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French tax credit records raise red flags

Al Harris August 12, 2010 30

Last week, IRS and FBI agents raided the Shockoe Slip office of developer Justin French, removing computers and boxes of paperwork.

Both agencies were tight-lipped about the reason for the raid, but Richmond BizSense has learned that over three years, French received an unusually large amount of tax credits for renovating historic buildings compared with what local developers typically reap on similar projects.

From 2007 through 2009, French projects received $18.8 million in state tax credits, according to a review of documents from the state Department of Historic Resources obtained by BizSense.

Developers are allowed to sell the state tax credits, and they often do so to large companies looking to reduce their state tax bills. French most recently was working with Markel Corp. as his tax credit purchaser until a feud between the two parties erupted. (You can read the original RBS story here. )

The DHR data show expense claims that are higher than normal, according to local contractors and developers. Several contractors said that the rehab costs reported by French are close to double the typical range.

For example, French received $179,183 in tax credits for a duplex at 3012 and 3014 Q St., in a run-down section of Church Hill. That means he claimed total expenses of about $718,000 (or $366 per square foot) to rehab the structures, which are assessed at $210,000 for the entire building.

“Those numbers seem extremely high. Something is not right there at all,” said Bill Pangburn, a renovator of historic homes in Church Hill. “I don’t know how in the hell you could spend $700,000. If that’s the case, someone is taking advantage of the system.”

David Gammino, a principal of contracting firm City & Guilds, said the reported costs are not close to the amount of construction he performed as general contractor.

“That is the first time I had ever heard of the costs that were certified to DHR. That is not consistent with the costs that were invoiced and paid for by French Consulting to City & Guilds for those projects,” Gammino said by phone.

Gammino said that he did not review any documentation used in the cost certification process that would have been submitted by French to DHR and that he was never contacted by DHR to verify any construction costs.

The sale of tax credits was a key piece of financing for French’s projects. It is important to note that the purchaser of the tax credits must also have a stake in the property’s ownership entity.

(The story continues after the slideshow of properties)

If you assume the Q Street duplex obtained state and federal tax credits (BizSense reviewed documents relating to state tax credits, but projects can qualify for a 20 percent credit on federal taxes), those could be sold for – at the high end – about 80 cents on the dollar. That would yield more than $250,000 in cash. If you deduct that from the claimed expenses of $718,000, it leaves almost $460,000 that French would have spent out of pocket on the duplex.

If he rented each unit for $1,000 a month, that would generate $24,000 a year in rental income. Ignoring expenses and real estate taxes, it would take 19 years to break even, an investment few would find appealing.

French also received tax credits totaling $807,000 for rehabilitation work on two adjacent Shockoe Slip properties, 1312 and 1314 E. Cary St. One of those buildings is French’s office. The state tax credit program allows developers to claim up to 25 percent of qualifying development costs, which generally include construction and certain professional fees. That means French claimed he spent $2.4 million fixing up the two buildings.

For the two Cary Street properties, that figure was $262 per square foot, based on the DHR numbers. Exactly how French could have spent that much renovating those two buildings is unclear, unless there were unusual consulting fees. There is no record of any building, mechanical, plumbing or electrical permits being applied for on either of those properties since French bought them, which suggests he did few major renovations.

Despite the lack of permits, Kelly Justice, the owner of the Fountain Bookstore and tenant on the first floor of 1312 E. Cary St., said that when French took over the building, he rewired it and replaced the HVAC system. She said French also knocked out the walls on the second and third floors to connect the building to his office next door.

One aspect that complicates analysis of his projects and might have befuddled officials is that French is often a partner in the firms involved in the subcontracting work, such as consulting and construction. It’s not clear what is a reasonable fee or markup to charge for a subcontractor involved in historic rehab, how French might have benefited from those relationships or whether French was claiming expenses related to consulting work performed by his company, French Consulting.

French could not be reached for comment and was not at his office Wednesday.

Not all expenses that qualify for tax credits would require building permits. Other qualifying expenses could have included renovation costs such as windows, custom cabinets and light fixtures, and included costs such as fees from architects and engineers.

