Monroe County officials formally ended the tax arrangement with CityGate developer Costello & Son

A D&C investigation has found that Costello & Son owes $2.2 million in school, town, city and county property taxes

The end of the tax break moves the property closer to foreclosure

Brett Costello says it is committed to resolving the issues of his late father's estate

One of Rochester's most innovative developers, already buried in debt, litigation and ill will, has lost its multi-million tax break for the CityGate project, leaving the fate of the project in doubt.

Developer Anthony J. Costello & Son has failed to make $700,000 in promised payments on the CityGate tax deal, prompting the city of Rochester to demand that the deal be canceled.

Monroe County officials formally ended the tax arrangement Tuesday, according to a letter sent to Costello & Son and later shared with the Democrat and Chronicle. County officials say they consider the project no longer viable.

The highly unusual tax deal could have saved Costello & Son $44 million over the course of two decades had the $177 million project been completed as proposed.

Loss of the county-sponsored tax break is only the latest blow to Rochester-based Costello & Son, whose fortunes and reputation have been fraying behind a veil of secrecy imposed by a local judge.

A Democrat and Chronicle investigation of the company has found that Costello & Son owes $2.2 million in school, town, city and county property taxes. Most payments stopped more than a year ago. Legal claims have been filed by contractors, ex-employees and others seeking in excess of $1.7 million more.

Both CityGate and the Reserve on the Erie Canal, an upscale Costello residential community, are beset by unfinished work and unoccupied buildings.

Angry residents at the Reserve, where home prices range from $300,000 to $2 million, have hired a lawyer and are planning to file a complaint with the state Attorney General's office about Costello & Son's inattentiveness to maintenance.

The Reserve's ostentatious $7 million clubhouse — the beneficiary of an astounding 99.9 percent tax break — is behind on its payments and could wind up being offered for sale at auction, documents show.

Costello-owned property at Clinton Crossings Medical Center, seemingly the most finished and successful of the company's projects, is in default on taxes and has drawn complaints about poor maintenance.

Those projects and others were masterminded by Anthony J. Costello, a one-time newspaper manager who built one of the community's most diverse real-estate portfolios, largely in Brighton and southern Rochester.

Costello, who died in March 2016, had envisioned something special there — four large developments within walking distance of one another, set amid green space and waterways and each distinctive in its own way.

The high-profile projects had a combined price tag of $600 million and were enabled by lucrative government grants and tax reductions.

In return, the developments promised local residents attractive new places to live, work, visit the doctor, shop and congregate.

But those promises have, in many respects, not been kept. And today, 2½ years after his death, Anthony Costello’s vision is at risk of being dismantled.

The partly finished Reserve residential community is for sale, according to two real- estate brokers, four residents and another party with knowledge of the situation.

The forced sale grew out of a dispute among 17 family members over the handling of Costello’s estate that has been playing out behind closed doors in Monroe County Surrogate’s Court.

City Corporation Counsel Timothy Curtin said city officials understand that some of the property at CityGate is on the market, and there are reports that the judge overseeing Anthony Costello’s estate also may have directed the sale of Clinton Crossings or other assets.

But details of judicial action in the Surrogate’s Court proceeding over Costello's estate remain unknown. Most records in the case are sealed and numerous parties involved in the case say the sealing order prevents them from discussing the company's affairs.

The Democrat and Chronicle filed a request in late September that Surrogate's Judge John Owens unseal records in the case. As of Thursday, the newspaper had received no response from Owens.

Owens did approve a request by the Democrat and Chronicle this spring for a copy of his original sealing order. That document referred to the dispute over the estate.

Anthony Costello's son, Brett Costello, was entrusted by his father with running the family business. At least some of the company's current woes appear to date to his assumption to that position.

Brett Costello responds

In response to a request for comment from the Democrat and Chronicle, Brett Costello sent a brief written statement filled with praise for his late father and chastened in tone.

"I had the great privilege to work with him and together built a wonderful portfolio in our community," Brett Costello said. "Upon my father’s abrupt passing, coupled with the sudden change of hand, and the nature of probate, there have been many obstacles during this transition.

"Our organization realizes this change has been difficult for all stakeholders and we are committed to resolving the issues of the estate, whether they be municipalities, banks or homeowners," the statement said.

