Random 'windfall' fee sends negative message

Posted: June 27, 2010

This is one of those tales that helps explain why many developers and business owners avoid Philadelphia.

It starts in 1987, when developer Stephen Klein purchased a two-acre parcel for $3.7 million and signed an agreement with the city's Redevelopment Authority that called for him to develop the site, at 17th and Vine Streets, within five years.

Klein made six attempts to build housing there, but for a variety of reasons - including economic downturns and the high cost of construction in the city - the deals never came together. Klein says he spent $1.8 million on the various development plans over the years. All the while, he operated the property as a parking lot and paid his property taxes, which now top $52,000 a year.

In short, Klein was no slumlord.

In 2008, Michael Nutter was sworn in as mayor, and his new RDA director, Terry Gillen, set out to enforce long-ignored rules and bring more order to the agency, which tended to operate on a deal-by-deal basis. Gillen notified several dozen landowners that they were in default of their development agreements with the agency, and she gave them six months to find a solution.

Klein's notice was dated Sept. 15, 2008 - the day Lehman Bros. Holdings Inc. filed for bankruptcy. Given the ensuing credit crunch and economic meltdown, Klein's chances of developing the property at that point looked to be less than zero.

Maybe the Lord does work in mysterious ways. Out of the blue, in May 2009, the Church of Jesus Christ of Latter-day Saints approached Klein about the property. Three months later, he reached a tentative agreement to sell it to the Mormons for $7.5 million, his spokesman said.

In December, Klein met with Gillen and told her about his plan to sell the land to the church, which wants to build a $70 million temple on it. The project is expected to create 300 construction jobs and 50 permanent jobs, according to Klein. It would also attract thousands of visitors and generate $20 million in economic activity every year, according to a study done for the church by Econsult Corp.

Klein thought the Nutter administration would embrace such a good deal in bad times. But a week after the December meeting, the RDA sued Klein, seeking to take control of the property on the grounds that he had failed to meet the long-unenforced development deadline.

The Inquirer published a front-page story this month about the legal dispute. That day, the RDA offered to drop the suit in return for 25 percent of Klein's sale price.

In some circles, that would be called extortion. At the very least, it was completely arbitrary. Nowhere in past agreements did the city demand a cut of any sale.

Gillen said in an interview that the city should share in Klein's "windfall." But didn't he already pay for the property 23 years ago? Gillen also said the amount of money Klein stood to pocket from the sale was "immoral." That sounds Marxist.

Granted, Klein didn't develop the site in a timely manner. But it's not as if he didn't try. And he's not a speculator who bought the property for a dollar, didn't pay taxes on it, and left a boarded-up eyesore to rot until the right deal came along.

Gillen said "rules matter." If that's the case, does the city plan to demand a 25 percent commission on every sale of a former RDA property? And why isn't the agency applying the same rules to others who have failed to develop former RDA property - including a similar site next to Klein's?

Gillen said her agency's demands would depend on the deal. And she said the owner of the property next to Klein's wanted to develop his site, while Klein wanted to "flip" his and make money.

It's good that Gillen is trying to enforce long-ignored rules, but the enforcement is uneven. And on the Klein deal, she and the Nutter administration are cutting off their proverbial nose to spite their face.

For starters, selling a property after 23 years isn't a "flip." And Klein hardly stands to make a "windfall." He paid $3.7 million for the site, says he spent an additional $1.8 million on it, and has an offer of $7.5 million. If the city takes 25 percent, or $1.9 million, Klein would net $100,000.

Granted, city finances are tight, but this effort to squeeze Klein is not worth the risk of blowing the deal. And a random "windfall" fee for a site that was already purchased sends a negative message to the broader development community.

After I spoke with Gillen, Nutter called to assure me that he supported the project and that the temple would get built. That's nice. But if this is how the Nutter administration supports a project, I'd hate to see it oppose one.

Paul Davies is The Inquirer's deputy editorial page editor.

He can be reached at pdavies@phillynews.com.

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