Peduto to investigate Cork Factory Lofts sale over tax avoidance
Pittsburgh officials say companies involved in the recent sale of heavily subsidized Strip District properties used a legal loophole to pay only a fraction of real estate transfer tax required from the sale.
Councilwoman Natalia Rudiak on Thursday called on Mayor Bill Peduto's administration to investigate the sale. Peduto said he would comply.
They said owners of the high-end Cork Factory Lofts and a nearby 427-vehicle parking garage that includes ground-floor retail space sold their holdings in May to GMH Capital Partners of Newtown for $20.5 million.
Rudiak and city Controller Michael Lamb, whose office is independently scrutinizing the sale, said the value of the properties was closer to $100 million.
Rudiak said more research on the exact nature of the loophole must be done, but the owners avoided paying more than $3 million in transfer tax to the city, Pittsburgh Public School District and the state, she estimated.
“What is particularly galling is that these developers all come to the taxing bodies, and they get huge subsidies and breaks in various forms, and then they turn around and they put the knife in our backs,” school district Solicitor Ira Weiss said.
The sellers were McCaffery Interests of Chicago and Mt. Lebanon businessman Charles Hammel of Pitt-Ohio Express.
They received $2.9 million in state grants, a $1 million low-interest loan from the Pittsburgh Urban Redevelopment Authority and a 10-year tax abatement to build the complex and garage in phases from 2006 to 2012, according to the URA.
Dan McCaffery, CEO of McCaffery Interests, said government officials should change the law if they aren't satisfied with it.
“It's another one of those instances where you do something that's perfectly legal and those in government have a different view,” said McCaffery, whose company is a front-runner in the bidding for redevelopment of the Strip's landmark Produce Terminal.
“I think if it's not something that should exist, they should go about changing it instead of complaining about it.”
Hammel and GMH could not be reached.
State Sen. Jim Ferlo, D-Highland Park, said the state Department of Revenue should challenge the sale.
“It's basically a scam,” Ferlo said, adding that he planned to look into the sale on his own.
Revenue Department spokeswoman Maia Warren said owners are required to report the fair market value of property being sold in a case like this. The department, she said, has authority to take enforcement actions, including a property reassessment, audit, lien or referral to a collection agency when fair market value is questioned.
Pittsburgh levies a 4 percent transfer tax on the sale of real estate. The city receives 2 percent, and the school district and state get 1 percent each.
Lamb said buyers and sellers typically split the total tax liability, which is $820,000 on a $20.5 million sale. The companies would have been liable for $4 million in taxes on a $100 million sale.
Downtown attorney Jonathan Kamin, who specializes in real estate tax law, said companies typically hide the true sale price of a property by paying the seller for things such as building equipment, which is not required to be reported as part of a real estate sale.
“It makes the transaction harder to value for real estate transfer tax purposes,” he said.
Ferlo sponsored legislation in 2012 that closed a loophole in the transfer tax law that permitted companies to avoid the tax by paying for properties over time. Peduto said that loophole cost Pittsburgh $10 million in lost revenue over several years.
In July 2013, lawmakers closed two more loopholes. One change blocks corporations from skirting transfer taxes by structuring deals using holding companies. A second change permits the state Revenue Department to tax a transaction when 90 percent or more of a property is transferred, regardless of whether the sale has a definitive closing date. Unless there was a date, no transfer tax had been required.
Peduto said the real losers are small taxpayers.
“Unfortunately, that gets paid by others who sell their homes or sell relatives' homes,” Peduto said. “They end up having to pay ... a higher percent because others are using loopholes.”
Bob Bauder is a staff writer for Trib Total Media. He can be reached at 412-765-2312 or email@example.com.