However, local builders and developers said it’s unlikely that those fees would come close to the figures claimed by French.

That might have raised red flags with government officials. The DHR refused to grant a Freedom of Information Act request by BizSense for French’s tax credit applications, citing a section of the state code that refers to criminal investigations.

Kathleen Kilpatrick, director of DHR, declined to go into detail about why French is being scrutinized by federal authorities.

She did confirm that the department has been cooperating with federal authorities and that several of French’s pending applications are in limbo.

“From our point of view, any attempt to abuse the system would be taken very seriously,” Kilpatrick said.

“I am honestly grateful for the work that has been done by hundreds of excellent developers and investors. I don’t want to see their work, or that of their investors, tarnished by bad actors,” Kilpatrick said.

This story was updated at 11:45 AM. A previous version did not mention that tax credit investors must also be members of the property’s ownership entity.

Below is a list of state tax credits granted to French properties in 2007, 2008 and 2009.

2009

1620 Altamont Ave. (apartment conversion)
Tax credit awarded: $1.79 million
Qualified expenses needed: $7.19 million
2010 assessment: $4 million

330 Oak Lane (private residence)
Tax credit awarded: $433,080.75
Qualified expenses needed: $1.7 million
2010 city assessment: $2 million

1312 E. Cary St. (commercial building)
Tax credit awarded: $362,381.25
Qualified expenses needed: $1.44 million
2010 city assessment: $340,000

2008

2601 Floyd Ave. (commercial building)
Tax credit awarded: $439,758.75
Qualified expenses needed: $1.75 million
2010 city assessment: $690,000

3012-3014 Q St. (duplex)
Tax credit awarded: $179,570.75
Qualified expenses needed: $718,183
2010 city assessment: $210,000

3122 W. Clay St. (commercial building)
Tax credit awarded: $463,328.50
Qualified expenses needed: $1.85 million
2010 city assessment: $789,000

1509 Belleville St. (Commercial building)
Tax credit awarded: $392,875.75
Qualified expenses needed: $1.57 million
2010 city assessment: $674,000

2007

1314 E. Cary St. (office of French Consulting LLC)
Tax credit awarded: $445,390
Qualified expenses needed: $1.78 million
2010 city assessment: $402,000

Al Harris is a BizSense reporter. Reporter Michael Schwartz and editor Aaron Kremer contributed to this report. Please send news tips to [email protected]

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30 Comments »

  1. RM August 12, 2010 at 7:05 am - Reply

    How could he get $434000 for Oak Lane when he bought that ALREADY RENOVATED!! This was a complete renovation done by the previous owner. I saw this house before he bought it – HOW DOES SOMETHING LIKE THIS HAPPEN??? Another “fleecing of America!”

  2. Irony August 12, 2010 at 7:19 am - Reply

    Correct me if I’m wrong, but if I read this correctly French has been inflating the expenses involved with these projects, using his own companies, in order to inflate the tax credits he applies for on these projects. That has awaken the Feds from their slumber. So I assume then that if French had not intentionally began to default on his loans then it would have taken the state and federal offices longer to figure this out.

  3. 30yearold August 12, 2010 at 7:19 am - Reply

    Rather than comment on any of the allegations, I’d just like to say this is some continued excellent investigative reporting. Keep up the good work.

  4. Ron August 12, 2010 at 7:55 am - Reply

    Wow, what the hell were the banks thinking?! Did anyone ever even go LOOK at these properties? Most of them could have been eyeballed by anyone halfway knowledgeable about construction costs and it would have raised eyebrows immediately. The saddest thing about this whole mess, beyond the subcontractors that did work they won’t be paid for- is that this is going to make it that much more difficult for legitimate developers to bring real opportunities and commerce to the Richmond construction industry for years to come. Everyone loses.

  5. Andrew August 12, 2010 at 8:03 am - Reply

    So in the last few years companies have been suffering but this guy has been just sitting back and laughing like crazy while he made basically free money. Well I hope he goes to jail for a good bit along with a few other people.

  6. Andrew August 12, 2010 at 8:06 am - Reply

    I agree with 30yearold some good reporting here keep it up I have followed this since you first broke it long before the RTD ever even mentioned this thanks.

