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McKee's Bottle District deals generated millions in tax credits, but no development

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McKee's Bottle District deals generated millions in tax credits, but no development
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ST. LOUIS • In May, during a trial to determine the value of a north St. Louis building acquired through eminent domain, lawyers for the city pointed to unusual real-estate transactions involving developer Paul McKee.

Those transactions — between McKee and the owner of the now-razed Buster Brown building and the owners of the Pierce-Elkay building on North 15th Street — were shams, the city claimed. They were designed to maximize the amount of Distressed Area Land Assemblage, or DALA, tax credits McKee could claim from the state by inflating property values, city lawyers alleged, and conducted without any cash changing hands by using seller-financing, or IOUs, from McKee.

After those revelations, Mayor Lyda Krewson said she was “shocked” and called for an investigation. The Missouri Department of Economic Development, or DED, said it was “very concerned” about the issues raised at trial. And Missouri Attorney General Josh Hawley filed suit to recover some of the tax credits issued on Pierce-Elkay.

In June, a few weeks after the trial, the city declared NorthSide Regeneration — the company McKee created to redevelop a large swath of north St. Louis — in default of its redevelopment agreement, a matter now being contested in court.

But there’s another, far larger deal that shares key similarities with the Buster Brown and Pierce-Elkay transactions.

A Post-Dispatch examination of city real estate records and Missouri DED documents has raised new questions about McKee’s 2011 and 2012 purchase of the Bottle District from companies connected to people at big construction and development firms Clayco and CRG Real Estate Solutions.

Those records, some obtained through a Sunshine Law request, show McKee acquired title to several properties in the Bottle District, a long-vacant 17-acre piece of ground immediately north of the Dome at America’s Center, in a similar way to the transactions now under scrutiny.

Among key findings:

• McKee provided promissory notes in 2011 and 2012 totaling $16.425 million to Bottle District Investors LLC and Bottle District Historic LLC, companies that at the time listed Claycorp as manager and CRG-Services as manager. Larry Chapman, partner with CRG Real Estate Solutions, signs on behalf of the sellers. The property was transferred to NorthSide Regeneration without McKee putting any cash down.

• The amount NorthSide said it paid for the Bottle District was 70 percent more than what the Claycorp- and CRG-managed companies reported as the combined sales price for the properties in 2007 certificates of value. Under the DALA program, the state reimbursed NorthSide for half of the value of real estate purchases, so the higher the price, the more credits issued.

Bottle district map

• NorthSide’s first payment on the 2011 Bottle District note came nearly a year after it was issued and was made the same day NorthSide sold $6 million in state tax credits issued for the Bottle District to a Chesterfield tax credit dealer.

More than $9 million in tax credits were issued based on the Bottle District deal, representing more than 20 percent of the $43 million McKee would ultimately tap from the DALA program before it ended in 2013. In addition to sales prices, the credits issued were also based on interest payments, which DALA reimbursed in full, and over $500,000 in brokerage fees paid to Claycorp and CRG partner Chapman’s Chapman Ventures, which the program reimbursed at 50 percent.

• As of 2018, some six years after NorthSide acquired the Bottle District, no development has occurred.

In an emailed response to questions from the Post-Dispatch, Chapman said “our intention has always been to develop this unique property.” Including professional fees, maintenance, insurance, taxes and other costs, Bottle District Investors has put $15 million into the property while Bottle District Historic invested $6 million over the years, Chapman said in a statement.

Prime Bottle District property remains dormant after tax credits

The Dome at America's Center stands in the background of the vacant semi paved lots north of the stadium on Wednesday, Aug. 1, 2018, in the area known as the Bottle District in downtown St. Louis. Photo by Christian Gooden,

“Additionally, efforts were made and costs incurred to attract Brown Shoe and Caterpillar, followed by a collaboration with the City, first on NFL Stadium expansion and the new stadium, including parking, and amenities. ... We are currently participating in the pursuit of two potential development opportunities, and are searching for ways to help those opportunities succeed,” Chapman wrote.

A statement from Stone Leyton & Gershman attorney Lynn Carey, in response to questions sent to the firm as lawyers for McKee, said attorneys at the firm had reviewed Chapman’s statements and concurred.

“Larry and NorthSide share a keen interest in creating future development opportunities at the property — such development would enhance the sellers’ security, and would create brokerage, development and construction opportunities of interest to Larry, Clayco and related parties,” he wrote.

‘It just seemed fanciful’

The main difference between the Bottle District and the Buster Brown and Pierce-Elkay transactions that have come under scrutiny is that McKee’s NorthSide still holds title to the Bottle District property. City lawyers and the attorney general’s office have based some of their claims of improper transactions on tax credits issued for a property transfer that was later “unwound” when NorthSide deeded the property back to the original owner.

