NTC's Arts Vision Threatened
The Naval Training Center arts district was supposed to be the second Balboa Park. But unforeseen property taxes have led to increased rents for many of the struggling arts organizations housed there.
Kelly Bennett is the arts editor for the Voice of San Diego. Her blog is called Behind the Scene.
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MAUREEN CAVANAUGH: I'm Maureen Cavanaugh, and you're listening to These Days on KPBS. It hadn't been easy being a nonprofit organization for the last few years. The great recession has squeezed many groups some right out of existence of that's why the vision of setting up the NTC foundation arts district at the old naval training center site has been so highly praised. It's provided a little shelter for the storm for the arts in San Diego, until recently. A complex funding maneuver has put several arts organizations on the hook for large property tax fees and rent increases they never expected. I'd like to introduce my guest to tell us more, Kelly Bennett is arts reporter with the VoiceofSanDiego.org. Kelly welcome back.
BENNET: Good morning, Maureen.
MAUREEN CAVANAUGH: What kind of fee and rent increases are we actually talking about for these arts organizations? Are they minor increases or significant?
BENNET: In some cases, they're pretty significant, a quarter of the rent, several hundred dollars and in the case of one of the organizations I talked to, more than a thousand dollars a month. And so if you think about just really any business or nonprofit to come up with that kind of money, unbudgeted, unexpected, it's a big burden, it's a big deal.
MAUREEN CAVANAUGH: Exactly. These increased fees to organizations we're talking like dance companies, other arts organizations are coming from the NTC foundation. Remind us why this foundation exists.
BENNET: The city got these 26 buildings in what's now called liberty station, the former naval training center. And decided to preserve those as an arts and culture district. To rehabilitate and manage those 26 buildings, this NTC foundation came into existence, and that's a nonprofit foundation, and they have been going for the last several years out to the market to get funding to actually fix up these crumbling barracks and make them habitable for arts organizations. And then also of the ones that have already been, you know, the ones that they've finished renovating, they have been the landlord for, like you said, dance company, water color society, a quilt museum, several artists' studios, a chocolate shop. So they have been finding tenants and trying to bring them into this district to really, in their language, make the next Balboa park.
MAUREEN CAVANAUGH: Right. So why is the NTC foundation increasing the rent on these organizations now?
BENNET: So they -- it last May started receiving what their CEO called a tsunami of property tax bills unexpectedly, going back several years of so we're talking not just current taxes but back taxes as well. Which, you know, come with penalties and interests and all sorts of extra payments and when they received those surprise bills, they went to the person sending the bills, which is the county assessor's office and said, hey, what's the deal here? We're a nonprofit. But because of some of the funding that they'd received, which is through these federal programs, tax credits, they'd actually gone into partnerships, for property partnerships, with different investors, and by doing that, by creating these for profit subsidiary companies to the nonprofit, they actually triggered property taxation, and the county assessor said, you know, you're a for profit, you're operating these buildings as a for profit because the -- the name on the lease, the title on these leases is a for profit company, and this far you can be taxed.
MAUREEN CAVANAUGH: Yeah, this is starting to sound very, very complicated. Can you tell us in some way that's a little stream lined how it -- why it would be that a nonprofit organization would have to become in some sense a for profit organization in order to get grants or --
BENNET: Right of it is kind of complicated. But if you think about this, these tax credit programs exist to encourage investment in historic properties and in low and moderate income properties of so the federal government says it's in our interest to see these historic assets preserved and to see investment in low and moderate income communities. In the case of NTC, the census tract that is liberty station, counted as one of those low and moderate income tracks, and then these buildings are certified as historic because it's the former naval training center. So the federal government says in order to encourage this investment, we'll forgive taxes or we'll give credits to the investors who would make investments there. Well, a nonprofit doesn't benefit from that because they're exempt from taxes. So in order to qualify for tax credits, they go into business, they essentially sell those tax credits to a for profit company that would want to make an investment and therefore see a reduction in their taxes. So they go into these limited partnerships for the sole reason of investing in these properties. And those for profit companies, a bank or an investment company or whatever benefits from the reduction in their tax liability over the next several years, and the NTC foundation benefits from the up front investment of cash to go and fix up these buildings. And so the NTC foundation says, basically, we've still been operating as a nonprofit, which is just a funding mechanism. These companies only exist for this very limited scope, this very limited purpose. And we shouldn't be penalized or we shouldn't be taxed for this, you know, in their mind, kind of in name only tax status. [CHECK].
MAUREEN CAVANAUGH: And we are talking about a complex funding maneuver that has landed several arts organizations at the former naval training center site with a large property tax fees and perhaps rent increases that they never expected. Now, that never expected part is what I'm gonna be asking you, Kelly, because I would imagine when they were putting together this financing that was gonna be allowing them to sell tax credits that thigh couldn't take as nonprofits, that they really didn't expect that this was gonna put their nonprofit property tax exemption, that it was gonna threaten that in any way.
BENNET: Absolutely. They went -- well, first of all, the city actually owns these buildings, the redevelopment agency, the city's redevelopment group actually owns these buildings, so first of all, government property, [CHECK] that's one exception. And then the other one is that they're this nonprofit. So they thought they were doubly protected from property taxes. And so when they were researching this, they said that these NTC foundation representatives told me that they went to the county assessor's office, that they asked about this eventuality. And the assessor [CHECK] and that's -- that just wasn't true. That eventually came back a few years later, and they did get those tax.
MAUREEN CAVANAUGH: And they did get the tax. Now, in mid-February, they went to the city with a pile of tax bills, an estimated 1.25 million through the end of 2011, and what did they ask about these tax bills and what happened?