  7. Richard Coughlan August 12, 2010 at 8:12 am - Reply

    Add me to the list of readers who continues to be impressed with the work of the reporters and editors at BizSense. Well done.

  8. Steve August 12, 2010 at 8:19 am - Reply

    The stories on French are very intriguing. I am wondering, though, if there isn’t all kinds of abuse going on with this program. What French allegedly did might be the norm! I would think that if you could get the numbers on French’s deals, you should be able to look into the deals done by others and see if this is widespread. If the state is asleep at the switch on French, then you have to believe lots of others have done this too.

    Let’s see an investigation on that too!

  9. Jason B. August 12, 2010 at 8:52 am - Reply

    Great reporting! I agree with the last comment by Steve. I wonder what other developers are out there right now that are tightening up / destroying there books on these past projects. Got to be a few more.

  10. Igor August 12, 2010 at 9:34 am - Reply

    Excellent work Al.

  11. anonymous August 12, 2010 at 9:48 am - Reply

    Again, it might be helpful to compare the FBI’s past dealings with Salomonsky (and the subsequent Hedgepeth trial).

    Historic tax credits can be great tools for neighborhood revitalization, but they can certainly be abused without vigilance.

    I would love to see Goldman’s plans for getting the government to allow historic tax credits for school building renovation. Virginia, and Richmond in particluar, has some of the oldest school buildings in the country.

    Other places allow not only only historic tax credits but also green building tax credits to renovate schools and create real jewel-like centerpieces for their historic neighborhoods.

  12. Cynthia Oliver August 12, 2010 at 10:36 am - Reply

    First, I’d like to chime in about the good reporting and details. Next, let’s not assume since one developer is “getting away with this”, that many others must be, too. I have been totally shocked that this has even happened! In my experience w/DHR, I’ve had to rework properties to meet requirements, provide detailed data and additional pictures, submit additional accounting from my Accountant, had aspects of the project disallowed AND meet DHR representatives at the property. It has not been an easy process. Add to that the scrutiny from my lender at each phase of construction, and I just don’t know how French did it. And I didn’t mention the dealings w/NPS for the federal side. So don’t jump to conclusions that this program is fraught with abuse. Personally, the projects I completed in 2009, I would not have been able to even consider restoration w/out the Historic Tax Credit incentive. I hope this won’t make restoration in Richmond’s oldest neighborhoods even more difficult. But I am afraid this will be another obstacle thrown in the path, along w/ banks not lending in distressed areas.

  13. Jason August 12, 2010 at 11:11 am - Reply

    You might want to look into his use of “Green” tax credits also.

  14. Interested on Altamont August 12, 2010 at 11:47 am - Reply

    Assuming these hugely inflated tax credits are true it seems that French borrowed a page from Clyde Pitchford and Bernie Madoff’s playbook. If you’re going to commit fraud it looks like going big is the way to go. People and businesses (who are, after all, just people) love to jump on the bandwagon with someone who appears to have the golden touch without really checking them out.

  15. Ron August 12, 2010 at 12:03 pm - Reply

    http://www.richmondbizsense.com/2010/07/09/french%e2%80%99s-bills-pile-up/

    This article listed several properties not mentioned in this piece, along with liens filed by affected contractors. I am curious to know whether there are tax credit applications pending on these other properties and if so who the purchasers were going to be. If the tax credits must be sold to entities with ownership stakes in the properties themselves, what obligation do these organizations have to see the liens satisfied and the renovations completed?

  16. susanne August 12, 2010 at 4:05 pm - Reply

    Well….great reporting!
    This is really bad and very upsetting to see such curroption.

    On the upside, I was walking today and noticed a large grassy area behind 2600 block of Parkwood Ave, and behind Robinson….and it said for rent please call. Well, it was French’s number…..and it’s a nice piece of land. Any advice on how to make it into a park area similar to other fan area parks (http://www.fandistrict.org/).

    He really was a slum land lord, and didn’t do anthing to his properties or at least the 5 that I walked by everyday.

