A surprising development tops the list of delinquent taxpayers in Pierce County.
Thousands of people walk along its waterfront every year. They reserve reclining leather seats in its posh movie theater and many stay after for a drink or some seafood.
We’re talking about Point Ruston, the 97-acre residential and retail development that straddles Tacoma and Ruston on the shore of Commencement Bay.
Over the past decade, father-son developers Michael and Loren Cohen have turned the one-time toxic Superfund site into a popular waterfront village where people live and play.
Nevertheless, two of the Cohens’ limited liability companies, Point Ruston LLC and Point Ruston Phase II LLC, are late paying nearly $750,000 in delinquent property taxes on nearly a dozen parcels, as of late April.
As Point Ruston accrued interest and late fees for not paying the taxes on time, the developers inked deals with the Tacoma City Council that qualify three projects there for $22.7 million in property tax breaks.
Point Ruston owes nearly triple the amount of the next highest delinquent taxpayer in Pierce County, according to an analysis of public records by The News Tribune.
One of the properties with overdue taxes is the development's three-level parking garage, located in Ruston and assessed at $27.6 million. In April it carried the largest late tax debt of any building in the county — $443,500, which includes late fees and interest.
Doing the math
When to pay — and when not to pay — property taxes is part of Point Ruston's strategy to provide a return of 30 to 40 percent to its investors, Loren Cohen said.
In delaying payments, the development and its backers come out ahead as long as the money the Cohens invest, which otherwise would go to taxes, makes more than the $150,000 in interest and late fees they owe.
“We’re not paying property taxes on the non-revenue-producing properties,” Cohen said.
As of mid-April, those properties and their late tax payments, with interest and penalties, included:
- Land in Ruston planned for a condominium building northwest of the Silver Cloud Hotel, $142,300.
- Land at the base of Promontory Hill near the marina, which one day might include residential, parking and retail, $36,200.
- Land for what's known as Building 7, an approximately $36.8 million structure slated for 194 apartments, $58,900.
- Land that eventually will be the site of GenCare Lifestyle, a $62 million building to house a six-story retirement community with at least 150 units, $45,700. (By late April, the late taxes, fees and interest from 2016 and 2017 had been paid .)
As for its revenue-producing properties — from apartments to restaurant spaces to the Century Theater movie house — Point Ruston is current on its taxes, records show.
The company’s property tax bill for 2018 is more than $2.3 million, according to county tax records. The first half of the payments were due to the county by April 30 and Cohen said Point Ruston intended to pay most of its 2018 taxes on time. The tax bill on Copperline Apartments alone is $616,900, county records show.
In the 12 years since the Cohens acquired the former Asarco land for Point Ruston, they have paid more than $6 million in property taxes, according to the company.
State law allows property owners to pay property taxes up to three years late before the county can seize the property and sell it to pay the debt. That's never happened at Point Ruston, and Loren Cohen said the development intends to pay the taxes on its delinquent properties before then.
In the meantime, he said, delaying the payments allows the company to invest elsewhere. Each building requires tens of thousands of dollars in permit fees, along with up-front costs for architects, engineers, traffic studies, marketing and more — all before a shovel strikes the dirt.
"(We can) keep that money working, either in an apartment building or buying other land to develop," Cohen said. "At the end of the day we believe — and our returns vet this out — we will achieve 11 percent above and beyond (the costs of paying late)."
Through a spokesman, Cohen declined to elaborate further on Point Ruston's rate of return for its investors.
Experts weigh in
From a strictly economic perspective, waiting to pay taxes like the Cohens does makes sense, said James Young, director of the Washington Center for Real Estate Research at the University of Washington.
Paying taxes late on land that doesn’t make money is “reasonably common” in the real estate world, he said.
“If your return is higher than (the cost of paying late), you are better off investing that money somewhere else for two years,” Young said.
“It seems like a pretty good strategy, actually,” he said. “At the rate at which property prices are moving upward, I can see that strategy being employed. Yeah, why not?”
There are a couple of reasons, said Joe Lawless, executive director for the Center for Leadership and Social Responsibility at the University of Washington Tacoma’s Milgard School of Business.
“Basically,” Lawless said of Cohen, “what he is saying is, ‘I’m not going to pay until the last minute,’ which I guess technically is within the limitations of the law. … We can argue whether or not that’s ethical or responsible."
"If he’s not paying (taxes), he’s not helping to encourage a vibrant community beyond what he is doing to develop Point Ruston.”
