December 20, 2010

Downtown property owners sue to stop State Center

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By Megan Poinski
Megan@MarylandReporter.com

Claiming that the state ignored procurement laws to award the contracts for the $1.5 billion State Center development project, a group of large property owners in Baltimore’s central business district sued the government and State Center developers on Friday, hoping to bring the project to a halt.

The massive project occupying more than eight-square blocks has had the enthusiastic backing of Baltimore elected officials and persistent skeptical analyses from the legislature’s staff.

An aerial view of where the State Center complex is slated to be constructed.

Attorney Alan Rifkin, lead attorney in the lawsuit, said Friday that the contract to develop the planned mixed use development on government land was not put out for competitive bids as the law required. Furthermore, the development agreement for the complex includes dubious finances and government subsidies that are in the hundreds of millions of dollars, he said.

“This doesn’t work,” Rifkin said. “This project is not viable. Why is public money being poured into it?”

Additionally, Rifkin said, the State Center project south of Bolton Hill occupied by several older state buildings, would draw business away from the central downtown district, exacerbating the already high vacancy rate in downtown commercial buildings and removing the vitality from a downtown that had once been the focal point for development.

The news conference to announce the lawsuit was held in a vacant 17th floor office suite on Charles Street, chosen to symbolize the glut of empty office space in the central business district.

Empty downtown space

David Johnson, senior vice president of Lexington Charles Limited Partnership, one of the plaintiffs in the case, said that the downtown business district was once vibrant. State Center would take that away by pulling businesses and people from that area.

“If this happens, the core will dim, and it will be irreversible,” he said.

State Center was first discussed in 2005. The plaintiffs decided to sue now for two reasons.

First, the Board of Public Works on Wednesday approved $33 million in financing to build the garage that is the first piece of construction on the site, a move protested by Comptroller Peter Franchot.

Rifkin has also heard rumblings that legislation might be introduced in the Baltimore City Council to approve tax-increment financing for the project.

The plaintiffs in this lawsuit are seeking an injunction, stopping all work on the project, and a declaratory judgment, finding that the process the state followed to issue the contract was incorrect.



How we got here

The State Center project was dreamed up under former Gov. Bob Ehrlich in 2004. Rifkin called it an effort to get the private sector to pay for buildings for state office workers, something the state had historically built for itself. A request for qualifications, usually issued to find out about the background of potential contractors, was put out in 2005 to search for developers. RFQs are not competitive bids; Rifkin said they are more like resumes.

From the RFQ, the state chose a team of developers. They included Struever Bros. Eccles & Rouse, Inc., Doracon Development, McCormack Baron Salazar, Pennrose Companies, Design Collective, Inc., Cherokee Investment Partners, LLC, Canyon-Johnson Urban Funds, and SunAmerica Affordable Housing Partners, Inc.

Not much happened on the project in the public eye for several years. Then in 2009, the Board of Public Works approved a new master development agreement for the project with a different lineup of developers. The current team is made up of PS Partners, LLC – which includes Ekistics Capital Partners, LLC – McCormack Baron Salazar; Kevin Johnson, president of Commercial Interiors, Inc.; Joseph Haskins, CEO of Harbor Bank of Maryland; Eddie Brown of Brown Capital Management; TAC Companies, LLC; Midtown Convergence, LLC; and Neighborhood Development Company.

An amendment to the master development agreement, passed in July by the Board of Public Works, solidifies that new development team, and says that the state had privately negotiated leases for the first phase of the project.

Rifkin said that the project would represent a financial windfall for any developer. The agreement includes state agencies as guaranteed tenants and gives developers the chance to build commercial space on state land with tax benefits.

“How can the current commercial property owners compete if they were never given a chance to do so?” Rifkin asked. “They paid for their own buildings. They paid the property taxes on their buildings.”

If the project had been put out for competitive bids, Rifkin said, more people could have tried to get the job. He said that bidding would have opened up the entire process, and potential contractors would have been subjected to public scrutiny before the Board of Public Works.

Where’s the money coming from?

The entire State Center project is slated to be developed in five phases and is worth about $1.5 billion, according to current estimates.

But who is paying for what, and who is giving incentives to whom has been questioned by many of those businesses now suing the state, Rifkin said.

