- Associated Press - Saturday, February 22, 2014

NORRISTOWN, Pa. (AP) - The project to transform an old Norristown shopping center into a movie studio was supposed to bring the glitz and fortune of Hollywood to the sagging seat of Montgomery County.

Build it and filmmakers will come. Build it and jobs will come and lift Norristown to prosperity.

That dream fizzled like a box-office bomb last May, when the project’s investor filed for foreclosure against the developer.

The forlorn shopping center, Logan Square, sits half-empty, its fate likely to be announced in the coming weeks. The county is grappling with how to recoup the $25 million it sank into the project - including $10 million in federal funds it must repay - and its lawyers are preparing a lawsuit against the developer. And prosecutors are scrutinizing the deal to see if more than bad luck and poor judgment were to blame.

Interviews with former and current county officials, along with county and state records, provide a clearer glimpse of the project’s rise and fall.

The pinch on taxpayers is already being felt. Some interest payments were made last year, and this year’s county budget includes a $510,000 payment on a $6.2 million debt - with similar sums due every year until 2030.

The $24.5 million in grants, loans, and loan guarantees the county invested was projected to kick-start the economy and create jobs. That money was supposed to bring, if not a tour de force, at least a happy ending.

“We got caught up in the possibilities,” James R. Matthews, former chairman of the county commissioners, said last month. “Possibilities don’t come to Norristown every day.”

THE BEGINNING

Logan Square opened in the mid-1950s, two miles north of downtown Norristown, where there was plenty of free parking. Sears Roebuck & Co. soon moved there from Main Street, then left in the 1980s for King of Prussia.

As other stores came and went at Logan Square, owner Joseph F. Butera put the property up for sale, recalled Jerry Nugent, executive director of the county’s Redevelopment Authority.

In January 2008, developer Charles Gallub created a corporation called Johnson & Markley Redevelopment, named after the two streets where the shopping center stands, and bought the property for about $18 million, according to county records. Most of the money Gallub used to buy it came from a private investor, Logan Lender L.P.

Even before the purchase, Gallub had pitched the project - Studio Centre - to the county, figuring the plan could benefit from tax credits then-Gov. Ed Rendell backed to promote moviemaking.

The plan and the tax credits were attractive enough to encourage Raleigh Studios in California and some homegrown filmmakers to partner with Gallub: “The vision is to … create one of the best film studios on the East Coast of the United States,” the developer said in 2007.

“There was a great amount of enthusiasm,” Nugent said. “Studio people would fly in from California and spout their excitement.”

But in March 2009, he and several colleagues urged county leaders to be fiscally cautious.

In a memo, they questioned the plan’s “financial feasibility” and whether the county and town should back the project without a financial guarantee from Gallub if it fell apart.

County Commissioner Bruce L. Castor Jr. said he was not given the memo. In recent interviews, Castor also said, as did Matthews, that they were unaware the county had agreed to let the private investor, Logan Lender, get repaid first if the plan fell apart.

That practice, known as subordination, isn’t an uncommon tool in public redevelopment financing. But, experts say, it must be done after scrutinizing a project’s feasibility and financial safeguards.

The same year, lawmakers shrank the tax-credit program, and Raleigh Studios backed out of the deal.

The studio plan collapsed.

When the state withdrew its promised $10 million Redevelopment Assistance Capital Program grant, Gallub focused on renovating the Sears building into office space. The centerpiece of the project became a plan to build a new structure for the maintenance company USM, which already was located at Logan Square but looking for new quarters, and a parking garage.

Despite the changes, taxpayer dollars flowed into the modified plan.

THE TAB

In 2010, the state gave the modified project a reduced state capital grant of $7 million.

The county gave Gallub:

- A $2 million loan in July 2010. That money won’t be repaid unless it comes through a lawsuit.

- The $6.2 million loan made in November 2010 by the county guaranteeing a Redevelopment Authority bond sale. That is the debt the county begins paying down this year.