  17. Scot August 12, 2010 at 4:12 pm - Reply

    I suppose the next article will read: ” So where is Justin French”
    My guess is somewhere else.

  18. Interested on Altamont August 12, 2010 at 6:35 pm - Reply

    I suppose the next article will read: ” So where is Justin French”
    My guess is somewhere else.
    ———————————————————————————–
    Perhaps Florida? Can you say Homestead Exemption Law?

  19. Casey Quinlan August 13, 2010 at 12:18 pm - Reply

    The entire series of articles RichmondBizSense is putting out on l’affaire French is a superb example of investigative journalism and shoe-leather reporting. It’s become a daily must-read.

  20. Bernie August 13, 2010 at 12:19 pm - Reply

    Some government oversight…. and by that, I mean “sight” with eyes… not paperwork, should be included in these projects. It doesn’t take a financial analyst to look at a dump on Q street and figure out that spending $700,000 on it and selling it for $200k or renting it isn’t a good idea. In order to make 30% funding go 80% of the way, people like JF will inflate their costs. I don’t think this is a common theme, but like Reagan, I would like to “trust but verify.” Reasonable costs can be assumed to be correct, but $366 per SF should be the price for the Sultan of Brunei’s palace, not a Churchhill duplex. I think these historic tax credits may be the only reason most of the city construction projects ever happen. They improve the tax base for the city and create an improved environment for businesses to operate. That benefits the taxpayers and as such it is a good idea, provided we have checks and balances that prevent this kind of abuse. Lot’s of people did work for French who had no way of knowing what he was reporting. They are completely innocent in this and should not be associated with his alleged crimes.

  21. Harold August 13, 2010 at 2:28 pm - Reply

    I am really enjoying these articles and the discussions about them.

    That being said, I think that a lot of the people on here, commenting on the need for checks and balances, are missing key points. These tax credits require the signature, and hopefully the review, of numerous people before they get approved. In a normal situation, these people are all unrelated firms and have their own best and competing interests at heart. The owner, contractor, architect, and a CPA all have to review and document these projects. French, by having an ownership stake in all of these entities, was able to skirt the normal checks that were in place to prevent fraud. I think, given the amount of people claiming tax credits in this area that need to get vetted, it is not outlandish for the regulatory agencies to assume that it would be difficult to get four or more separate firms to all tell the same lies to said government regulatory body, thereby committing multiple felonies. Ultimately, it will always come down to the word of the people applying for and reviewing the credits.

    The same goes for the bank loans. Banks don’t normally employ construction professionals. They contract with people to fill this need. The architects involved in a project routinely fill this role for banks. The banks in this case just happened to contract with a firm, ADO, that was partly owned by the person they were supposed to be checking behind. One can argue that these banks should have checked the ownership of this architecture firm, but it is not unreasonable for the bank to expect a licensed professional, with a good reputation in the community, to uphold the responsibilities of said profession. If they had decided to instead hire a real estate appraiser, French could have easily bought into that firm to effect the same outcome.

    I guess the point is that, as long as massive amounts of money are concerned, people will find ways to scam the system. Blaming the people who got scammed doesn’t seem as productive as making an example of the crooks that did the scamming.

    The questions I keep trying to answer are “where is the money?” Just roughly figuring the amount of money involved, based off of just these few properties mentioned here, there are tens of millions of dollars missing. If it becomes apparent in the course of the investigation that these ill gotten sums of money were invested in local business, those involved in perpetuating the fraud and those used to subsequently launder the money via legitimate transactions, what responsibility do those companies have to repay the money? There are numerous companies that have been profiled as being supported or started with capital invested by French. It would be safe to assume that some of that was “dirty” money. If he was using these companies, with or without their knowledge, to hide the proceeds from a fraud, shouldn’t they be responsible for returning that money? For helping the people injured by this?

    Keep up the good reporting, RBS. This has become very entertaining, albeit in a train wreck sort of way. I do miss French’s daily threats to break people and smack them with chairs, but I guess he doesn’t have internet access in Nepal,Columbia or where ever.

