Big debt downtown

Economic
development can be a gamble between public officials and private real-estate
developers.

            When the gamble pays off, everybody
wins. The developer attracts tenants to a property, such as businesses that
create jobs, pay taxes, and improve the general economic climate in the area.
The developer makes a profit. And the public entity that loaned money or gave
tax breaks gets its loans repaid and its tax base boosted. Everybody’s happy.

            But when a property goes bust,
everybody loses (though some, inevitably, take more of a hit than others). And
that’s what’s happening in the heart of downtown Rochester, where the city’s
efforts to revitalize the Sibley Building on East Main Street have proven to be
a frustrating and expensive failure.

            How expensive? The Sibley Building’s
owners owe nearly $11 million in back taxes, delinquent loans, and late fees.
Moreover, this debt has been accruing for most of a decade.

            Ordinarily, even a debt of this
magnitude wouldn’t raise many eyebrows. Millions of dollars routinely change
hands, like poker chips, in the world of commercial real estate. And municipal
economic development officials, realizing that some investments may tank,
balance high-risk endeavors with low-risk ventures in their portfolios of
publicly funded projects.

            But there’s more at stake in the
Sibley gamble than the individual fortunes of the players involved.

            The future of downtown Rochester is
on the line.

Let’s meet the
players.

            First, there’s Rochwil Associates,
the Sibley Building’s owners. Rochwil is a limited liability corporation set up
by Wilmorite, a Rochester-based, commercial real-estate development and
management company.

            Wilmorite is, as its website boasts,
“one of the largest shopping center owners and
managers in the United States.” Its operating partnership, Wilmorite Holdings,
owns and manages 16 malls in eight states. Its local properties include
EastView Mall, Marketplace Mall, Pittsford Plaza, and Greece Ridge Center.

            When
Wilmorite set out to acquire the Sibley Building in the late 1980s, it created
Rochwil Associates and got help from the other two main players in this gamble.

            One is
the International Brotherhood of Electrical Workers — specifically, the
managers of the union’s pension fund. The pension fund, like a bank, holds the
primary mortgage on the Sibley Building. So Sibley’s owners must make mortgage
payments to the IBEW to stay in good standing with the fund managers, who, in
turn, are beholden to the union members whose money they’re lending out.

            The
other major player is the City of Rochester. In the early stages of this deal,
city officials provided loans, using federal urban development funds, to help
finance Rochwil’s acquisition of the important building.

            Rochwil’s efforts
to develop the Sibley Building have been further aided by a special tax
agreement for the property. The PILOT (Payments in Lieu of Taxes) arrangement
Rochwil participates in through the county’s industrial development agency
gives it a variety of tax breaks and exemptions — although, as the name
implies, Rochwil must make some payments under the plan.

            There is another key provision of
the PILOT agreement that works to Rochwil’s advantage. Under normal
circumstances, if a property owner fails to pay its taxes, the city can
foreclose on the property, take ownership, and sell it to recoup the money it
lost in tax revenue. However, the city cannot foreclose on a property as long
as its owners are participating in the PILOT program.

            And, of course, it can’t sell a
foreclosed property if no one’s willing to buy it.

So here’s the
deal:

            Rochwil has struggled to attract and
retain tenants in the Sibley Building. Strapped for cash, “what they did was
not pay who they figured they could not pay,” says Rochester Deputy Mayor Jeff
Carlson. In this case, the entity Rochwil could afford not to pay is the City
of Rochester.

            City officials say Rochwil has kept
current on its mortgage payments to the IBEW. A Wilmorite spokesperson
confirmed this, but union officials with knowledge of the deal could not be
reached for comment. “The IBEW is more important to [Rochwil] than the city,
obviously,” says Fashun Ku, the city’s commissioner of economic development.
“Because if they are behind on IBEW, IBEW immediately will take action.”

