The Town of Hempstead gave around $600,000 in tax breaks to a Long Island company in a failed deal to build and operate an equine medical center.
The Hempstead Industrial Development Agency agreed in 2009 to provide the tax exemptions for International Equine Acquisition Holdings, a Long Island horse breeder that owned the 2008 Kentucky Derby and Preakness winner Big Brown. The facility, known at the Ruffian Equine Medical Center, operated for only several months before closing. The town IDA terminated the agreement with IEAH in December 2012 after the company failed to make a $21,000 semiannual payment.
The two-story structure on Plainfield Avenue adjacent to Belmont Park is now empty and has been auctioned for IEAH for an undisclosed sum.
And one of the horse firm's investors was indicted in February by federal authorities on charges of defrauding investment clients by executing a Ponzi-like scheme.
"All we have here now are weeds," said Patrick Nicolosi, president of the Elmont East End Civic Association, as he stood beside an auction sign in front of the empty two-story horse hospital building.
The town, which had backed the project as a way to revitalize the neighborhood, has no plans to try to recover the nearly $600,000 in lost tax revenue because IEAH acted in "good faith" even though the project failed, said Hempstead officials.
For more than three years, Hempstead provided the tax break to IEAH with an agreement to let the private firm run the new horse hospital on land taken over and owned by the Hempstead agency. This allowed the horse firm to avoid paying any of the usual school, county and other property taxes.
Instead, the firm agreed to pay a reduced annual fee to the town agency under a so-called PILOT (Payment in Lieu of Tax) agreement, a statewide tax break program to encourage business in run-down or undeveloped areas.
Property taken off tax rolls
In July 2009, Hempstead IDA officials agreed with IEAH's president, Michael Iavarone, and Richard Bivone -- a former IDA member who represented the firm -- that an equine medical center was needed near Belmont racetrack and that the firm could use a financial helping hand. Under the PILOT agreement, the firm's building and property was transferred from IEAH to the agency's ownership, taking it off the usual tax rolls, until the town's lease deal ended in 10 years and the Elmont property reverted back to IEAH.
Initially, town officials pointed to the project as part of their effort to build up the neighborhood. "Elmont is the gateway to Hempstead Town -- projects like this are helping to polish the gateway and revitalize this business community," said Town Supervisor Kate Murray, shortly after the IDA approved the deal.
But the Hempstead IDA terminated the arrangement last December, after IEAH failed to make a lease payment.
"We worked with them as much as we could, but we can't have an empty building with no jobs," said Edie Longo, the IDA's chief financial officer, pointing out the firm never created the promised 15 jobs at the site.
"They [IEAH] took a bath and went belly-up and they've lost this facility," said IDA executive director Fred Parola. He said the hospital was opened for only a few months.
During three previous tax years, 2010-2012, the horse hospital would have owed at least $759,000 in property taxes if not for the agreement, records show. Instead, IEAH paid $146,800 in lease fees before being dropped by the town. During this past school year alone, Elmont residents had to pay an additional $233,000 in school taxes because of the tax break given to the horse firm, said the school treasurer.
Critics say IDA officials ignored many warning signals about IEAH, which touted big dreams of creating a $100 million hedge fund to buy other thoroughbreds. These problems include Iavarone's history of bad debts, and being previously fined and censured for improper activities with another firm.
Shortly after Big Brown's Kentucky Derby win in May 2008, news reports disclosed that Iavarone had been punished by the National Association of Securities Dealers, then the industry's self-regulating agency, and that he had faced debts for unpaid bills, including a 2004 IRS lien for $130,000 in back taxes. Iavarone acknowledged the past problems but insisted his current finances were in good shape at that time.
Need for break questioned
At a June 2008 hearing about the PILOT proposal, then-Nassau County Tax Assessor Harvey Levinson, a Democrat, questioned the need to give a tax break to IEAH, whose star horse, Big Brown, had just won the Kentucky Derby and Preakness, two of racing's richest races. He pointed to records showing Bivone -- a former Hempstead IDA member and political contributor to Republican County Executive Edward Mangano -- was recruited by IEAH to help gain the tax break.
