"...cuts to public services to pay for a failed real estate speculation,..."

City Center II: "We don't pay taxes. Only the little people pay taxes”—Leona Helmsley.

A History of Property Tax Delinquencies and Forfeitures

Although foreclosures on over-leveraged Strathmore developments did not begin until after East Lansing government signed the 2008 City Center II development agreement (but before the foolhardy purchase of the Evergreen properties), there was already more than ample evidence (including that provided by citizen-investigators) that Strathmore was far too big a risk for a mega public-private project involving tens of millions of dollars in taxpayer-backed city bonds and MEGA business tax incentives. Claims of “due diligence” were lies or, perhaps in the case of financially illiterate members of Council, the mouthing of others’ lies.

City Center II requires substantial tax increment financing for “bond servicing”—averaging about $1.6 million (of $2.3 or $2.6 million total bond servicing) per year according to the latest $34 million Baird plan (accepting its high parking revenue expectations), more than $2 million in the 2008 brownfield plan. Obviously, this requires a reliable taxpayer. Strathmore’s property tax delinquency history prior to the signing of the development agreement should have precluded its consideration for any project involving TIF for bond servicing. The excuse that “everybody does it,” when it comes to developers not paying property taxes as a cash flow strategy, is another lie. Any developer with adequate financial resources to tackle a major project pays the taxes on properties awaiting future development, and it pays mortgages and contractors.

Before the 2008 development agreement, Strathmore’s CADA Investment Group “affiliate” already had forfeited to Ingham County the former Citizen’s Bank building, purchased in 2004, for $81,360.96 in unpaid 2005 property taxes (plus interest) and $65,599.28 in 2006 taxes (plus interest). A lesser City Center II building, 136 W. Grand River, purchased in 2006, was forfeited to the county for non-payment of 2006 winter taxes. Even if redeemed before going to tax auction by the county sheriff, by time these forfeitures are paid, it is sometimes more than two years after summer taxes were due—the forfeiture on 2005 taxes, of which $62,307.91 had been due August 31, 2005, was not redeemed until March 27, 2008. Both these properties were also delinquent on summer and winter 2007 taxes, which were transferred to the county, but paid before forfeiture in the context of the development agreement. Of course, as we well recall, all seven City Center II properties (the rest purchased in 2008) were delinquent on 2008 and 2009 taxes, after the development agreement was signed, and these taxes were only paid when they were because of the need for the CC II site plan revision approval by Council, which followed the infamous $99,000 on a credit card incident. 2010 taxes were still unpaid when the Planning Commission approved an extension.
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Other Strathmore projects were replete with property tax delinquencies and forfeitures, with some developments, such as Broadway Village, Nixon Farms, and Bear Creek, almost every year, the last even after it was producing revenues. Unpaid taxes were anything from a few thousand to hundreds of thousands of dollars. During its brief ownership by Strathmore affiliates, before foreclosure, the Center of Bonita Springs shopping center, home to a supermarket and other major lessees, had approximately $360,000 in delinquent 2007 taxes and approximately $450,000 in delinquent 2008 taxes. As quoted in the Naples News-Press, May 15, 2009, concerning $397,603 listed for the annual Lee County delinquent tax auction, Strathmore’s president said, “We are in the process of refinancing…and that is why we haven’t paid.” In 2008 and 2009, the State of Florida Department of Revenue issued warrants against Strathmore’s Center of Bonita Partners for collection of delinquent sales and use tax in the amounts of $76,587.75 and $101,339.66.

Because county governments bend over backward to avoid tax foreclosure auctions, the system can easily be abused by serial tax delinquents. A Bay Harbor Yacht Dock near Petoskey, owned personally by Strathmore’s president, has had annual tax delinquencies since 2006, always redeemed in time to keep the property from the sheriff’s gavel.

The attitude of city officials (and the developer) has persistently been, once taxes are finally paid, “what’s done is done” (or using the spin of certain former presidents caught figuratively or literally with their pants down, “it’s all in the past”). But risk assessment involves predicting future behavior from past behavior—this is why diligent bill payers worry about their credit scores any time they inadvertently forget—so the correct risk assessment perspective for a persistent pattern of property tax delinquencies and forfeitures is, “what’s done cannot be undone.”

In a sense, however, the tax delinquency/tax forfeiture-history risk assessment that taxes would probably not be paid reliably on a completed City Center II is “all in the past,” because it has been surpassed by the much bigger fear that the city will issue $34 million in bonds, and Strathmore will fail to complete City Center II, as due diligence now overwhelming predicts from the history of unfinished projects, foreclosures, write-offs by Loomis’ failed National City, etc., and the known and as yet undetermined debts.

IRS and State of Michigan Tax Liens

As reported in The State News on July 6, the IRS filed a personal income tax lien against Strathmore’s president, dated June 16, for $496,659.20 owed for 9 quarters, June 2007 through June 2009. Ex-City Manager Ted Staton’s comment that, “A careful review of the matter demonstrates that the amount of the tax lien is in dispute,” was arrogant and stupid even by his own inimitable standards for arrogance and stupidity, especially since the lien references a tax form used by the IRS after the amount owed has been appealed. The State News reporter was told that a State of Michigan income tax lien, dated March 14, 2010, for $107,540.19 owed in 2007 and 2008 taxes had already been paid, but the record shows a payment date several days after the interview.

