William Paladino and his partners had been looking forward to making a big change at the former site of George’s Produce Market in Williamsville.
![Ellicott Development project at 5226 and 5228 Main St.](https://bloximages.chicago2.vip.townnews.com/buffalonews.com/content/tncms/assets/v3/editorial/5/5d/55ddc0c2-9998-5113-84f8-8950ed83a94e/6616da353ef0e.image.jpg?resize=150%2C100 150w, https://bloximages.chicago2.vip.townnews.com/buffalonews.com/content/tncms/assets/v3/editorial/5/5d/55ddc0c2-9998-5113-84f8-8950ed83a94e/6616da353ef0e.image.jpg?resize=200%2C133 200w, https://bloximages.chicago2.vip.townnews.com/buffalonews.com/content/tncms/assets/v3/editorial/5/5d/55ddc0c2-9998-5113-84f8-8950ed83a94e/6616da353ef0e.image.jpg?resize=225%2C150 225w, https://bloximages.chicago2.vip.townnews.com/buffalonews.com/content/tncms/assets/v3/editorial/5/5d/55ddc0c2-9998-5113-84f8-8950ed83a94e/6616da353ef0e.image.jpg?resize=300%2C200 300w, https://bloximages.chicago2.vip.townnews.com/buffalonews.com/content/tncms/assets/v3/editorial/5/5d/55ddc0c2-9998-5113-84f8-8950ed83a94e/6616da353ef0e.image.jpg?resize=400%2C267 400w, https://bloximages.chicago2.vip.townnews.com/buffalonews.com/content/tncms/assets/v3/editorial/5/5d/55ddc0c2-9998-5113-84f8-8950ed83a94e/6616da353ef0e.image.jpg?resize=540%2C360 540w, https://bloximages.chicago2.vip.townnews.com/buffalonews.com/content/tncms/assets/v3/editorial/5/5d/55ddc0c2-9998-5113-84f8-8950ed83a94e/6616da353ef0e.image.jpg?resize=640%2C427 640w, https://bloximages.chicago2.vip.townnews.com/buffalonews.com/content/tncms/assets/v3/editorial/5/5d/55ddc0c2-9998-5113-84f8-8950ed83a94e/6616da353ef0e.image.jpg?resize=750%2C500 750w, https://bloximages.chicago2.vip.townnews.com/buffalonews.com/content/tncms/assets/v3/editorial/5/5d/55ddc0c2-9998-5113-84f8-8950ed83a94e/6616da353ef0e.image.jpg?resize=990%2C660 990w, https://bloximages.chicago2.vip.townnews.com/buffalonews.com/content/tncms/assets/v3/editorial/5/5d/55ddc0c2-9998-5113-84f8-8950ed83a94e/6616da353ef0e.image.jpg?resize=1035%2C690 1035w, https://bloximages.chicago2.vip.townnews.com/buffalonews.com/content/tncms/assets/v3/editorial/5/5d/55ddc0c2-9998-5113-84f8-8950ed83a94e/6616da353ef0e.image.jpg?resize=1200%2C800 1200w, https://bloximages.chicago2.vip.townnews.com/buffalonews.com/content/tncms/assets/v3/editorial/5/5d/55ddc0c2-9998-5113-84f8-8950ed83a94e/6616da353ef0e.image.jpg?resize=1333%2C888 1333w, https://bloximages.chicago2.vip.townnews.com/buffalonews.com/content/tncms/assets/v3/editorial/5/5d/55ddc0c2-9998-5113-84f8-8950ed83a94e/6616da353ef0e.image.jpg?resize=1476%2C984 1476w, https://bloximages.chicago2.vip.townnews.com/buffalonews.com/content/tncms/assets/v3/editorial/5/5d/55ddc0c2-9998-5113-84f8-8950ed83a94e/6616da353ef0e.image.jpg?resize=1763%2C1175 2008w)
Ellicott Development is seeking $1.34 million in tax breaks to put up a four-story building, including six “workforce housing” apartments, at 5226-5228 Main St., the former site of George’s Produce Market.
The CEO of Ellicott Development Co. had acquired the deep and narrow property on Main Street seven years ago, after the Pope family – which had been selling fruits and vegetables there from local farmers for almost 60 years – decided it was time to move because of rising property values and taxes.
