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St. Louis officials alleged Wednesday that a transaction between a property owner in the footprint of the National Geospatial-Intelligence Agency’s planned western headquarters and developer Paul McKee was designed to inflate sale values in a scheme to procure more state tax credits.

The allegations came out at a trial in St. Louis Circuit Court to decide a long-running challenge to the value of a property the city acquired by eminent domain as it was assembling land for the NGA’s future campus in north St. Louis.

Jim Osher, former owner of the Buster Brown shoe factory building at Jefferson and Cass avenues, has been fighting the city for two years over its acquisition of the property.

Osher pointed to a $3.75 million sale to McKee’s Northside Regeneration company in 2011 as evidence of the building’s value, which his attorney argued was now closer to $5 million. Osher had acquired the building at 1516 North Jefferson Avenue for about $200,000 in the 1990s.

The city’s Land Clearance for Redevelopment Authority, which acquired property for the NGA project, argued the value is closer to $573,000. A commission to decide value for eminent domain ended up paying a little more than $800,000 after it was acquired for the NGA project in 2016.

But Ryann Carmody, an attorney representing the LCRA, told the jury that the sale with McKee was not a sale at all. She argued in court that it was designed to trigger to McKee the state disbursement of distressed area land assemblage tax credits, a now defunct state program that McKee lawyer Steve Stone helped write.

“The higher the purchase price, obviously, the higher the tax credits McKee gets,” Carmody said.

McKee reaped over $40 million in tax credits from the program while it was operational earlier this decade. While other developers could qualify, McKee was the primary beneficiary as he assembled land for his touted Northside Regeneration project over the last decade.

Little work has been done except for construction that appears to have started this year on a gas station and grocery store near the Stan Musial Veterans Memorial Bridge. But McKee argues the NGA deal would not have happened if he hadn’t started assembling a large chunk of land in north St. Louis. He was the first to submit a proposal for the NGA to relocate from south St. Louis to the area, which LCRA director Otis Williams testified “got the ball started.” But the city ultimately took the reins of assembling the remaining land for the site and was forced to buy back land it had sold to McKee years earlier.

The land assemblage program allowed McKee to receive tax credits worth 50 percent of the value of purchases he made in the Northside footprint. It also disbursed credits to reimburse interest costs and brokerage fees.

Carmody presented emails in opening arguments illustrating negotiations between Osher and McKee for a 2011 sale of the Buster Brown building to McKee. She said no money changed hands and Osher seller-financed the property, asking only for half of the tax credits McKee received from the state.

At one point, McKee’s broker contacted Osher to raise the purchase price by several hundred thousand dollars.

“We, the buyer, are going to increase this purchase price,” she said, pointing the jury to an email from McKee affiliates.

Osher continued renting the building from McKee, but there was little demand for payment from either party in the interim — Osher for principal on his loan or McKee for rent, Carmody said.

“Paul’s never paid, Jim’s never paid Paul for rent,” Carmody said.

In 2015, as the NGA negotiations heated up for property in the area, Osher and McKee agreed to unwind the purported sale, giving it back to Osher.

McKee had reaped about $2 million in tax credits from the transaction, Carmody said. Osher got $591,000.

Osher’s lawyer, Tracy Gilroy, said the Buster Brown sales price was higher because of growing redevelopment momentum in the area and because it was a key corner in McKee’s redevelopment footprint.

“What a willing seller would sell this building for has everything to do with what that building can be,” she said.

Howard Smotkin, an attorney representing Northside Regeneration, called the Buster Brown property “a critical piece — a corner piece,” in an email to a reporter Wednesday seeking comment from McKee on the allegations.

“The allegation that the purchase price for the Buster Brown Building, or any other real estate acquired in North St. Louis by Northside Regeneration, was inflated for purposes of the Distressed Area Land Assemblage Tax Credits is not true,” Smotkin’s email continued. “With or without the tax credits, it was always in our financial interest to pay as little as possible. All purchases were the product of reasoned business decisions.”

According to Smotkin, Northside Regeneration contends it didn’t believe it overpaid for the property and that it was denied tax credits on the purchase “but paid Osher an initial installment of approximately $600,000.”

“We were severely criticized for quietly buying at more affordable prices before our activities were made public, and now we are being accused of overpaying following the announcement of our land assemblage activities,” he wrote.

The Post-Dispatch asked the Missouri Department of Economic Development, which administered the tax credit program, whether the tax credits were clawed back, but the department declined to comment.

By the end of the day, St. Louis Mayor Lyda Krewson had weighed in.

“I am shocked at these very serious allegations,” Krewson said in a tweet. “We are committed to investigating these claims thoroughly and taking appropriate action.”

The state senator who represents the area, Sen. Jamilah Nasheed, D-St. Louis, also criticized McKee, saying he “took tens of millions of dollars from taxpayers, and all St. Louis has to show for it are acres of mud.”

“I have no patience for developers pocketing millions from the state of Missouri through fraudulent tax credits,” Nasheed said in a tweet. “Paul McKee owes the people of Missouri an explanation, but first he owes them $40 million.”

The city’s attorneys also alluded to evidence of a similarly structured transaction between McKee and Osher to procure tax credits by inflating another building’s value.

That 2012 transaction was for a building on Magazine Street, west of the NGA area. There, Osher transferred a building he had bought a year earlier for $35,000 to McKee’s Northside for $2.94 million. Again, the city says it has evidence that tax credits were the only compensation paid and the sale was later “unwound,” according to court documents.

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