest financial companies, including Goldman Sachs Group Inc., US Bancorp, JPMorgan Chase and Prudential, have taken advantage of a federal subsidy that will cost taxpayers $10.1 billion -- and most of the public has never heard of it. Investors have used the program, called New Markets Tax Credits, to help build more than 300 upscale projects, including hotels, condominiums, office buildings and a car museum, on streets far from poverty, according to Treasury Department records released through a federal Freedom of Information Act request. Money spent on high-end development could have been used to build more than 1,000 job-training centers, medical clinics and schools. The program, endorsed by Republican Senator Rick Santorum and House Speaker Dennis Hastert and adopted by Congress, was signed into law by President Bill Clinton in 2000. Building high-end commercial projects goes against the intent of the New Markets program, says Cliff Kellogg, a former senior policy adviser at the Treasury Department who helped design New Markets. "Things like luxury hotels are entirely contrary to what we set out to do," says Kellogg, who's now a bank consultant. "Some hotels may create jobs and spur other nearby investment, but you have to ask if these projects prevent worthwhile ones from getting done." Some of the subsidized luxury projects may not have required federal aid at all, the Government Accountability Office found in a 2010 study. "This underscores the need to ensure the program is operating as efficiently as possible at a time when the government is under severe pressure to address the growing federal budget deficit," says Michael Brostek, GAO's tax issues director. The Blackstone adjoins Chicago's cultural hub, one of the most vibrant in the nation, and is miles from the city's neediest neighborhoods. Prudential invested $9.3 million and made $30.4 million in loans, according to Chicago records. Under New Markets rules, firms get a credit of 39 cents on the dollar, paid over seven years, for cash or loans they put in. For its contribution, Prudential collected $15.6 million in credits, according to a July 2008 JPMorgan project oversight report filed with Chicago. Prudential spokesman Simon Locke declines to answer specific questions about the Blackstone project. "We do not comment on individual transactions or discuss our clients," Locke says. JPMorgan spokesman Tom Kelly also declines to discuss specifics. "We think these projects help the community," Kelly says. The Blackstone says it hired more than 200 workers when it opened in 2008. Clinton regarded New Markets as a way to spur development and create jobs in communities held back by high unemployment and lagging business growth. He touted the program on a six- state tour in 1999. "This is a good business opportunity here," he said at a cabinet factory in Clarksdale, a Mississippi Delta town with a per capita income of $12,611. "If we can't fully develop the Delta now, with the strongest economy, when will we get around to it?" Clarksdale has received no benefit from the tax credit program, Treasury Department records show. President Barack Obama has endorsed New Markets to help ease the effects of the longest recession since the Great Depression and proposes increasing the tax credits. In December, Congress extended the program for two more years. The Treasury controls who gets tax credits money and how the subsidies can be used. The agency bases decisions on census tracts, which are supposed to have common economic standards. Only tracts with at least a 20 percent poverty rate or with a population earning 20 percent less than the median family income of the surrounding metropolitan area qualify for subsidized projects. The numbers are from the 2000 census. The 2010 count hasn't yet been used. The 15-block tract that's home to the renovated Blackstone -- census No. 3206 -- qualifies because it had an individual poverty rate of 26 percent in 2000. A closer look at the demographics tells a different story and shows how investors can game the system, says Janet Smith, who lives in the Blackstone tract and teaches urban planning at the University of Illinois at Chicago. The tract's New Markets poverty qualifications don't reflect gentrification that has been going on in the neighborhood and the broader South Loop region since the 1980s, Smith says. The poverty profile reflects the large number of students who attend two schools -- Columbia College Chicago and Roosevelt University -- in the area, she says. Among families, the poverty rate is just 3.9 percent, according to the census. The tract already had a major hotel -- the Hilton Chicago across the street -- before the Blackstone reopened. It also had a high-rise condominium, with units selling this year for up to $1.3 million. And it includes a chunk of Grant Park -- designed by celebrated urban architect Daniel Burnham -- where Obama celebrated his 2008 election victory. "I wouldn't say this is a needy tract by any means," Smith says. "You have to make a distinction between family- level poverty and individual-level poverty. The problem with a subsidy program like this is that we give away money where we don't really need to and usually in markets where development is already there." It's common for a tract to have diverging poverty rates for individuals and families, Smith says. Accounting for both measurements yields a truer picture of whether a tract needs New Markets help, she says. The program's standards open up some of the nation's wealthiest areas to development, according to Treasury records. Taxpayers have subsidized projects in tracts with median family incomes as high as $200,000, records show. A total of $7.4 billion of the $16 billion already spent under New Markets, or 46 percent, has gone to tracts with family poverty levels ranging from zero to 19 percent, Treasury and census data show. Those communities include areas of California's technology-rich Silicon Valley. The program's definition of poverty tracts --which include just individual rates -- show that $3.6 billion, or 23 percent, went to areas with less than a 20 percent rate. Those tracts qualify under other eligibility criteria, primarily low median family incomes, says New Markets spokesman William Luecht. "The way the rules are written, it's allowing a kind of cherry-picking by financial institutions to find favorable census tracts," says Virginia Parks, a social services professor at the University of Chicago. "It's so easy to qualify that all you need to do is hire a good demographer. It's not rocket science." Scores of New Markets projects have benefited poor communities. The program has helped develop job-training centers, charter schools and housing in severely impoverished locations stretching from the Watts section of Los Angeles to Appalachia in Kentucky and other states. From 2003 to 2008, 25 percent of project investments, or $3.9 billion, went to tracts with family poverty rates above 30 percent, according to Treasury and census records. Using individual rates alone, Treasury calculates that figure as 49 percent, Luecht says. "Many desperately needy communities for the first time have gotten access to capital and technical advice," says University of Michigan law professor Michael Barr, a former assistant Treasury secretary who was the program's chief developer. "We feel good about that." Goldman has used New Markets to build an affordable-housing project with shops and a community center in what had been Brooklyn's run-down Bedford-Stuyvesant neighborhood. US Bancorp helped create 1,300 jobs in financially distressed Dubuque, Iowa, by converting a former department store into a service center for International Business Machines Corp. Goldman targeted tracts on the upswing in Pittsburgh and Portland, Oregon, when the firm got its first New Markets investment authorizations in 2002. In Pittsburgh, $30.5 million of a $75 million Goldman investment authorization went to a shopping center in the East Liberty neighborhood. The mall's tract was in the midst of recovery with city renewal efforts that had already helped lure a Whole Foods Market Inc. grocery store. Goldman brought in PNC Financial Services Group Inc., the sixth-largest US bank by deposits, to help finance the project. PNC invested $30.5 million in equity and loans to receive $11.9 million in tax credits. The subsidy was $1.3 million more than PNC's cash investment of $10.6 million. Banks, lawyers and consultants took fees totaling $9 million -- 28 percent of the total project cost of $32.7 million, according to city records. Goldman's share, for overseeing the project's finances, wi...

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