Taxes pay for the operation of local governments, from cities to schools and fire districts. Lawless argues that not paying taxes breaks a social contract to support roads, firefighters, police and parks.
“One could argue Point Ruston has received a fair amount of benefits from government,” and should help pay for them in a timely manner, Lawless said.
Among governments owed money from Point Ruston's late payments are:
- Tacoma Public Schools, owed nearly $310,100.
- The State of Washington, owed more than $92,300.
- The City of Ruston, owed more than $92,400.
- Pierce County, owed more than $57,300.
- The City of Tacoma, owed more than $11,300.
Some banking and business professionals contacted by The News Tribune questioned the logic of delaying tax payments and taking on interest and late fees.
Marguerite Moyet, a senior vice president at KeyBank’s income property group, manages a commercial loan portfolio of $200 million to $300 million. She said she had no knowledge of Point Ruston’s finances and was speaking generally about commercial real estate financing.
A typical commercial real estate loan, she said, would have a 4.5 to 5.5 percent interest rate — far lower than the 12 percent in interest and the late fees on top of that a property owner would pay for paying property taxes late.
One reason a developer might pay taxes late, Moyet said, would be to use the money as equity in another project, something she would consider a red flag.
“They might have a hard time coming up with the equity,” she said. Not paying property taxes is “just like a delinquent mortgage payment and that mortgage is in default.”
In interviews over the last few months, Cohen has said his popular, waterfront development is not in financial duress.
As for paying taxes late, he called the penalties and interest he would pay on projects worth tens of millions of dollars "budget dust," a term lawmakers have used to indicate an inconsequential amount of money.
Big bills for top scofflaws
Just about everyone pays their taxes on time. Statewide, about 2 percent of those owning taxes pay late by the end of the year the taxes are due, according to state and Pierce County figures.
In Pierce County, delinquent property taxes, penalties and interest amounted to about $37 million in February, the most recent period for which data are available.
“There’s a lot of people who simply are running behind, but they know they don’t want to go into the foreclosure process,” Assessor-Treasurer Mike Lonergan said.
Typically the county starts the year with about 3,000 people who are three years behind in tax payments, Lonergan said. About one-tenth of those properties might be sold at the end of the year to pay tax obligations.
If taxes are not paid within the three-year limit, state law requires the county to foreclose on the property, which then can be sold in an auction to recover the debt owed to the taxing districts. Anything collected above the tax debt, interest and fees can go back to those with a financial interest in the property, Lonergan said.
After the Cohens, as of mid-April, the next four taxpayers with the highest delinquent bills were:
- Central Network Retail Group, a Memphis-based company that bought three McLendon Hardware stores in Pierce County last year. Taxes owed: $309,000.
- George Heidgerken, who’s involved with three limited liability companies that owe property taxes on more than a dozen parcels in Pierce County. Taxes owed: $256,700.
- Hatem Shalabi, who once owned 22 gas stations and now is late paying taxes on eight properties in Pierce County. Taxes owed: $228,400.
- Rowland and Ronda Litzenberger have more than two dozen properties in arrears, most of which have three years of unpaid property taxes. Taxes owed: about $151,500.
Central Network Retail Group bought the McLendon Hardware chain since April 2017. John Sieggreen, president of the company's board, said it noticed tax bills were being sent to the wrong address earlier this year.
“We take those obligations very seriously,” he said in April.
The next day, he said the company's late property taxes were paid, along with taxes due so far this year.
When reached for comment, Heidgerken told a reporter, “Take a hike, because it’s nonsense.” When asked to elaborate, he hung up the phone. Shalabi did not return repeated requests for comment and the Litzenbergers could not be reached.
'It's devastating to us'
Many taxing districts budget for some taxpayers not keeping up.
Tacoma Public Schools, for instance, plans to receive about 1 to 1.5 percent less in tax revenue it would otherwise collect if taxes were all paid on time, said Rosalind Medina, the district's chief financial officer.
"We have a buffer, " she said.
With patience — and some tax foreclosure sales — taxing districts get their money one way or another.
That's cold comfort for Ruston city officials.
Point Ruston owes the city more than $92,400, nearly a fifth of the tiny city's property tax collections, according to the city's 2018 budget.
That's money needed to deal with the effects of the growth at Point Ruston, Mayor Bruce Hopkins said. For instance, he said, Ruston has had to expand its police department, "which directly correlates with the development."
"It's devastating to us," he said. "Had we not had reserves to call on, we couldn't meet the needs of the city."