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Developers sweeten deal to get KOZ approval for Adelaide Mills

By Randy Kraft, WFMZ.com Reporter, RKraft@wfmz.com
Published On: Jul 25 2013 05:20:06 AM CDT
Adelaide Mill

Randy Kraft/69News

Former Adelaide Mill

ALLENTOWN, Pa. -

Developers are sweetening the deal to entice the Allentown School Board and Lehigh County commissioners to approve a Keystone Opportunity Zone (KOZ) designation so they can transform a large old factory into apartments in the city.

The school board is expected to consider the deal when it meets Thursday evening. The county commissioners learned about it Wednesday night, but won’t vote until Aug. 14.

The property is the Adelaide Mills building, which stands along Linden Street, between Race Street and Jordan Creek. The massive U-shaped structure is directly across Race from the Allentown Bus Terminal.

KOZ properties that are redeveloped do not have to pay any local or state taxes for up to 10 years. That gives developers a major financial incentive to invest in properties that otherwise might remain vacant and deteriorating.

For the Adelaide Mills property to become a KOZ, the city, county and school district must agree to give up all taxes from the property for a decade.

However, developer Borko Milosev is proposing “payment in lieu of taxes” agreements to both Allentown School District and Lehigh County.

He explained he will continue to pay the full real estate taxes the property now pays to ASD and the county during every year of the KOZ, plus an additional 10 percent.

“In this particular case, we lose nothing,” said county Commissioner David Jones. “The county, the taxpayer, loses nothing.”

Because the property is privately owned, it now generates a total of about $28,857 in annual tax revenue for the city, county and school district.

The county collects about $4,268 in annual real estate taxes, with the school district collecting an estimated $18,648, according to figures provided by city officials.

If the county and school district take Milosev’s deal, both will get 110 percent of those amounts each year for the life of the KOZ -- rather than zero.

For the county, that means $4,694 a year in “financial support payments.”

A 110 percent “payment in lieu of taxes” –PILOT – is allowed by the state legislation that created Pennsylvania’s Keystone Opportunity Zone program, said Todd Collins, Allentown’s business development manager.

All three local taxing bodies – the city, school district and county – must approve giving Adelaide Mills a KOZ designation.

Allentown City Council already did that on July 17, without any PILOT agreement.

The city gets $5,941 in annual real estate taxes from the property, but will get nothing for 10 years if the county and school district also approve the KOZ.

“The city has decided this project is important enough that there is no request for a PILOT,” said Collins. “We figured we should be leading the way in regard to this KOZ designation.”

Final KOZ approval comes from the state.

Transformation into an apartment complex?

Formerly the home of Phoenix Clothes, the Adelaide building’s address is 333 Court St.

It has 235,000 square feet of space but is vacant, deteriorated and blighted, according to city officials. Just bringing it up to the city’s code standards will require a significant investment, said Collins, who added the building also is in the Jordan Creek flood plain.

Milosev, who has an agreement to purchase the property, told county commissioners: “The current owners have no intent to do anything with it.”

Milosev’s partner in the project is Samuel Himmelrich, a Baltimore area developer.

They plan to turn 75 percent of the building into apartment units. Milosev said there will be 125-150 apartments. The other 25 percent of the space will be occupied by retail and commercial businesses frequented by the building’s tenants and the neighborhood. Milosev said that could include a grocery, a daycare center and a legal services office.

He said the apartment complex will have elevators, secure entrances, parking and perhaps even a swimming pool.

City officials have determined what Milosev proposes is the highest and best use for that property, said Collins.

Even if Adelaide gets a KOZ, the project’s plans must be approved by the city before it can be developed. The developers also will have to request rezoning. Officials said it currently is zoned for light industrial uses.

Commissioner Percy Dougherty said he has great difficulty with an industrial building being transformed into a residential building, especially if it will mean more children bringing more financial stress to the school district. “Not that I’m against kids,” he added.

Milosev said more than half the apartments will have only one bedroom. Collins argued that even with two-bedroom units in the complex, Adelaide Mills will not be a natural draw for families with school-age children.

Dougherty said he supports KOZs that will spur job-creating industrial activity.

But Commissioner Daniel McCarthy said the 19th-century building is not suitable for 21st -century manufacturing.

Adelaide Mills was built in 1881, according to a date on a peak of the four-story brick building.

Weighing the KOZ

Collecting the current property tax plus 10 percent for the next 10 years is far less than the county and school district would collect in increased taxes if the property could be redeveloped without a KOZ in less than 10 years.

“We do lose the potential gain on the value of the property,” said Commissioner Michael Schware.

But Jones countered it’s a gain that will never happen without KOZ.

Said Dougherty: “Some people have expressed to me that, with everything that’s going on in downtown Allentown, this site probably will be developed anyway without the KOZ.”

Collins said Adelaide is much larger than any other former mills that have been redeveloped in the city and is deteriorating more every year. “We’ve had other developers look at this site and walk away because of the hurdles that need to be addressed,” he said.

KOZ is “an inducement, an incentive” to potential buyers interested in redeveloping a property, said McCarthy.

Collins said the PILOT agreements with the county and school district will remain in effect even if Milosev and Himmelrich would sell the property to another developer after it wins the state’s KOZ designation.

Pennsylvania’s KOZ program is designed to improve long-neglected properties, create jobs and ultimately increase tax revenues, improving the financial health of the community.

Michael Hefele, Allentown’s planning director, said a KOZ designation ultimately results in a significant increase in taxes to the city, county and school district.

Collins estimated taxes could increase by 850 percent after Adelaide Mills would be redeveloped.

A second proposed KOZ

The former Allentown Metal Works, a second proposed Allentown KOZ at 606 S. 10th St., already has been approved by the school board and city council. The county commissioners also will vote on its KOZ status at their Aug. 14 meeting.

That site includes a number of empty factory buildings on more than 17 acres just above Little Lehigh Creek.

That property has been owned by the Allentown Commercial & Industrial Development Authority since April, which means it currently is generating no taxes. Unlike Adelaide Mills, the property will be marketed for another industrial use rather than residential.

ACIDA’s intent is to sell the property to a developer and get it back on the tax rolls, said Scott Unger, its executive director. He told commissioners no purchaser has been identified yet.

Unger said it’s too early to know if it will be a multi-lot or single-lot industrial development. But he stressed it will be used for manufacturing or some other industry, which could generate up to 300 jobs for city residents.

Unger said 15 environmental conditions, most typical of an old industrial site, must be “characterized and remediated.” He told commissioners that includes more than 300 drums of various chemicals, most of them related to painting.

He said that environmental clean-up could take up to 18 months. Until that is done, he said, it’s not a marketable property. “We’re going to put it into a condition that it will marketable.”

McCarthy said the property was a major manufacturing site for many decades. He said it originally was the site of Traylor Engineering, then Fuller Company.

“This is a very important property to be developed,” said Dougherty. “If it’s going to be industry, it is going to bring good paying jobs back to the Lehigh Valley. I’m totally in support of this.”

Last September, county commissioners rejected a KOZ designation for the same S. 10th Street property by a 6-2 vote. But then it was privately owned and that owner owed back taxes.

Said Dougherty: “It was before us one other time and we turned it down, because we thought people were lined up getting ready to buy it. But once the KOZ was not accepted by this board, any interest in that site went away.”

Commissioner Brad Osborne said approval of the S. 10th Street property will allow a property “not on the tax rolls today an opportunity to get on the tax rolls. And presumably, at the end of the 10 years, it’s rolling – we’ve got employment, we’ve got taxes that reflect the full value of that land.”