- A $10 million loan through the U.S. Department of Housing and Urban Development’s Section 108 program. Local governments that borrow money guaranteed by that program, according to HUD, “must pledge their current and future CDBG (Community Development Block Grant) allocations to cover the loan amount as security for the loan.”

HUD is waiting for the county to say how it wants to repay the $10 million loan, spokeswoman Niki Edwards said.

That $10 million won’t impact the county budget, which currently stands at $375.7 million. The cost comes in what Montgomery County chief financial officer Uri Z. Monson calls “the opportunities lost” by using block-grant dollars for the debt instead of putting it toward other needs.

The county commissioners at the time - Matthews, Castor, and Joseph M. Hoeffel III - supported the new, office-campus plan.

In recent interviews, all three said the prospect of creating jobs in Norristown, with or without a studio, was too promising to reject. About 19 percent of the town’s population lived in poverty from 2008 to 2012, according to the U.S. Census.

“If any place needs a kick in the butt,” Matthews said, “it’s Norristown.”

THE CONNECTIONS

At the same time he was getting county support, Gallub was a generous political contributor to county officials.

Through one partnership, he gave $15,000 to the Friends of Joe Hoeffel committee in 2009 - one of the biggest contributions in Hoeffel’s bid for governor. The same year, he gave Matthews $4,500; the Friends of Bruce Castor got $1,250 from him in 2010 and 2011.

All three said those contributions did not influence their decision-making.

There was one more political connection: Gallub’s attorney on the project was Marcel Groen, longtime chairman of the Montgomery County Democratic Party, who often represents developers on high-profile real estate deals in the region.

Gallub also was given a seat on the Montgomery County Strategic Economic Development Policy Task Force, a group charged with drafting a plan for the county’s economic transformation.

Among other things, the group recommended boosting the same funding sources the county later tapped for Gallub’s project.

THRIFT STORE

One of the bigger tenants at Logan Square now is a thrift store. Other businesses include a deli, a pharmacy, a Social Security Administration office, and an outpost for State Rep. Matt Bradford.

The most visible sign of Gallub’s ownership is in the parking lot, where the sleek, new headquarters of USM glistens. The company added 34 more jobs there last month, increasing its total on site to 468. Hoeffel said retaining those jobs proves the investment was a success.

“The bottom line is it’s costing the county taxpayers more per job than I had wanted it to,” Hoeffel said. “But it was under the terms we felt we had to agree to to make the project work.”

Nugent doesn’t hesitate when asked if the public money for the project was well-spent: “Obviously not.”

Matthews and Hoeffel opted not to seek reelection in 2011. The next year, their successors, including holdover Castor, rejected Gallub’s request for an additional $11 million.

“We didn’t think it warranted throwing good money after bad,” current Commissioners Chairman Josh Shapiro said.

In October, private investor Logan Lender bought the old shopping center for the value of the debt it was owed and $8,000 in cash for fees at a sheriff’s auction. What happens next to the site is likely to be decided “sometime in the first quarter of 2014,” said Richard S. Roisman, the Philadelphia attorney for the property’s new owner.

Meanwhile, the county is working with Norristown officials to take legal action against Gallub.

“We need to do it jointly,” Monson said.

There is no timetable on when that lawsuit may be filed - or on how long the District Attorney’s Office might scrutinize the deal.

Montgomery County District Attorney Risa Vetri Ferman said last month that her office was still investigating the project, but she wouldn’t say what or whom prosecutors were reviewing.

Logan Square could have a bright future, said former Upper Darby resident Christopher Leinberger, a fellow at the Brookings Institution who is an expert on downtown redevelopment.

Raze the shopping center, build housing in its place, create a grid of streets, and turn the property into a walkable, urbanized community: That, Leinberger said, is “the biggest development trend in the country.”

Whatever the plan for Logan Square, there’s little chance of another big county investment.

“I would listen to any proposal,” Shapiro said, “but I would not be willing to put any public money at risk.”

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Information from: The Philadelphia Inquirer, http://www.inquirer.com