            Rochwil is delinquent on its loan
payments to the tune of roughly $6.8 million (a figure that includes late
fees). But the way the financial agreement between Rochwil, the IBEW, and the
city is structured, the city is in no position to take action on that account.

            Rochwil also owes over $4 million in
delinquent PILOT payments, taxes, and late fees. But, again, the city can’t
foreclose on the building as long as Rochwil’s participating in the PILOT
program.

            The situation between the three
players has been in what Ku calls “a kind of imbalance” for several years now.

            “IBEW will say, ‘I’m getting paid
every month. Why should I worry about this?'” Ku explains. “Wilmorite [a.k.a.
Rochwil] will say, ‘Guess what? I pay IBEW, I don’t pay the city. I don’t pay
my PILOT, I’m OK.’ And we’re the ones saying, ‘Wait a minute, we’re not OK.'”

            City officials have been trying,
unsuccessfully, to negotiate a new arrangement with Rochwil to deal with its
debts. “Most of the deals that were on the table involved waiving the taxes,”
Carlson says. “We’re not in any position to do that. We can’t, by law, waive
the taxes.”

            The situation is finally approaching
its end game. Carlson says the city sent a letter to Wilmorite Chairman Tom
Wilmot in early May, “saying we really reject the last deal that was on the
table, and that we can’t seem to come to a deal.” (Wilmot did not return calls
from City seeking comment.)

            So the city is now poised to play
its trump card, the only card it holds that gives it any leverage in its
dealings with Rochwil and the IBEW.

            “We’re filing a notice that we’re
coming after the PILOT,” Carlson says.

At the May 20
meeting of the county’s industrial development agency, Carlson says the city will
initiate a process to take the Sibley Building off the PILOT program. That
process is simply an “administrative” task, Carlson says; once begun, it’s all
but a done deal.

            Once that happens, Rochwil will have
to pay its property taxes. If it fails to do so for two years, the city could
then foreclose on the property. This is a move the clearly frustrated Carlson
has wanted to make for a long time.

            “I wanted to foreclose on this three
years ago,” Carlson says, but “it just kept getting dicked around. There was
always somebody coming up with, ‘Oh, we can do this’ or ‘We can do that.’ And
finally, I’m sitting there pulling my hair out. It’s amazing that we’ve said
‘no’ several times, and we keep getting the same proposal bouncing on the
table.”

            The action on the PILOT is intended
to prod the IBEW into negotiating a compromise with the city. “At the end of
the day, when you foreclose, you’re gonna force the primary mortgagee to the
table,” Carlson says.

            “We’re a municipal entity. That
would give us the ultimate right to foreclose,” he continues. “The absolute
last thing a mortgagee wants is for us to take ownership, because then they
just lost every dime. We’re in a little bit of a game here to see how hard we
can push the mortgagee.”

            According to Ku, Rochwil still owes
the IBEW $14 million on its mortgage. “Once we initialize the foreclosure
action, IBEW will say, ‘Wait a minute. If they take that, I will lose my entire
$14 million,'” Ku says. “So, most likely, they will come up with enough money
to pay whatever [is owed] us.”

            “They,” in
this case, could be the IBEW, Wilmorite, or both parties. A privately held
corporation, Wilmorite is neither eager nor obliged to disclose the details of
its financial arrangements. However, Wilmorite “always works with unions,” says
Carlson. “The people who [Tom Wilmot] borrows from are unions.” A company
spokesperson wouldn’t go that far, but said it’s “not unusual” for Wilmorite to
borrow from unions.

            “The pressure is really on [Tom
Wilmot’s] multiple dealings with IBEW,” Carlson says, then adds, “and when I
say ‘pressure,’ I don’t want to imply threats or anything else. This is a
standard real-estate move to really get the attention of a number of people….”

            Carlson and Ku say their primary
interest is to recoup the money Rochwil owes on loans the city made to the
company using federal urban development funds.