City officials are not clear on what is happening with Anthony Costello's estate, Curtin said. But for months, they have been meeting regularly with Brett Costello and his lawyer about the floundering CityGate project, and making demands for payment of the mounting tax debts.

Two years on from inking an agreement, the city made the decision to request cancellation of the tax deal and Imagine Monroe, the county economic-development agency, carried out that request.

Doing so moves the property closer to tax foreclosure. But nothing is certain, as officials remain open to resurrecting the deal they made with the father — if the son shows up with cash in hand.

"We could still put this Humpty Dumpty back together again, if that is what they want to do," Curtin said. "So that option is still on the table."

CityGate: Lights out

The giant letters that spelled out CityGate's name on a towering old smokestack on East Henrietta Road lit up at night in constantly changing hues. They were a colorful signature for what was meant to be a hip urban development.

But the lights were dismantled and taken down in the spring of 2017. The company posted on its Facebook page they had been damaged by high winds and would be repaired and replaced.

They never went back up, and the stack on which they hung is now riddled with cracks. The area at the base of the stack is now fenced off and marked with "Danger" signs, apparently for fear bricks will fall from above.

The stack is an apt symbol for CityGate — ambitious but disassembled.

CityGate, which Anthony Costello first announced in 2006, was conceived as a walkable urban village of shops, restaurants, offices, a hotel and apartments.

It abuts the Erie Canalway Trail, and Costello envisioned residents and patrons bicycling and walking to the complex along the water. The company installed lights on the mile-long stretch of trail between CityGate and the Reserve so people could make the trip comfortably at night.

A parking garage was planned to minimize the footprint devoted to cars. An RTS center would invite transit users.

Everyone loved the idea. State economic development officials pledged $3.5 million in grants to help build it.

Along the way, however, the urban-village concept died. The parking garage and transit center ideas were discarded, a big-box Costco store was added, and the apartments, offices and hotel were never started.

Costco, the national discount retailer, opened its 150,000-square-foot store in June 2015. Costello-owned space for eight other retailers began opening the following spring.

Judging by the cars that crowd its parking lot today, Costco is doing well. The company owns its own building and is current on taxes.

The rest of the development is a mixed bag.

Cheeburger Cheeburger, a restaurant that rented space from Costello, was the subject of an eviction proceeding in City Court and closed several weeks ago. A wine and liquor store that became embroiled in costly litigation with Costco was evicted for non-payment of rent in March and also is closed.

Two other storefronts have never been occupied.

A pair of fast-casual restaurants, DiBella’s Subs and Qdoba Mexican Eats, remain in operation there. A new tenant, CSL Plasma, which buys blood from walk-in donors, just opened.

The largest of Costello & Son's CityGate stores is occupied by outdoors retailer REI, which opened in August 2017. It's at the south end of the development near the canal; a customer could buy a kayak or a bike at REI, carry it out the back door and pedal or paddle away.

In June of this year, REI filed suit against Costello & Son in state Supreme Court for slightly more than $533,000 that the retailer said Costello had promised to help pay for the store's build-out.

Separately, a contractor filed a claim against Costello & Son this summer for $248,000 that it says it is due for work at the REI property. The claims are spelled out in publicly available legal filings.

In addition to the retail space, Costello & Son owns the long-closed power plant and its cracked smokestack, and another 32 acres to the south and east of the existing CityGate buildings. That's where the hotel, offices, more shops and more than 300 apartment units were supposed to go.

Most of that vacant land is in the town of Brighton. The taxes haven't been paid since last year.

In his day, Anthony Costello enjoyed good relations with county officials. They leased him land at Greater Rochester International Airport and sold him the land on which CityGate is built.

And he persuaded the county economic development agency to extend that development on the city-Brighton border a tax benefit the likes of which has been employed only a few times in the Rochester area.

Under the arrangement, Costello & Son was authorized to redirect 75 percent of the money it would have spent on property taxes and to repay the funds it borrowed to build the complex.

But while the framework of the plan was signed and put in place, the supporting financial documents and mechanisms were not, city Corporation Counsel Timothy Curtin said.

Costello & Son also failed to make any of the tax payments to the city called for in the agreement in each of the last two years.

"We have told them that their time is getting short that they have got to figure this out," Curtin said. "I don’t think its moving along as quickly as we would like or as quickly as they expected. They need to raise some money to pay these taxes, and that is not entirely within their control."

SORR@Gannett.com

BDSHARP@Gannett.com

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