"They'd just won the Kentucky Derby and made a lot of money, and yet they said 'we're poor' and needed a tax break -- that was a charade," recalled Levinson. He said Bivone was a "paid facilitator" for IEAH "to make things easier for the permits, and that's basically his business."
At that June 2008 hearing, Bivone, who left the IDA in October 2006, criticized Levinson for "scaring them [Elmont residents] about not getting taxes from the new project," records show. Bivone didn't return Newsday's calls seeking comment.
Federal authorities now say IEAH was used as part of an alleged criminal fraud scheme that, records show, occurred during the same period that Hempstead officials granted it a tax break on its property. In coordinated actions in February of this year, the federal Securities and Exchange Commission and Preet Bharara, the U.S. attorney in Manhattan, charged James A. Tagliaferri, 73, a Virgin Islands financier and key IEAH investor, with defrauding clients by withholding the fact that he was receiving kickbacks in exchange for placing client funds in certain companies.
Bharara said Tagliaferri "concocted an elaborate scheme to defraud his clients," collecting "secret fees" for placing investors' money into ventures without their knowledge.
The SEC charged that Tagliaferri received $1.6 million in kickbacks from IEAH. The federal indictment referred to the $1.6 million coming from "a company located in Garden City."
In its application for the Hempstead tax break, IEAH never mentioned Tagliaferri's involvement in IEAH. But in a 2010 sworn statement in a lawsuit brought by investors, Iavarone, a Bethpage native, said Tagliaferri provided $20 million in financing to the horse firm, which in exchange paid $1.6 million in fees to Tagliaferri. In his affidavit, Iavarone said he was unaware that Tagliaferri was allegedly misleading investors, but that he began to have doubts in spring 2008 -- the same time that the company was applying for the Hempstead tax break.
"Mr. Tagliaferri threatened on a regular basis to close IEAH down if his wishes weren't met, and that he would 'pull his investors out' if we objected to anything," Iavarone swore in his affidavit. "Because IEAH was in such precarious financial shape, I was afraid to protest further."
Lawsuit: Iavarone involved
However, a lawsuit in State Supreme Court in Manhattan brought against Tagliaferri by investors from Long Island also alleges that Iavarone was part of this scheme. Court papers allege Iavarone helped create phony invoices for $1.6 million in "nonexistent" consulting fees paid to Tagliaferri, which the lawsuit alleges were actually "kickbacks" given without investors' knowledge or consent.
Neither Iavarone nor Tagliaferri could be reached for comment. IEAH's office in Garden City closed this year
Overall, records show Hempstead's tax break for the horse hospital was generally much bigger than other projects statewide. According to a May 2013 state comptroller's report, agencies provided tax exemptions of nearly $1.5 billion in 2011 for 4,486 projects statewide, but collected $917 million in PILOT payments -- a collection rate far greater than what the Hempstead IDA collected during its three-year PILOT with the horse hospital.
The state comptroller's report recommended that IDAs have a "clawback" provision to recover lost tax revenues, something that Longo said was not in the 2009 PILOT with IEAH. She said Hempstead currently requires payback provisions for projects that receive tax exemptions but fail to live up to their agreement with the town.
IEAH regained ownership
Now after some $600,000 in lost tax revenue at the site, the Hempstead IDA is no longer the landlord of the horse hospital. After the agency ended its tax agreement, IEAH gained back title of the property, which was then promptly put up for auction in May. Details of the sale and new owner have not yet been finalized, said the Florida-based auctioneer last week.
When recently asked, Hempstead officials said they were unaware of Tagliaferri's indictment or the allegations that the horse firm was used to defraud investors.
Nor were they aware that the Nassau County treasurer had advertised a $341,000 lien for delinquent taxes at the site in 2011 while it was under IDA ownership. The debt was paid at the last minute by IEAH before the tax lien was offered at a February 2011 county real estate sale.
The horse firm's unpaid $21,000 PILOT payment from last November prompted the IDA's decision the following month to terminate the tax break agreement, officials said. Court records show other judgments against the firm. But Hempstead officials insist they're no longer fiscally responsible for the empty building covered in weeds.
In retrospect, Levinson said, the IDA would have avoided this trouble if it had heeded his warnings.
"When you've heard a company that's won the Kentucky Derby wants to build a horse hospital, that's fine, but don't give them a tax break," he said.