What The State News failed to report was the State of Michigan tax liens on Strathmore Development Company and the IRS tax liens on Terra Management Company.

As of October 13, 2011, the State of Michigan has four outstanding tax liens against Strathmore Development Company for unpaid employee withholding taxes on file with the Ingham County Register of Deeds: $10,479.57 for April to June 2010; $3,502.11 for July and August; $7,077.98 for October and November; and $4,448.91 for December 2010 and January 2011. There is also a lien on record from the Michigan Department of Labor and Economic Growth for $4,315.85 in unpaid unemployment insurance from January to April 2010. The IRS tends to be slower than the state in filing tax liens, so it is certainly possible that a company that failed to pay about $25,000 in state employee withholding taxes between April 2010 and January 2011 also failed to pay Form 941 federal taxes for something on the order of ten times as much.

The IRS has three outstanding Form 941 tax liens against Terra Management Company, Inc. for a total of close to $900,000: $842,198.80 for December 2007 through June 2009; $43,683.19 for the quarter ending September 2009; and $2,812.46 for the quarter ending December 2009. (Form 941 combines withheld employees’ income taxes and withheld employee/employer Social Security and Medicare.) Previously, in August 2007, the IRS filed a tax lien against Terra Management for $56,038.15 on unpaid Form 941 taxes for the tax quarter ending March 31, 2007, which was discharged (marked as paid) on September 21, 2007.

The State of Michigan had withholding tax liens against Terra Management of $20,895.27 for March through August 2009 and $14,088.46 for September through December 2009. The latter, dated April 15, 2010, was released May 25, 2011, and the former, dated October 28, 2009, was released on June 20, 2011. Terra Management still has State of Michigan unemployment insurance tax liens for $3,101.98 from July 2007 through December 2008, $1,917.40 for July through September 2009, and $4,794.51 for April through June 2009.

There are signs that an attempt is being made to erase Terra Management Company, probably the principal business of Strathmore’s president since its incorporation in 1997. Terra Management left Suite 200 of The Pointe late in 2010, and the entire operation is now in the much, much smaller Suite 150, under the Strathmore name, with Terra Management boxes piled high, at least on last observation. (Strathmore did not previously have its own acknowledged office for which it paid rent or personal property taxes.) On March 5, 2010, the Assistant Treasurer of East Lansing swore out a Jeopardy Tax Assessment Affidavit against Terra Management for $4,206.56 in 2010 taxes on personal property valued at $66,000—a Jeopardy Tax Assessment Affidavit for personal property taxes is required by state law when seeking advanced payment if there is reason to fear taxes will not be paid and is usually only issued when there is likelihood forfeiture of property to pay off taxes will not be an option in the future (e.g., business closure). (Unlike another Jeopardy Tax Affidavit of the same time, this one was discussed with the City Manager, and includes no meaningful explanation, as required, on the document.) Based on the State of Michigan tax liens, it may be surmised payroll has shifted from Terra to Strathmore. Terra, which had not filed its required annual report with the Michigan Department of Licensing and Regulatory Affairs since May 2008, was automatically dissolved on July 15, 2011.

Terra’s Tax Troubles Are Strathmore’s Tax Troubles

None of this will allow Terra to escape from the nearly $900,000 in IRS tax liens, as if walking away from a limited liability company’s National City mortgage with nothing to lose but a property worth a fraction of the debt.

In its latest incarnation, Strathmore Development Company Michigan, and its Florida counterpart, are limited liability companies formed respectively in March and February 2007. From 2000-2007, Strathmore had been the assumed name of its president’s incorporated development company (founded in 1997).

According to a September 27, 2010, organizational chart provided for the failed Bear Creek Partners I Chapter 11 bankruptcy petition: both Strathmore Michigan and Strathmore Florida limited liability companies are 95% owned by Terra Holdings, LLC, of which Strathmore’s president is 90% owner (5 staff members each own 2%); the other 5% of the Strathmore LLCs are owned by a company (Covenant Investment Group, Inc.) belonging to his wife.

Despite interposing the Terra Holdings shell company, formed in October 2007, more than six months after the Strathmore LLCs, from the public record alone it is easy to trace everything to Terra Management. This means the IRS tax liens on Terra Management probably can and probably will be imposed on Strathmore Development Company Michigan and any assets it may have. Terra seeking Chapter 11 bankruptcy protection would, of course, mean a total halt until that was worked through, but given that debt likely vastly exceeds collateral, it is safe to predict this attempt at restructuring would be “doomed from the start.”

Comment

The citizens of East Lansing should never have been forced put up with this kind of mess. We should certainly not have to put up with city officials sneaking around behind closed doors negotiating $34 million in bonds for someone who gets into this kind of mess.

It has been a year and a half since City Center II was on the agenda of City Council, and that was to rubber stamp a site plan with no consideration whatever of financial issues.

Quite frankly, at this point, if the people of East Lansing end up with $2.5 million or so in annual cuts to public services to pay for a failed real estate speculation, it is our own fault for not demanding our elected officials act responsibly.