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Matt D’Arrigo surveyed a couple of dozen former buildings in the former Naval Training Center in 2004, and believed.
“I was taking tours here when it was just a mud pit. All these buildings were crumbling and vacant and in disrepair,” said D’Arrigo, a nonprofit leader.
D’Arrigo participated in conversations and committees for three years, helping to plot the arts and culture focus in 26 buildings of the former Naval Training Center in Point Loma and dreaming of a time when the region’s arts groups would all be neighbors.
D’Arrigo’s organization, ARTS: A Reason To Survive, gives art training and classes to at-risk kids. It was one of the first tenants to sign a lease, moving in back in 2007.
“I loved the vision of it,” he said. “I still do.”
But D’Arrigo just found out that being part of that vision will cost his organization an extra $1,200 a month in property taxes starting next January — a significant bump to his $6,200 rent.
For some of D’Arrigo’s neighbors, the increase goes into effect even sooner. A nonprofit group that trains organizations on including kids with disabilities found out two weeks ago it’ll have to come up with an extra $550 a month — starting April 1.
The increases came because of some unexpected property tax bills received by the NTC Foundation, the nonprofit foundation charged with managing and rehabilitating those buildings on behalf of the city, which still owns the buildings.
The property taxes apply because the foundation formed for-profit sub-companies to qualify for certain funding. Faced with what its CEO called a “tsunami” of current taxes, back taxes and penalties, the NTC Foundation recently convinced the city of San Diego to pay more than $1 million to cover the bills.
But going forward, those taxes — byproducts of that decision to form for-profits — could price out the very organizations these buildings were rehabilitated to house. A letter the NTC Foundation wrote the James Irvine Foundation seeking funding in 2005 pledged that the new arts district, NTC Promenade, would give nonprofit resident groups “cost-effective facilities and services in a magnificent setting — a real ‘home’ many of them have not been able to afford in the past.”
Several of them say they aren’t going to be able to afford this home for much longer.
The group that has to come up with a sudden extra $550 — about one-quarter of its monthly rent — is Kids Included Together, a nonprofit training and education organization working to provide learning opportunities for kids with and without disabilities.
“This isn’t the least expensive place for nonprofits to be anymore,” said Jan Giacinti, CEO of Kids Included Together.
The city is covering the property taxes through the end of this year. But that hasn’t stopped the NTC Foundation from beginning to charge some organizations the full monthly tax payments — even before the city’s help expires.
The NTC Foundation’s executive director, Alan Ziter, said that’s because the foundation needs to make sure it has enough in its coffers to pay next spring’s property tax bill.
“That was the decision of the CEO and the finance committee to start collecting the full amount so that we wouldn’t have any payments that wouldn’t have been able to be made,” Ziter said.
D’Arrigo and Giacinti are proud pioneers in the city’s new arts and culture district, whose denizens include a watercolor society, several dance troupes, individual artist studios and a gourmet chocolate shop. But they say this tax bill could be the last straw for them and some of their neighbors. Nonprofit leaders are used to believing in a mission even when times are rocky. But ultimately, the historic and cultural revitalization of the district is not their bottom line. They have their own missions to accomplish.
“There’s definitely a lot of positive things,” D’Arrigo said of the district. “But if I can save X amount of dollars and put it into reaching more kids, I’d do that in a heartbeat.”
On Feb. 15, the NTC Foundation went to the city with its pile of tax bills, an estimated $1.25 million through the end of 2011, and asked for help.
“If the NTC Foundation is not able to make these payments, what would happen?” Councilman Kevin Faulconer asked.
“I think under the circumstances we’d have to turn the property back over to the city of San Diego and collapse the foundation,” said Richard Ledford, chairman of the foundation’s board.
“And the foundation primarily exists to …” Faulconer continued.
“The foundation is here to provide the service to the community,” Ledford said. “At your direction, we are creating the next Balboa Park.”
The City Council voted to pay for the current and back taxes, and all outstanding penalties and fees the foundation incurred. The foundation committed to trying to negotiate lower tax bills with the County Assessor’s Office and to paying whatever the costs will be in 2012.