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Paladino had held onto it through the pandemic, then unveiled plans a year ago to demolish two remaining houses on the site and construct a four-story building in their place, with 30 mostly market-rate apartments, plus retail space and a restaurant. He even got the property rezoned and won municipal approvals. He brought in his partners, Castle & Mosey. And he was just granted $1.9 million in tax breaks by the Amherst Industrial Development Agency.
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But now, Paladino isn’t sure he can go forward with the project at 5226-5228 Main St., because the numbers behind the development just don’t add up.
Rising construction and labor costs already made the upfront investment expensive. But while the proposed rents are consistent with local norms, and would generate significant revenue, that would now be eaten up by the higher financing payments after the steep jump in mortgage rates, according to a report by an independent firm analyzing the project.
The project’s shaky financials, detailed in the consultant report, provide insight into the impact that the surge in construction costs and the doubling of mortgage rates have had on development projects.
Even with the sizable jump in average rents over the last few years, in many cases, that’s not enough to offset the increases in other costs.
And it’s led to delays in several projects, from Paladino’s Williamsville venture to Douglas Jemal’s Statler rehab to various plans by Ciminelli Real Estate Corp.
“The numbers are just astronomical, like we’ve never seen before,” Paladino said. “If the numbers come down in terms of project costs, and we can get an interest rate cut a point or two lower, that’s going to help us make sense of the project.”
Even with a generous set of tax breaks that he just obtained from the Amherst IDA, the project will just barely yield any cash at all in the first few years, and only around $85,000 annually after 10 years – significantly below the standard rate of return for the market, according to the report by the independent firm, Camoin Associates. And he and his partners won’t recoup their investment for more than a decade.
“We have not committed to this project,” Paladino said. “The numbers we have seen on this, you can’t build it.”
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A view of the Ellicott Development project at 5226 and 5228 Main St. in Williamsville, April 10, 2024.
A struggle for all
Paladino’s uncertainty illustrates the problem facing all real estate developers, especially for housing, and demonstrate why there’s less construction activity compared to a few years ago. Many projects have been proposed and even approved, only to be shelved when the builders start to get construction bids and mortgage terms.
Jemal is holding off on renovating the upper tower floors of the Statler into apartments and hotel rooms. He’s also delayed construction of a nine-story building with a parking ramp and apartments on a parking lot surrounded by highway loops at 61 Terrace. And he’s waiting to renovate the Mahoney State Office Building into a boutique hotel, and redevelop the Mohawk Ramp and Simon Electric properties.
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Douglas Jemal has delayed his proposed 61 Terrace project, a nine-story building with a parking ramp and apartments on a lot surrounded by highway loops where the Skyway connects to the I-190 North.
Ellicott Development Co. has put off its proposed Locker Room project at the corner of Delaware and West Delavan avenues, along with its smaller 878 Elmwood project. And Sinatra & Co. Real Estate’s Heritage Point project has been suspended since the end of last year, after it lost its financing last August.
Demand for housing is high, for both apartments and new homes for sale. But homebuilders can’t put up a new house for less than $350,000, which prices out the lower levels of buyers. And the apartment rents in Western New York, while they have risen significantly in the last 15 years, are still well below what landlords can command in larger cities. So while the costs of construction and borrowing have risen, the potential revenues haven’t kept up.
The tax breaks help, Paladino said, but they are not enough. So he’s expecting to hold off until at least the fall to seek construction bids, and hopes costs come down.
“Everything has just escalated so substantially in such a short period of time,” Paladino said. “I don’t think they’ll ever come back to where they were, but they definitely have to come back down or everything is going to come to a screeching halt.”
Located between a KeyBank branch and a Wendy’s restaurant, the George’s Produce site is a narrow sliver of unused property that Ellicott bought from the Pope family in 2017 for $875,000. It’s also in a town “enhancement area” where redevelopment of “obsolete and underutilized parcels” is encouraged, the IDA noted.
The project includes demolition of a pair of two-story houses with a barn and garage on the 1.1-acre property, and construction of a 45,373-square-foot building, with 9,870 square feet of first-floor commercial space, plus 30 apartments on the upper three floors. Half of the commercial space is for a restaurant and half for retail.