The original project proposal called for private developers to finance everything. However, the recession dried up bank financing, and the state is now picking up most of the tab for the $36.5 million parking garage. At the Board of Public Works meeting on Wednesday, Gov. Martin O’Malley and Treasurer Nancy Kopp both voted for a $33 million lease to build the garage. Comptroller Peter Franchot voted against it, saying that the state should not take on such a large debt burden.

Previously, the Board of Public Works approved long-term lease agreements for several of the offices that will be built in the complex. The 20-year leases are for the Department of Health and Mental Hygiene, the Maryland Department of Planning, and the Maryland Transit Authority. The rents at State Center will cost about $38 a square foot, Rifkin said, while median rental rates in the central downtown district are about $20 a square foot.

Also, the leases with State Center do not have a “convenience clause,” which allows the government to back out of a lease before the term is up.

“Not only do these developers have the ability to build on state land, but they have leases that are almost double the going rate,” Rifkin said.

In addition to these subsidies, $314 million in tax-increment financing through Baltimore City has also been promised, Rifkin said. Tax-increment financing, or a TIF, is an agreement to use projected future increases on property taxes to pay for current improvements. They usually come into play when developments are proposed in blighted areas, which Rifkin said is not the case here. He said this is the only TIF he knows of for a project on state-owned land.

No TIF agreement has been approved for the State Center project, but Rifkin said that a TIF would ensure that the funding for the project is shouldered by taxpayers. He said Baltimore’s TIF law lacks rules and guidelines, and said that money gained through a TIF is like a “modern day slush fund for those who have enough political power.”

Reports made by the Department of Legislative Services this year also call the subsidies into question, saying that it is unclear what kinds of financial benefits the state may see, and questioning the size of the TIF.

Three developers – Ronald Kreitner, T. Courtenay Jenkins III, and Calman Zamoiski Jr. – wrote an open letter to Assistant General Services Secretary Michael Gaines in response to comments he made in an October story in the Baltimore Sun about the project. They told him that he was talking around promises of outlandish subsidies and profits for the developers.

“By our calculations, this suggests the project’s private developers – the recipients of the remaining 93 percent of the profits – would reap an astounding $2.3 billion over 20 years. That’s $115 million per year for 20 years,” the letter states.

Kreitner said neither Gaines nor anyone else in state government had responded to the letter. Reached Friday, Gaines said he had no comment.

Vacant office space in Baltimore

Baltimore City already has major problems with empty offices. Rifkin said that there is currently 2.2 million square feet of empty office space in the central business district – about 25 to 40%, depending on where you draw the boundaries.

There are currently 600,000 square feet of government offices currently in the downtown business district — and apparently moving to State Center, Rifkin said.

“How do you expect the city to be viable and survive?” he asked.

A Department of Legislative Services report on the project from May 2009  also questions the logic of building new offices with so many empty ones already in the downtown area.

Economist Anirban Basu, who is working with the plaintiffs as a consultant, said that the empty offices are not a national trend stemming from the poor economy. This trend is specific to Baltimore, and getting worse, he said.

Each plaintiff in the lawsuit lists how much vacant space it has, as well as pledges to rent it to the state for government offices at a lower rate than State Center.

Basu said that he believes competition is a good thing for the economy, and thinks that the central business district could use some healthy competition from offices in an area like State Center.

“But subsidized competition is unfair,” he said, referring to the downtown area.

What do they want?

The plaintiffs don’t want money or honor, Rifkin said. They don’t want a guarantee that state employees will rent their buildings. What they want is the slate to be made clean and the process to be clear.

Rifkin said that he agrees the buildings currently at State Center could use renewing, but that is not the point. He wants to ensure that any big project comes through the normal procurement process. And, he said, he wouldn’t care if the state might decide on exactly the same plans in exactly the same place with exactly the same people if the project had been competitively bid.

“We want the state to go back to the drawing board on this, and rethink its policies and procedures,” Rifkin said.

There was not much reaction to the lawsuit on Friday. Officials said that all inquiries were forwarded to the attorney general’s office, and calls there were not returned.

Caroline Moore, chief executive officer of Ekistics LLC, said in an e-mail that the development team is “confident that the selection process was completely appropriate and will be validated by the courts. “