French tax credit records raise red flags

Last week, IRS and FBI agents raided the Shockoe Slip office of developer Justin French, removing computers and boxes of paperwork.

Both agencies were tight-lipped about the reason for the raid, but Richmond BizSense has learned that over three years, French received an unusually large amount of tax credits for renovating historic buildings compared with what local developers typically reap on similar projects.

From 2007 through 2009, French projects received $18.8 million in state tax credits, according to a review of documents from the state Department of Historic Resources obtained by BizSense.

Developers are allowed to sell the state tax credits, and they often do so to large companies looking to reduce their state tax bills. French most recently was working with Markel Corp. as his tax credit purchaser until a feud between the two parties erupted. (You can read the original RBS story here. )

The DHR data show expense claims that are higher than normal, according to local contractors and developers. Several contractors said that the rehab costs reported by French are close to double the typical range.

For example, French received $179,183 in tax credits for a duplex at 3012 and 3014 Q St., in a run-down section of Church Hill. That means he claimed total expenses of about $718,000 (or $366 per square foot) to rehab the structures, which are assessed at $210,000 for the entire building.

“Those numbers seem extremely high. Something is not right there at all,” said Bill Pangburn, a renovator of historic homes in Church Hill. “I don’t know how in the hell you could spend $700,000. If that’s the case, someone is taking advantage of the system.”

David Gammino, a principal of contracting firm City & Guilds, said the reported costs are not close to the amount of construction he performed as general contractor.

“That is the first time I had ever heard of the costs that were certified to DHR. That is not consistent with the costs that were invoiced and paid for by French Consulting to City & Guilds for those projects,” Gammino said by phone.

Gammino said that he did not review any documentation used in the cost certification process that would have been submitted by French to DHR and that he was never contacted by DHR to verify any construction costs.

The sale of tax credits was a key piece of financing for French’s projects. It is important to note that the purchaser of the tax credits must also have a stake in the property’s ownership entity.

(The story continues after the slideshow of properties)

If you assume the Q Street duplex obtained state and federal tax credits (BizSense reviewed documents relating to state tax credits, but projects can qualify for a 20 percent credit on federal taxes), those could be sold for – at the high end – about 80 cents on the dollar. That would yield more than $250,000 in cash. If you deduct that from the claimed expenses of $718,000, it leaves almost $460,000 that French would have spent out of pocket on the duplex.

If he rented each unit for $1,000 a month, that would generate $24,000 a year in rental income. Ignoring expenses and real estate taxes, it would take 19 years to break even, an investment few would find appealing.

French also received tax credits totaling $807,000 for rehabilitation work on two adjacent Shockoe Slip properties, 1312 and 1314 E. Cary St. One of those buildings is French’s office. The state tax credit program allows developers to claim up to 25 percent of qualifying development costs, which generally include construction and certain professional fees. That means French claimed he spent $2.4 million fixing up the two buildings.

For the two Cary Street properties, that figure was $262 per square foot, based on the DHR numbers. Exactly how French could have spent that much renovating those two buildings is unclear, unless there were unusual consulting fees. There is no record of any building, mechanical, plumbing or electrical permits being applied for on either of those properties since French bought them, which suggests he did few major renovations.

Despite the lack of permits, Kelly Justice, the owner of the Fountain Bookstore and tenant on the first floor of 1312 E. Cary St., said that when French took over the building, he rewired it and replaced the HVAC system. She said French also knocked out the walls on the second and third floors to connect the building to his office next door.

One aspect that complicates analysis of his projects and might have befuddled officials is that French is often a partner in the firms involved in the subcontracting work, such as consulting and construction. It’s not clear what is a reasonable fee or markup to charge for a subcontractor involved in historic rehab, how French might have benefited from those relationships or whether French was claiming expenses related to consulting work performed by his company, French Consulting.

French could not be reached for comment and was not at his office Wednesday.

Not all expenses that qualify for tax credits would require building permits. Other qualifying expenses could have included renovation costs such as windows, custom cabinets and light fixtures, and included costs such as fees from architects and engineers.

However, local builders and developers said it’s unlikely that those fees would come close to the figures claimed by French.

That might have raised red flags with government officials. The DHR refused to grant a Freedom of Information Act request by BizSense for French’s tax credit applications, citing a section of the state code that refers to criminal investigations.

Kathleen Kilpatrick, director of DHR, declined to go into detail about why French is being scrutinized by federal authorities.

She did confirm that the department has been cooperating with federal authorities and that several of French’s pending applications are in limbo.

“From our point of view, any attempt to abuse the system would be taken very seriously,” Kilpatrick said.

“I am honestly grateful for the work that has been done by hundreds of excellent developers and investors. I don’t want to see their work, or that of their investors, tarnished by bad actors,” Kilpatrick said.

This story was updated at 11:45 AM. A previous version did not mention that tax credit investors must also be members of the property’s ownership entity.

Below is a list of state tax credits granted to French properties in 2007, 2008 and 2009.

2009

1620 Altamont Ave. (apartment conversion)
Tax credit awarded: $1.79 million
Qualified expenses needed: $7.19 million
2010 assessment: $4 million

330 Oak Lane (private residence)
Tax credit awarded: $433,080.75
Qualified expenses needed: $1.7 million
2010 city assessment: $2 million

1312 E. Cary St. (commercial building)
Tax credit awarded: $362,381.25
Qualified expenses needed: $1.44 million
2010 city assessment: $340,000

2008

2601 Floyd Ave. (commercial building)
Tax credit awarded: $439,758.75
Qualified expenses needed: $1.75 million
2010 city assessment: $690,000

3012-3014 Q St. (duplex)
Tax credit awarded: $179,570.75
Qualified expenses needed: $718,183
2010 city assessment: $210,000

3122 W. Clay St. (commercial building)
Tax credit awarded: $463,328.50
Qualified expenses needed: $1.85 million
2010 city assessment: $789,000

1509 Belleville St. (Commercial building)
Tax credit awarded: $392,875.75
Qualified expenses needed: $1.57 million
2010 city assessment: $674,000

2007

1314 E. Cary St. (office of French Consulting LLC)
Tax credit awarded: $445,390
Qualified expenses needed: $1.78 million
2010 city assessment: $402,000

Al Harris is a BizSense reporter. Reporter Michael Schwartz and editor Aaron Kremer contributed to this report. Please send news tips to Al@richmondbizsense.com.

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