  22. s anynomous August 13, 2010 at 8:55 pm - Reply

    Many ask how did Justin get away with it, uttering. “Uttering is the act of offering a forged document to another when the offeror has knowledge that the document is forged.[1] Uttering does not require that the person who presented the document actually forged or altered the document. ” from Wikapedia.

    Having worked on historic tax credit projects with different architects, contractors and developers there is a TON of paperwork involved. However, that paper work could easily be forged.

    Getting Todd Dyskorn, the architect, to falsify documents could be done by simply holding out a carrot of ” I can’t pay you for the work you’ve done so far but, I’ll give you the next job and we’ll make it up to you then” It’s one of the oldest tricks in the book that developers and contractors use on their subcontractors to use the subs time & money.

    I worked on projects with Todd before he went out on his own and it surprises me he fell into this mess. But, who knows what folks do in desperate times. Architects and engineers are being hit hard in this economy, several large and small A&E firms have had lay offs in the past 2 yrs.

    Our company almost partnered with on a building from Justin 2 yrs ago, but in talking to a friend who knew Justin said “You can dance with the devil if you know the steps”. That’s all he said and believe me after seeing all this come out I’m glad we didn’t.

    I just feel for all the contractors who lost money due to his lack of ethics.

    Great reporting to RBS and Al, I look foward to the updates.

  23. Harold August 14, 2010 at 7:09 am - Reply

    One thing that I think has been under reported about this is his use of renewable energy tax credits. He put 100’s of thousands of dollars in solar power panels on the roofs of his buildings. There are state and federal tax credits for those too. If he is being investigated for the abuse of historic use credits, why has the solar tax credit avenue not been explored. He owns part of Cityspace, now Urban Grid. If he follows his pattern of abuse of the tax system, I am sure he was scamming that system as well. I would like to hear more about that. Mr. Crump was no stranger to RBS when it got him publicity, yet he has been strangely quiet. I am sure that he has comments about this as well.

    I have to say that AL and gang sure scooped everyone on this. The RTD and local news organizations should be paying fair rights usage for the articles. You can tell, after his office was raided and now that he has been arrested, that reporters from the bigger guys have been reading these articles for leads. Keep up the good work.

  24. Sean August 15, 2010 at 10:45 am - Reply

    The only way the Q St tax credits make sense are if they include ALL of the Q St properties he owns… 3012, 3014, 3016, 3018, 3020, 3022, 3024, and 3026 Q St. All owned and renovated by French according to the City’s Property Search.

  25. david August 15, 2010 at 2:14 pm - Reply

    Actually Harold, your statement … “The owner, contractor, architect, and a CPA all have to review and document these projects. French, by having an ownership stake in all of these entities, was able to skirt the normal checks that were in place to prevent fraud” is incorrect.

    The developer entity submits documentation, in the form of whatever it is his CPA requires to issue a document known as a cost certification. The documentation the developer chooses to include is not vetted by the contractor or the architect. It is a process controlled by the developer, and supposedly verified by the accountant chosen to do the cost certification.

    To submit a statement indicating that the contractor and architect review these documents is to make an assertion that is simply not true.