            Rochwil’s failure to make those
payments impacts the city’s ability to help finance various projects, like
human services and housing initiatives, and small-business loans. The city is
still able to supply this funding, but it has to tap its reserves to do so. Ku
says Rochwil owes the city $1,142,400 in loan interest alone.

            Ku and Carlson suggest that the city
would be willing to forgo the money it’s owed in PILOT payments in exchange for
having its loans repaid. This would allow Rochwil to keep the building and the
IBEW to keep its $14 million investment.

            If the city forecloses on the Sibley
Building, “everybody takes a huge bath,” Carlson says. “So we are showing the
IBEW that it’s probably a good idea now to jump in the boat with us and re-plan
this building. We’re more than happy to restructure the financing.”

Once the
Sibley Building is off the PILOT program, Wilmot could be in a tight spot.
Properties with large tax debts are virtually unmarketable. So Rochwil would
likely have to settle its tax bill before putting the Sibley Building on the
market or, an option that seems less realistic, find a buyer willing to pay $14
million for the property, debts and all.

            “No one is gonna pay, right now, $14
million for it,” Carlson says. “It’s probably more worth $7 million, which is
what you’ll get if you strip off all the bullshit: all the late fees, all the
taxes, all the loans.”

            If the city takes ownership, Ku says
it can either keep the building and work with another developer to fill it with
tenants, or sell it. “All I need to do is sell the property for $9.5 million,”
Ku says. “I’d probably sell it for $10 million, get all my back taxes taken
care of.”

            Carlson and Ku say the city has an
interested buyer in mind (and that another party may also be interested,
depending on the price). Carlson would only go so far as to say the interested
parties are “semi-local” and private entities. They both say the presence of
interested buyers makes taking their current course of action all the more
appropriate.

A
representative of Wilmorite, who requested anonymity, says the
company is unaware of any interested buyers. But the representative, who we’ll
call “Will,”was highly doubtful that anyone would buy the Sibley
Building, which has been a financial albatross around the company’s neck since
the day Rochwil took it over.

            The Sibley Building “never made
money from day one,” Will says.

            “I wouldn’t want to see a figure in
the paper,” Will says, “but we’ve put millions into that building — and not
one, two, or three [million].”

            Will cites several factors that have
made Rochwil’s efforts to fill the Sibley Building a struggle. For one thing,
businesses, non-profits, and institutions that occupy space downtown want to
have “an identity,” he says — a prominent presence in the city. He names
Catholic Family Services and SUNY Brockport, two former Sibley tenants that
left when the opportunity to secure their own building downtown presented
itself.

            This is also a symptom of the state
of the downtown real-estate market. Office vacancy rates are high, rents
correspondingly low, and would-be retail and office renters or owners have
plenty of options — including the alluring prospect of setting up shop in the
suburbs.

            The vacancy rate itself works
against downtown, especially for retailers who rely on walk-in customers.
Concerns about parking and perceived safety issues are also major turn-offs —
and in the case of the latter, the reason Rochwil can’t pay its taxes,
according to Will.

            Will says Rochwil spends over
$600,000 a year on security for the Sibley Building. The representative says
security at Sibley has to be especially visible in order to deter crime and
keep “street people” out of the office building.

            This puts the company in a catch-22,
Will says: Get bad publicity for not paying taxes or cut security to the bone
and get bad press when crime begins to fester in the building.

            Will also expressed concern about
the crowds that tend to congregate at the bus stop just outside the Sibley
Building. After an assault took place outside the building a year ago, Will
says the company lobbied city officials to move the bus stop in front of Sibley
a block west, in front of a largely vacant stretch of East Main Street. That
proposal was shot down, Will says, because that stretch of sidewalk was deemed
to be too narrow.

            The prospect that the Sibley Building
will be kicked off the PILOT program is no news to Will. The representative
points out that Rochwil is nearing the end of the PILOT program’s timeframe,
anyway. During the last stages of the program, a participant’s PILOT payments
approach what its property taxes would be normally.