That a landlord could be surprised by something as ubiquitous as property taxes speaks to the complicated way the district is set up. The city owns the 26 buildings, and has leased them for 55 years to the NTC Foundation, a nonprofit set up to manage and rehabilitate the arts and culture district. Neither the city nor the foundation is used to paying property tax bills — government properties and nonprofits are exempt.
But in order to get certain types of funding to rehab the buildings in the first place, the foundation formed subsidiary, for-profit companies to hold the leases.
In the first phase — rehabilitation of seven buildings — the foundation pulled in $12 million through federal tax credit programs — funding “that would otherwise have never happened,” foundation CEO Pam Hamilton Lester said in the Feb. 15 meeting. For the second phase, which would rehabilitate eight more buildings, the foundation has another $11 million in funding from the federal tax credits.
“We don’t know where else to fill that gap,” Lester said.
But setting up those for-profit companies meant that the buildings were no longer exempt from property tax bills, according to the County Assessor’s Office. Last May, the NTC Foundation started receiving bills for current taxes and penalties for unpaid taxes in previous years. Ziter said when the foundation formed the for-profits, they contacted the County Assessor’s Office and were told that because the city owned the property, they wouldn’t have to pay taxes.
The foundation is appealing the bills and says it hopes some of the money could be returned. But it said it needed the city to pay the bills so it could go forward with a clean record to the next phase of construction and fund-gathering. So it asked the city, the buildings’ owner, to step in.
Starting on good financial standing for that next phase of development may not be all the foundation has to worry about.
Days after it got the bills covered by the city, the foundation sent letters to its tenants notifying them that their rents would go up to cover property taxes. Tenants are scrambling to determine how to move forward — or to move out.
“When I got that letter, it was another unfortunate sign that maybe our time here is limited,” D’Arrigo said.
The groups that are still under original leases don’t have to pay any property taxes yet, because their contracts didn’t say anything about it. But other groups that have renewed or signed new leases recently do have a mention of “future taxes” that they might be on the hook for in their contracts.
“That’s language that should’ve been in there from the beginning and it wasn’t,” Ziter said.
But when Giacinti’s group renewed its lease, which went into effect in December, Giacinti didn’t realize that the foundation had added the tax mention. She said NTC Foundation officials didn’t draw the inclusion to her attention. So the approximately $550 additional monthly payment came as a shock.
“It was for us to discover within the lease, buried in there somewhere,” she said. “This hit us like a ton of bricks because they said the language is in there.”
D’Arrigo’s ARTS wouldn’t be on the hook for the $1,200 tax payments until January 2012, and only then if it renews its lease, which is also due to increase from its current $6,200 monthly.
“If I’m running a responsible nonprofit, it’s tough for me for rents to increase,” D’Arrigo said. “Even before the tax letter, we’re looking. There is other property out there that is much less than here.”
One of the most frequently touted successes in the arts districts is Dance Place San Diego, which houses Jean Isaacs San Diego Dance Theater, Malashock Dance and San Diego Ballet.
Isaacs said the dance groups don’t know yet how much the property tax issue will affect their next lease negotiation, which will happen this year. Like ARTS, Dance Place’s original lease didn’t mention anything about property tax, so the dance companies didn’t get letters charging higher rents in April. She didn’t know until an interview for this story how significant the additional payments are for some of the other tenant groups.
“That’s not going to work,” she said. “That would totally price us out.”
Ziter said this issue has been difficult for the foundation.
“We held off for the latest possible moment to send this off to the resident groups because we know it’s difficult for them to make their rent payments,” he said. “We want to see them put their rent money into their programming.”
The foundation is working to try to lessen the current bills and maybe even avoid future payments altogether. It got State Sen. Christine Kehoe to introduce a bill on Feb. 18 that would specifically exempt the NTC historic properties from property taxes. That bill won’t be acted on until at least March 22.
And the foundation is also appealing the county’s tax bills. In the meeting, Ledford told the city he was “fairly confident” the assessor would work with them, because about three-quarters of the space is occupied by nonprofits. But when the assessor is deciding how much a building is worth, and therefore what it should be taxed on, it doesn’t contemplate whether its occupants are for-profit or nonprofit.
“We assess the same market value regardless of who’s using it — its highest and best use,” said Jeff Olson, division chief for assessment services at the Assessor’s Office.