  26. Harold August 15, 2010 at 4:11 pm - Reply

    David,

    I will admit that my involvement in projects of this type are some what lopsided in terms of what side of the equation I was on. If I spoke from a position that is contrary to the current tax credit environment, I am sorry.
    As I understand it, the CPA would need documentation of expenditures to certify the costs on a project. The GC, being one of the largest “costs” on a rehab project, would have to have provided some accounting of billings or payments. What form these took and by what method they were verified would be open to variation. A CPA cost certification is only as accurate as the documentation that they are given. They have to work with the numbers that they have, something usually stated in some form on the certification. They have no way to determine which expenses are reasonable, only if they occurred. Documentation of what has transpired on site, and the cost associated with that, is the responsibility of the contractor. If the contractor only submitted billings for work completed and materials on hand, then it would be hard to inflate the costs to levels seen here. I say hard, not impossible, because I am sure there are was to get around this.
    In short, I was not saying that each of the people mentioned above were complicit in the fraud that occurred, just that it took more than one convicted felon to pull this off. Who else was involved will be something we will have to wait to find out. I am sure the authorities are digging into everyone involved.
    I know that from the perspective of the bank loans, lien waivers must have been signed by subs and a lien release signed by the GC to get draws released. If the lien waivers do not total close to the amount requested, banks usually will not release the funds. As a matter of course the GC, at a minimum, has to sign a release that the funds previously dispersed were used to pay materialmen and subs on a job. Those lien waivers include the amount previously given to the owner. If Mr. French was taking draws ahead of the work done, the GC would have ample opportunity to see this from the lien waivers. These have to be notarized so it would be hard to see a situation where the GC could claim not to have known what was transpiring. For Mr. French to get as far ahead of the banks as he did, somehow he got lien waivers signed for amounts that far exceeded the work that had been done. If someone signed lien waivers for work that had not been paid or for work not performed, they would be guilty of fraud, irrespective of whether they profited from the fraud. I think it would stretch credibility to assume that a contractor on a site where such massive fraud is occurring would not have some idea that said fraud is being perpetrated, even if they did not actually participate in or profit from it.
    At any rate, I am one person, commenting on an online forum. Take what I say with a grain of salt. I have just as many questions as the next person in this and will be watching to see how it turns out. It does have repercussions for a lot of people in this community and I for one look forward to seeing folks in jail.

  27. Harold August 15, 2010 at 5:33 pm - Reply

    Sean,
    Looking at the building permits, the other Q street properties were not renovated until 2009. One would assume that the tax credits for those properties would not have been paid until 2010 and may be in the batch that has been held up by DHR, prompting the investigation. One can only imagine the total costs that were claimed for all of the properties. It also appears from the building permits that there were solar panels installed on those, prompting even more tax credit applications and possibly more fraud. It would be interesting to compare the values of the improvements stated when applying for the building permits to the amounts claimed in the tax credit filings. The discrepancy would appear to be enormous, and easily prove fraud. For fun, you guys should try going to the city website and searching the building permit database. There is a wealth of good information there. It requires a log in, but it is easy to sign up for one.

  28. Harold August 15, 2010 at 6:45 pm - Reply

    Just as an example; for the 3012-3014 Q St. properties, totaling the building permits pulled by City and Guilds on those properties, you get $118,695.00. The tax credits received by French on the properties were for work totaling $718,695.00. Almost $600k difference. Someone isn’t telling the truth. All of this is public record. I am sure that with all of the additional stuff that we don’t know, it is a lot easier to prove fraud on the part of a wide range of participants.

    Also, I was wrong, Richmond doesn’t make you sign in. Its all right there for anyone under the online services section of their city website. There are 100+ more properties for someone to look into.

  29. Ron August 16, 2010 at 8:06 am - Reply

    @Harold,
    Very good fact-finding…I am impressed. As a layman with only basic understanding of how the tax credit program works, I am shocked that it appears that the costs claimed on the building permits and tax credit applications do not have to align in the slightest???
    Can someone please explain how it’s possible to claim expenses that are so wildly different for the same property, to two separate government entities, with no oversight? And how is is possible that Mr. French was so far behind on paying taxes on these properties while still recieving tax CREDITS on these and others? It’s baffling. Fleecing of America indeed.

  30. Ry August 16, 2010 at 9:28 pm - Reply

    I think a point that is being missed is that now that the Feds, IRS, and State have caught these that the tax credits will be lost by the investors (or French if he kept any to reduce his tax liability) and they will be required to pay the taxes they did or hoped to reduce. Just like if you mess up on your taxes and are caught by the IRS you still owe the money even if the year has past. Also, even though the investors generally enter into the partnership agreement prior to starting work on the building, they aren’t allowed to reduce their tax liability until the building is placed into service. Therefore, on all of the buildings where the work hasn’t been completed the person hung out to dry is the developer, bank, and investors that fronted the money to get the work done. The credits are also an all or nothing thing, so they won’t be able to claim the credits on work completed if the job isn’t finished. I don’t have any particular knowledge of these specific projects, but don’t get down on a program as it has been great overall for the restoration of older buildings and cities.

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