Historic Brown Shoe Co. Building Coming Down

Demolition continues on the former Buster Brown Blue Ribbon Shoe Factory on Wednesday, Aug. 2, 2017, at the corner of Cass and Jefferson Avenues. The building is in the footprint of the future National Geospatial-Intelligence Agency. The building was constructed around 1900 when St. Louis was one of the nation's largest shoe manufacturing cities. Photo by J.B. Forbes,

McKee’s lawyers at Stone Leyton & Gershman, the firm that has long represented McKee and whose partner, Steve Stone, is credited for helping write the 2007 state DALA legislation, have said seller-financed transfers were appropriate under the tax credit law.

Yet the notes issued by the Claycorp and CRG-affiliated companies have passed their original maturities, which came in late 2016 and 2017. The companies still hold liens on the Bottle District.

“NorthSide Regeneration is in compliance with our agreements,” Chapman’s statement said. “There are no plans to take the property back. Our sole emphasis is finding a way to develop or sell the property so development occurs.”

As for not putting any cash down when part of the Bottle District was transferred?

“It is not uncommon for real estate developers to borrow 100 percent of the cost to buy and build a development whenever able to do so,” Chapman wrote.

Chapman, who signed the deeds and seller-financing statements transferring the Bottle District property, was a longtime associate of McKee. He, Clayco and McKee’s former company, McEagle, partnered on the NorthPark development near St. Louis Lambert International Airport.

Also, unlike the Buster Brown and Pierce-Elkay deals, the Bottle District transactions involved a partner — Chapman — at a high-profile St. Louis developer that works closely with influential construction firm Clayco. He and the firm have given thousands of dollars over the years to various politicians. Chapman, for instance, gave $10,000 to then-Gov. Jay Nixon in 2011 and $5,000 to then-Mayor Francis Slay that year. Clayco gave $6,500 to Nixon and $10,000 to Slay in 2011, plus thousands more in the ensuing years.

The city’s Board of Aldermen passed special legislation in 2011 and 2012 to expand NorthSide’s development footprint, making the Bottle District eligible for the distressed area tax credits.

At the time, McKee and Chapman touted a $190 million development of shops, homes and offices.

Prime Bottle District property remains dormant after tax credits

The iconic Vess soda bottle replica stands amid the vacant semi paved lots north of the Dome at America's Center on Wednesday, Aug. 1, 2018, in the area known as the Bottle District in downtown St. Louis. Photo by Christian Gooden,

Alderman Scott Ogilvie was one of the people back then questioning whether the whole deal was just a means to obtain more state tax credits. In an interview Wednesday, Ogilvie called the Bottle District transactions “more evidence that McKee was using the tax credit program as a bank rather than as a means to develop anything.

“When they presented that, they had so much less information than a typical development would have, particularly one of that size,” Ogilvie recalled. “Even at the time, to me, it just seemed fanciful. So it’s not surprising in retrospect that there was not really a real intention to develop that site at the time.”

Tallying the costs

McKee and Chapman’s first request for state tax credits based on the Bottle District transfer, in 2011, was initially rebuffed by DED officials. Attorney Paul Puricelli of Stone Leyton & Gershman in January 2012 emailed Chris Pieper, the soon-to-be acting director of DED who would later go on to become Nixon’s chief of staff.

“This will follow up on Larry Chapman’s voicemail message to you,” Puricelli wrote, copying Steve Stone and Chapman on the email. “We would like to schedule a time to discuss the application for land assemblage tax credits associated with the NorthSide/Bottle District project.”

Puricelli later sent a memo to a DED attorney outlining why the firm believed the Bottle District transfer should qualify for the tax credits.

But the department didn’t relent. Despite 2011 legislation from the Board of Aldermen granting Bottle District’s development rights to NorthSide, Chapman and McKee had to come back to aldermen in 2012 to get the area formally added to the footprint of McKee’s NorthSide Regeneration.

That move was initially blocked by Alderman Freeman Bosley Sr. But a week later, after Bosley said he had a discussion with McKee about the project, he reversed course and helped guide the measure to passage.

A few days later, the DED emailed Chapman about the Bottle District transaction.

“We understand that the St. Louis Board of Alderman have approved the bill to combine the Bottle District TIF with the NorthSide TIF Redevelopment Plan,” Mark Pauley, a DED employee who served as a contact for much of the DALA tax credit submissions, wrote to Chapman in November 2012, copying Pieper and other top DED officials. “In light of this we are in the process of reviewing the NorthSide Regeneration LLC application that was submitted November 15, 2011 and subsequent documentation pertaining to the Bottle District that was submitted in December 2011.”