            But Rochwil still can’t afford to
pay them.

Finally,
there’s the factor that has troubled the Sibley Building in the past and now
threatens to bring the struggling property to its knees: the flight of college
tenants.

            “This is the heart of the matter,”
Carlson says. When the city helped Rochwil acquire the Sibley Building,
municipal officials thought two key tenants — SUNY Brockport and Monroe
Community College — “would eventually fill this building and it would be an
institutional building,” he says.

            That didn’t happen. As mentioned,
SUNY Brockport has since left. MCC’s Damon Center, a satellite campus, is still
there. But the college has no plans to expand it. Although the college recently
signed a five-year lease with Rochwil, MCC officials may move the Damon Center
out of Sibley and into a new facility they could build downtown, several blocks
to the west.

            If that happens, Will says the
Sibley Building will never recover from the financial loss of its largest
tenant. Of the building’s roughly 1.2 million square feet of space, 751,500
square feet are leasable. Nearly 500,000 square feet are currently being rented,
but the building still isn’t profitable. Losing the 200,000-square-foot Damon
Center would be a deathblow, Will says.

            Moreover, Will echoes what urban
planning experts have been telling city officials for some time now. Sibley is
a key property in the heart of downtown. Should it thrive, it would create a
synergistic link between the hotels and convention center to the west, and the
rejuvenated East Avenue area to the east.

            If it fails, well, you get the
picture — just look at the area now.

            Furthermore, the prospect that MCC
will pull out is, in and of itself, enough to scare any potential buyer away
from the property, Will contends.

            And consider yet another factor,
Will says: If the proposed Rochester Central Station bus terminal project
becomes a reality, adding hundreds of thousands of square feet of office and
retail space downtown, finding tenants for Sibley will be an even more Quixotic
prospect.

            But one ironic point is not lost on
city officials: The success of Wilmorite’s suburban malls works against its
efforts to fill the Sibley Building. And while its downtown property remains
two-thirds vacant, Wilmorite is expanding EastView.

            “Tom’s able to expand that mall down
there and he’s got a full mall elsewhere,” Carlson says. “You don’t think he
can put a couple of tenants in [the Sibley] Building? He doesn’t have a
relationship with tenants where he can say ‘I’ll give you a prominent location
in Marketplace and EastView if you come in here?’ I mean, two-fers and
three-fers are the rule of the day.”

            For that matter, why can’t Wilmorite
take money from its profitable suburban malls and use it to pay off Rochwil’s
loans and tax debt? The idea of a wealthy corporation growing its sprawling
suburban properties while stiffing the cash-strapped city government that
helped it with public loans doesn’t sit well with some people — like Mayor
Bill Johnson.

            “I’m very upset,” Johnson says, “and
I’ve said this to Tom: ‘You know, you can spend $25 million expanding EastView
Mall.’ And he says, ‘Oh, that’s a different corporation.’ I know it’s a shell
game.”

            “Each project stands on its own,”
Will says, and the investing partners in one Wilmorite-created company may not
be the same as any other. Thus, the idea of taking funds from one set of
investors to help a project involving a different (even slightly different) set
of investors doesn’t fly.

            “It would have been great if
[Wilmorite] took a big brand name they had in one of the malls and put it
downtown,” Johnson says. “But they don’t have total control over that. The
retail has something to say about that as well, and they go where the market
is.” Will says as much.

            Johnson says Wilmot is “painfully
aware of his liabilities, of what he owes. We are constantly talking about how
we deal with that.”

“The best strategy is to find a new owner,” Johnson says.
“Somebody with a new idea. But the debt on that is so huge, somebody’s gonna
have to take a haircut.”

