Luxury hotels built with federal subsidies meant to help poor communities
Since 2003, some of the world's biggest financial companies, including Goldman Sachs and JPMorgan Chase, have taken advantage of a federal subsidy that will cost taxpayers $10 billion.
The landmark Blackstone Hotel in downtown Chicago, which has hosted 12 U.S. 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, the second-largest U.S. life insurer. The company got $15.6 million in tax credits from the U.S. 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, the second-largest U.S. 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, U.S. 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 and created in 2000, 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.
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.
Prudential spokesman Simon Locke declines to answer specific questions about the Blackstone project.
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.
How it works
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 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 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.
"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."
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, says New Markets spokesman William Luecht.
"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 rundown Bedford-Stuyvesant neighborhood.
U.S. Bancorp helped create 1,300 jobs in financially distressed Dubuque, Iowa, by converting a former department store into a service center for IBM.
Goldman targeted tracts on the upswing in Pittsburgh and Portland, 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.
Prudential has used the New Markets program to finance two luxury hotels. Along with the Blackstone, the company in 2008 helped build the Nines in Portland, bringing the firm $27.3 million in tax credits, according to Portland records. A Travel & Leisure magazine guide ranked the Nines 25th among North American hotels in 2010.
Prudential spokesman Locke declines to comment on the Nines. He says his firm no longer owns the Portland tax credits. He declines to elaborate.
In Portland, Goldman and U.S. Bancorp partnered with city government on another cultural development helped by New Markets. In 2004, the Portland Development Commission was advocating conversion of a historic armory into a nonprofit theater, and the project caught Goldman's eye, according to city records.
The armory, which housed horses and cannons in the 19th century, sat in the city's Pearl District, a former industrial area enjoying a resurgence with upscale stores and housing. The tract qualified with a 41 percent individual poverty rate because it included one poor neighborhood on its fringe. The family poverty rate was 11 percent.
Goldman arranged $28 million in New Markets financing for the theater. U.S. Bancorp put $8.4 million into construction and loaned an additional $11 million. That allowed it to win $10.9 million in tax credits, city records show.
Goldman will collect a fee of $1.4 million for tracking finances for the government, according to Goldman spokesman Stephen Cohen.
The 599-seat Gerding Theater opened in 2006.
The League of Women Voters in Portland assails the use of federal tax subsidies.
"It's ludicrous," says Shelley Lorenzen, a former League of Women Voters board member who has studied Portland urban renewal. "The area has become kind of the hottest real-estate market in town, with the best restaurants, art galleries and very high-end condos."
Kellogg, the former Treasury official who helped structure the subsidy plan, says New Markets needs changes. It should divert money from projects such as high-end hotels and exhibit halls, he says. New Markets should target small-business development in regions that truly need a lift, Kellogg says. After all, he says, that was the point from the start.
Sam and Sara Lucchese create handmade pasta out of their kitchen-garage adjacent to their Ballard home. Here, they illustrate the final steps in making pappardelle pasta.
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