It would feature three one-bedroom units, 21 two-bedroom apartments and six three-bedroom units. Six of the apartments, or 20%, will be designated as “workforce housing,” and would be affordable to households earning no more than 80% of the area median income. That will be maintained for at least 15 years.
Work was slated to begin this summer, with completion by September 2025. But the developers said they needed subsidies to make it financially viable.
They noted that the site was purchased prior to the Covid-19 pandemic that drove up material and labor costs, and prior to new zoning codes for “retrofit districts” that require “enhanced building materials and design standards.” They also cited demolition, site development and higher lending costs as other impediments. And they listed the inclusion of the workforce housing, which will have lower rents.
So the partners, through 5226 Main LLC, applied to the IDA for $1.92 million in tax breaks, including a 10-year property tax payment-in-lieu-of-taxes, or PILOT, that would save $1.34 million, plus $507,500 in sales tax and $65,133 in mortgage-recording tax relief. The IDA incentives are limited to the construction costs, not the restaurant or retail space.
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Construction has paused at the Heritage Point development at Canalside after developer Sinatra & Co. confirmed that project financing had fallen through.
Justifying tax breaks
Paladino’s challenges are laid out in his application to the Amherst IDA and in a report by Camoin Associates – an economic development consulting firm hired by the IDA to evaluate if Paladino’s tax-break request was justified. It’s the first time the Amherst agency has done so, and comes after it received criticism for even considering tax breaks for a market-rate housing project.
Such criticism has been leveled against IDAs for years – including by Erie County Executive Mark Poloncarz – for being too willing to approve tax incentives for projects that critics say don’t need them.
That includes projects that aren’t at risk of moving out of the region, don’t generate many jobs, or mostly or completely involve market-rate housing. If the demand for housing is strong enough, the critics argue, developers will build those homes and apartments on their own.
The Erie County IDA, for example, will not approve tax breaks for market-rate housing. But it will do so for senior housing, affordable housing and adaptive-reuse projects.
In response, Amherst IDA Executive Director David Mingoia said Amherst officials researched what other IDAs in the state do, “as a number of them will provide some incentive even for straight market projects that do not include workforce or affordable priced units.”
Officials learned that those agencies conduct “a secondary analysis on financial feasibility,” and often use Camoin, a Saratoga Springs-based economic development firm that has served municipalities, corporations and companies nationwide since 1999. So the Amherst IDA followed suit, and has now even included a requirement for such studies into its new Workforce Housing Policy.
The consultant’s report concluded that, without the $1.9 million in tax incentives, the $11.9 million project would lose money for the first 10 years of operation. And determining that was important for the IDA board.
“The one thing we are trying to avoid is providing an incentive where it isn’t needed,” said Mingoia.
Tight margin, tough project
The use of the independent firm isn’t likely to quiet critics of tax breaks and IDAs. But it also showed that, if the current revenue and expense assumptions hold true, the project is troubled no matter what.
According to Camoin, Ellicott’s “operating assumptions” for rent, vacancy and expenses were “generally in line with local and regional benchmarks,” except that Ellicott’s anticipated expenses were lower.
For market-rate apartments, the report said that Ellicott projected offering:
- Two one-bedroom apartments for $1,475 per month. That’s about 8% lower than the median rent for such apartments in Amherst of $1,602, according to independent research firm CoStar.
- 17 two-bedroom units for $2,085, which is 9% above the median of $1,914.
- Five three-bedroom apartments for $3,285 per month, 37% above the median of $2,403 for Amherst.
For workforce housing, meanwhile, Ellicott would offer a one-bedroom at $1,300, four two bedrooms at $1,500 per month, and one three-bedroom at $1,700 per month.
But the profit margin for the project is “below market expectations” even with property tax breaks, and it wouldn’t have positive cash flow without them. The developers also would not recoup their investment within 10 years. According to Camoin, total cash flow with the tax breaks would be $505,538 over 10 years. But without the assistance, the project would lose $686,733.
That’s because, while after-tax net operating income would rise from $51,293 in the first year to $832,873, the debt payments on the mortgage would be $821,667 each year. The developers plan to borrow $8.68 million, or 75% of the project cost, at 8.25% interest over 25 years. According to Camoin, that’s “within the range of the benchmarks” for such debt.