BENNET: They essentially said, listen, we're working on your assets for you, we're a nonprofit, we set up this funding mechanism that doesn't affect our mission as a nonprofit, we didn't expect these taxes, we're trying to work things out with the county assessor, but meanwhile we've got [CHECK] we can't have all of these delinquencies on our record --
MAUREEN CAVANAUGH: Because they didn't get anymore investors or funding or anything in order to continue the refurbishment of these buildings right?
BENNET: Right. If you could about any kind of financial decision you make that puts you behind rate on your rent or late on your mortgage or something, that's a mark on your financial standing and it makes it difficult to borrow more money, and so in this case, they said we really need to come -- we need to be on solid financial footing to go forward here, can you -- can the city cover the buildings that have accrued to this point and through the end of December 2011, it's no more, the city basically committed to no more than $1.25 million coming out of redevelopment funds that would otherwise go, you know, still in that former naval training center redevelopment area, and the city did agree that cover those bills. They essentially, the NTC foundation essentially presented what we've just been talking about, this kind of complex maneuver that they went in to get these thousands of dollars in [CHECK] and the city said okay.
MAUREEN CAVANAUGH: Was there any sort of problem with the city as financially strapped as it is to take on this tax burden that wasn't expected from these buildings at NTC?
BENNET: You know, there certainly was some questioning about, hey, why is this our problem? And there is kind of I clear message from the NTC foundation, well, it's your problem because you own these buildings. And yes, it is embarrassing and we wish that I weren't with in this situation, but ultimately if we can't -- we don't have the money. The network TC foundation said we don't have the money to pay for this. Their funding comes in, and it's for very specific things of it's for rehabilitation or for construction or whatever. And they just said we can't cover it, and so if we can't cover it, Kevin faller in, councilman Kevin Faulkner asked the board chairman, [CHECK] what happened if the NTC foundation just doesn't pay? And they said we'll have to collapse the foundation, give the buildings back to the city, and then the city's on the hook for these bills anyway and potentially, up, foreclosures from the county, and all other sorts of repercussions that would come from these delinquencies of being allowed to continue. So the city was really between a rock and a hard place [CHECK] Trump card in this too. That the NTC foundation used which is this idea that they're creating the next Balboa park. So do you want to be the city council person who says we're not gonna --
MAUREEN CAVANAUGH: With this bold experiment, yet.
BENNET: Right. Exactly.
MAUREEN CAVANAUGH: Now, why if the city is covering the cost of these property taxes, why is NTC still saying that it's gonna be raising represents for these arts organizations?
BENNET: That's a really big piece of some of the stories that I've been looking at this week. The NTC foundation went just within days from getting their bill covered by the city to sending letters out to their tenants to ballet companies and to an arts organization that works with at risk kids and a nonprofit foundation that does work with kids with disabilities and said, okay, we've got this unexpected tax liability and you're going to have to start paying for it. In some cases, the organizations had clauses in their existing leases that said, you know, future taxes, there might be taxes some day in the future that you'd be responsible for. Of and in those cases, NTC foundation says you've gotta start paying in April. Of in other cases, where those taxes aren't included in the let's, it'll be included in the next lease, and that's -- these arts organizations will have to decide, can they honestly these increased payments for taxes. The interesting thing for me was that the bills are going to start in April for some of these groups, even though the NTC foundation has the bills covered through the end of December. And I was asking about that, because tax pills go between July and June. So, you know, six months of one year, and 6 months of the next year is what your property tax bills are contingent O. And it would seem that these bills could be halved by the fact that the city is paying for six months of 2011, and I asked the NTC foundation why they're charging the full amount to some of these groups, and they said it's because they need to -- they said that it was a decision to just charge the full amount anyway, even though the city had covered their full bill through the end of this year, and that they need to save up some money to make sure they are able to make their payment when their bill comes next February. So it was kind of a decision that is putting some of these arts groups in a bind.
MAUREEN CAVANAUGH: However, there is a ray of hope that may be taking place in Sacramento; is that right?
BENNET: Yeah, there are a couple of things, they're trying to -- the NTC foundation is still trying to work with the county assessor's office to say, hey, wait a minute, we shouldn't be taxed on this, or we shouldn't be taxed as much. So trying to get some kind of negotiation going about how much those bills should actually be for, and also they have gone to Christine Kehoe's office, state senator Christine Kehoe, and she's introduced legislation that would -- it's still in discussion up in Sacramento, but she's at least put the word out that she's interested in contemplating an exclusion for property taxes specifically for the NTC foundation. So the idea would be that because these are historic properties, because they're city owned and still run by a nonprofit, even though there are these for profit subsidiaries, that the NTC foundation would be exempt from those taxes, and that's similar to the way that it does work for an affordable housing developer or another nonprofit, specifically on housing that would benefit from exemptions even though they're running these for profit subsidiaries, so she's just kind of trying to widen that out. So it does appear currently in the language a very specific exemption for this particular case.
MAUREEN CAVANAUGH: Makes our taxes look easy. Kelly, I know you're gonna keep --
BENNET: I still haven't done mine though.
MAUREEN CAVANAUGH: I know that you're gonna keep covering this. Thanks for speaking to us about it today.
BENNET: Thanks for asking.
MAUREEN CAVANAUGH: I've been speaking with Kelly Bennett, arts reporter with the voiceofsandiego.org. If you would like to comment please go on KPBS.org/These Days. Coming up, the search for cures and treatment for rare diseases. That's as These Days continues here on KPBS.