Larry Chapman

Larry Chapman, a principal with the real estate development team CRG, a subsidiary of Clayco construction firm.

The seller-financed, $12 million sale of much of the Bottle District site from 2011 then triggered $6 million in distressed area tax credits.

A 2007 certificate of value filed with the city showed that Bottle District Investors purchased that land for $6.63 million. It acquired the land from a company connected to Dan McGuire, who first touted the Bottle District development in 2004 but made little progress.

Chapman said a certificate of value doesn’t include costs such as bank fees, insurance, or planning and design.

“A certificate of value is not an appraisal, but a public disclosure that only reports the amount of the cash paid for the property at the time it was originally acquired,” he wrote.

He also referenced a $2.87 million jury award in 2008 for a portion of the Bottle District that the city acquired via eminent domain in 2005, prior to Clayco and Chapman’s involvement in the property. Chapman said the $12 million McKee referenced for the Bottle District acquisition is actually 20 percent lower than if the square foot price of that jury verdict had been applied to the remaining parcels.

An eminent domain commission in March 2005 had initially pegged the land’s value at $1.26 million, up from the $523,000 the city first offered the former landowner.

Claycorp and Chapman’s company Chapman Ventures also charged $150,000 each in brokerage fees to NorthSide Regeneration, costs that were eligible for a 50 percent tax credit. A $240,000 interest payment was also made on the loan the Chapman companies had advanced. Interest costs were eligible for DALA tax credits worth 100 percent of their value.

Prime Bottle District property remains dormant after tax credits

A resident of the Collins Terrace Apartments who did not wish to be identified speaks on the phone on Wednesday, Aug. 1, 2018, the balcony of her unit, which is adjacent trash strewn onto the vacant semi paved lots north of the Dome at America's Center in the area known as the Bottle District in downtown St. Louis. Photo by Christian Gooden,

That $240,000 interest payment was made on Dec. 21, 2012, the day NorthSide and Carr Square Tenant Corp. sold the $6 million in tax credits issued for the Bottle District sale. Carr Square is a nonprofit controlled by the politically influential family of Rodney Hubbard Sr., whose son, Rodney Jr., helped steer the DALA program through the Legislature in 2007.

Despite a McKee-signed affidavit submitted to the state pledging to use his tax credit revenues to develop the Bottle District property, most of the initial round of credits issued for the Bottle District transaction appears to have gone back to Bottle District Investors.

The Bottle District note says Bottle District Investors, which Chapman signs for, is due 80 percent of the proceeds of a “revenue event,” which it describes as something other than the sale of the property.

DED documents indicate that the payments on the $12 million Bottle District transaction matched 80 percent of the value of state tax credits McKee and Carr Square sold to Lisart Capital, a Chesterfield tax credit dealer.

The sale of the $6 million in state tax credits by McKee and Carr Square yielded $5.46 million, according to DED records. In the weeks following the tax credit issue, an invoice for the Bottle District Investors loan references a $3.828 million payment. Add that payment to the $240,000 interest payment and $300,000 in broker fees and you get $4.368 million — 80 percent of the $5.46 million the tax credits were sold for.

Chapman’s response said the 80 percent Bottle District Investors took is “consistent with the purpose of all tax credits.”

“All of the tax credits received by Bottle District Investors and Bottle District Historic were used to repay bank debt to be sure tax credits were used to reduce cost and make the development more feasible,” he wrote.

In November 2012, after aldermen approved its addition to NorthSide, the other portion of the Bottle District would be sold in another seller-financed transaction.

That $4.425 million sale in late 2012 triggered another $2.2 million in tax credits issued by the state in early 2013.

That price was up from the $3 million price tag Bottle District Historic listed for the parcels in a certificate of value when it purchased them in 2007.

Claycorp and Chapman Ventures would charge a combined $221,000 in brokerage fees on the sale of the remaining Bottle District parcels, for which another $110,000 in tax credits would be issued. Through August, when the program expired, the state would issue another $300,000 in tax credits to reimburse the interest on the Bottle District notes.

By 2014, Royal Banks of Missouri, which had lent money to the Claycorp- and CRG-affiliated companies for their purchase of part of the Bottle District, would release its lien on part of the Bottle District property.

The DALA program has often been derided as a tax credit law for one man, McKee, who would use his NorthSide Regeneration to tap almost all of the $47 million in tax credits it ultimately issued.

But there were indeed others who benefited.

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