How Ocean City’s taxpayers paid $20 million for vacant lots that were supposed to cost $9 million

OCEAN CITY, N.J. — Are the Klause brothers Ocean City royalty — Harry grinding it out every day selling cars from his desk inside a trailer, bicycle stashed nearby; Jerry presiding over his ever-expanding Peace Pies empire — or are they now its villains?

Late last year, a Cape May County jury decided the empty lots in the center of town that the brothers were originally willing to sell to the city for $9 million in the summer of 2018 were worth $17.8 million, an amount that has ballooned to $20 million with interest. Taxpayers are left holding the bag.

But it was a taxpayers group, Fairness in Taxes (FIT), that revolted and helped scuttle the original $9 million agreement, believing it was overpriced and concerned that there could have been some deal between the Klause brothers, whose grandparents moved to Ocean City in 1919, and the city’s elected officials.

To say the FIT strategy backfired on Ocean City’s taxpayers is an understatement.

FIT president Dave Breeden regrets nothing. He still considers the original $9 million price, for the old Perry-Egan Chevrolet dealership across 17th Street from what is now Ocean City’s Aquatic & Fitness Center and library at 1735 Simpson Ave., inflated.

But in the end, the Klause brothers (pronounced like Santa) only saw the price for the land go up. And up.

A combination of missteps by the city, objections by the taxpayers group, and a real estate market that blew up in the pandemic led to what even Villanova basketball-crazy Harry, 74, would acknowledge is a slam dunk.

Says Jerry, 71: “Harry has said this to me many times: ‘Every time they did something and it f-ed with us, it wound up making us more money.’”

The Klause brothers say they only set out to get a fair price on land once owned by their grandmother, Mary Palmer.

But it’s only the fourth quarter for the Shore town’s taxpayers.

The city still needs to acquire land owned by the Klauses’ cousin, John Flood, 71, which is 40% of the block, in order to complete a swath of open space between 16th and 17th Streets, and Simpson and Haven Avenues.

That could cost another $10 million. Plans could evolve, but for now, the city says the land will be used for parking.

After the Fairness in Taxes group successfully petitioned in 2018 to put the $9 million sale to a referendum, the city withdrew its initial offer. The agreement expired in late 2018.

In the summer of 2019, the city then began condemnation proceedings against the Klause brothers, with an initial valuation of $6.5 million. In May of 2020, the city filed legal action to take the property by eminent domain, but never made a deposit to set the valuation at $6.5 million, as required by law.

Months went by. Ultimately, the valuation date was set in December 2020.

You may recall, those 2020 months were not just any months.

They were pandemic months, when real estate values in Ocean City and other Shore towns exploded, as people rushed to buy property in a place perceived as safer, or at least less populated, and more peaceful, to ride out a pandemic.

Buyers, in other words, who figured out what the Klause family had known for generations.

Jerry Klause believes the city deliberately waited to deposit the money, hedging their bets on the pandemic tanking real estate values.

“The pandemic is blowing up,” he said. “Everything is getting wacky. In the first half of 2020 did any real estate person think to themselves that property values are going to explode? Nobody knew what was going to happen. You have to understand it’s easy in hindsight for Dave Breeden or anybody to say the city f-ed up. They knew what the law is.”

The Klause brothers started getting approvals to develop the land into single family homes they were calling “coastal cottages,” further driving up the value of their land.

The city did not want more density. It wanted open space, considered a premium in the beach town (despite the presence of the beach itself).

In the spring of 2022, court-appointed mediators set the value of the property at $13 million. By this time, the Klause brothers were not interested in $13 million, and appealed the case to Superior Court to let a jury set the price.

The Klause brothers valued their property at $17,865,000 million, and after five days of testimony in October, the jury agreed.

Harry sobbed after the judgment was read, safe in the knowledge that he could leave a legacy to his grandchildren like his grandparents had left him and Jerry.

But there was still the matter of interest.

At this point, the Ocean City City Council had had enough.

With interest rates at an all-time high, they finally cut their losses. They accepted the eye-popping offer of $20 million as a final settlement from Klause Enterprises, and in January, voted to authorize the purchase. A final judgment was entered in the case on Feb. 8.

However you view it, the saga of how Jerry and Harry Klause agreed to $9 million but ended up with $20 million for a vacant block of land is now Ocean City legend.

Breeden, the taxpayer advocate who is — plot twist — a buddy of John Flood’s, reflected this month on the jump from the $9 million agreed upon in 2018 to $20 million, and insisted neither FIT nor the Klause brothers are villains. He blames the city, and the pandemic real estate explosion.

“I do not blame the Klauses at all,” he said. “They’re business people. They have every right to get the maximum. There’s no question they bullied the mayor and took advantage of him. The bottom line is, every phase of this land taking, the city lost every major step. The city was outmaneuvered and outsmarted.”

Mayor Jay Gillian said in a statement that the effort was all part of the city’s effort to get open space for a duplex-heavy Shore town.

“The city has acted in good faith,” Gillian said. “We saw an opportunity to preserve an area larger than a city block as open space. This is a far superior result than more housing density. We never want to pay more than necessary, but a number of factors beyond city control came into play.”

Those factors, Gillian said, included “the engagement of outside organizations.”

(Meanwhile, in Longport, Dorothy McGee, who died in November, was leaving two valuable beach block lots to the borough in her will for a park.)

Ocean City envisions a “truly amazing space,” of public land stretching from 15th Street to 18th Street, from Haven to Simpson Avenues. Coupled with a nearby school, the corridor of public space would extend to 20th Street.

“I think we can all agree that it is quite a rare occurrence in our region to have such a significant tract of open land that can be used for public benefit,” Gillian said, though Breeden noted that it was nowhere near the ocean or boardwalk.

But for now, the city is envisioning a two-story parking lot to help overflow from the aquatic and fitness center, library, and historical museum.

There’s more.

The value of cousin John Flood’s property is currently set by the city at $7.2 million, but Flood also wants to let a jury have the final say. That could push the cost of obtaining the full tract of open space coveted by Ocean City (if not its taxpayers) toward $30 million.

That trial is set for May.