Politics,
politics

Deputy
Mayor Jeff Carlson is frustrated with the city’s situation in the Sibley deal.
He’s willing to push Rochwil Associates and its mortgagee, the International
Brotherhood of Electrical Workers, into what they may feel is a painful
compromise. But he’s also sensitive to the political implications of angering
the IBEW and Tom Wilmot, Chairman of Wilmorite, the company that created
Rochwil. Both Wilmot and the IBEW are major contributors to Democrats.

            The city’s move toward foreclosure
compels the mortgagee to come to the bargaining table, and “they’re not gonna
be happy,” Carlson says. But, he says, “we also realize the mortgagee is the
IBEW. That’s a problem for us. I mean, we are Democrats. That is a union
pension fund. I don’t want a union explosion on our hands.”

            Especially, one could add, in the
same year the Democratic mayor is making a difficult, and costly, run for the
county’s highest office against a Republican challenger, County Clerk Maggie
Brooks.

            The IBEW, like many unions that do
business in Monroe County, donates to both political parties. But Democrats
have received about twice as much money from the union as Republicans.
According to campaign filings, since late 1998, the IBEW’s Washington DC-based
Education Fund has given the Monroe County Democratic Committee $13,485 and the
Monroe County Republican Party $7,600. Friends of Bill Johnson received $5,750
from the IBEW in the last five years; Friends of Jack Doyle got $2,500.

            But in addition to cash
contributions, of course, are the votes a union endorsement might deliver.

            The city’s dealings with Tom Wilmot
are slightly more complicated and much touchier. For instance, when City interviewed transportation
authority board chairman Bill Nojay about plans to build a bus terminal in the
Sibley Building, Nojay charged that Democratic city officials’ interest in the
idea was rooted in a desire to bail Wilmot out, given his financial support of
the party (see “Street Fight,” March 26, 2003). In addition to being a
prominent proponent of building a combination bus terminal and
office-and-retail complex across the street from the Sibley Building, Nojay is
the treasurer of Friends of Jack Doyle.

            Since 2000,
Wilmot has personally contributed $4,450 to the Dems’ county party, but nothing
to the county Republicans’ fund. Wilmorite Holdings and Wilmorite Property
Management have pumped $10,250 into the county Dems’ coffers since May of 2001,
and have given Friends of Bill Johnson $2,500, according to campaign filings.
The Republicans’ county fund and Friends of Jack Doyle got zilch during the
same period.

            While discussing his strategy for
Sibley in the first of two extensive interviews with City, Carlson said, “I definitely did want to talk to you about
[the city’s plans], because I’d love to be able to retaliate everything that’s
going on, to mute that shit out of Nojay.”

            Carlson insists that the city’s
interest in forcing the foreclosure issue is based on its need to collect on
outstanding loans it made to Rochwil using federal urban development funds, not
to make Wilmot happy.

            “So it’s not like the rat bastard
Nojay thinks, that we’re trying to bail out our Democratic friend Wilmot,”
Carlson says. Once Sibley is kicked off the PILOT program, “We could squeeze
[Wilmot] for all his taxes, and then he can default on all his loans. What good
does that do us?”

Olde
Rochesterville

The
Sibley Building isn’t the only downtown property in the Wilmorite portfolio
that is in arrears. Olde Rochesterville, a 69,000-square-foot mix of
residential, office, and commercial space on North Water Street, was developed
with the help of a $1,159,568 Urban Development Action Grant from the city. The
UDAG has not been repaid by the limited liability company, also called Olde
Rochesterville, that was set up for this project.

            But city officials say the debt on
Olde Rochesterville is a relatively easy fix, at least compared to the Sibley
Building, mainly because the market for the property is much stronger.

            “The underlying profitability is
there,” Deputy Mayor Jeff Carlson says. “It’s not over-mortgaged. It’s much
easier to straighten that out, because there’s a market for it. The financing
needs to be restructured. But as soon as it’s restructured, the building will
perform. We’re not going to ask [Olde Rochesterville tenants] to move out.”

This article appears in May 14-20, 2003.