AMONG THE words most frequently mouthed by Baltimore's economic development officials these days are "but for."
As in, "but for" a tax break, a project would not occur.
Is that in fact the case? Or have tax breaks, in the form of reduced payments in lieu of taxes, or PILOTs, become so commonplace in the city that few self-respecting developers would deign to work without one?
Put another way, if the city had no PILOTs, would developers let their land lie fallow, or would they find another way to do a deal?
Who can say for sure? The fact is, they're so ingrained in the city's culture of fostering development that the best strategy for those of us who pay full value on our property is not to grouse about them, but to try and understand them. To know them is, if not to love them, then at least to accept their usefulness.
A look at a pair of the most recent proposed PILOTs offers a window on the thinking of officials in promoting them, and shows how the city stands to gain as well as what it has to give up.
The proposed PILOTs are for the Water Tower Apartments, a $47.4 million project to be built atop a parking garage in the 400 block of Water St., and for 300 E. Pratt St., an $88 million retail and luxury apartment development on what is now a parking lot on the site of the old News American building across from Harborplace.
Both PILOTs recently won the unanimous approval of the Planning Commission. They are awaiting action by the City Council, and also must get the nod of the Board of Estimates, the five-member panel of top city officials that reviews tax and spending matters.
Since both projects are on private land, they don't raise questions about whether the city is getting enough money for the sale of public property - questions that have dogged other projects.
As in all PILOTs, what the city is giving up in the Water Street and East Pratt Street PILOTs is a portion of its future property tax revenue so the developers can get a better rate of return.
In deciding whether to grant a PILOT, "We try to structure our deals to get developers before-tax returns of between 14 and 20 percent," explains Robert Aydukovic, who negotiated the Water Street deal in his capacity as director of the Downtown Housing Council.
Aydukovic says that range is based on historic stock market returns of about 12 percent a year. Since real estate is considered riskier than stocks, he says, it needs to offer a greater return.
With the PILOTs, both the 300 E. Pratt St. deal - brokered by the city's economic development agency, the Baltimore Development Corp. - and the Water Street project will provide developers with a pretax return of about 17 percent.
Without the PILOTs, the East Pratt Street project would give the developers a return of 13 percent; Water Street, 12 percent.
As things stand, the city receives minimal taxes from the two parcels. For the undeveloped air rights over the Customs House Parking Garage at 414 Water St., built in 1989 to support a possible office tower, the city gets $35,000 a year in taxes; the News American site, which has been a parking lot since the same year, generates $132,000 in taxes.
The Water Street Apartments, a 310-unit middle-market rental project to be developed by Lutherville-based Constellation Equities Corp. and Savannah Development Corp., would have a 10-year PILOT, paying 5 percent of the full taxes in the first eight years and 10 percent in the last two.
The PILOT for the East Pratt Street project, which is to contain 292 luxury units plus parking and retail and will be developed by a partnership of New York-based Schulweis Realty and ING Real Estate, would be longer but more graduated: It would cover 20 years, with payments rising from 5 percent in the first year to 75 percent in year 16.
In both cases, the tax breaks over the life of the PILOTs are undeniably large - about $6.8 million for Water Street and $12.6 million for East Pratt Street, calculated in today's dollars.
But so is what the city is projected to receive in extra revenue during the terms of the PILOTS, especially when weighed against the possibility that neither parcel might otherwise be developed: $404,000 for Water Tower Apartments and $5.8 million from East Pratt Street.
And when the tax breaks expire, the two projects should generate a total of an estimated $3 million a year in property taxes.
Then there are the income taxes expected to be generated from 800 new downtown residents who will populate both projects, two-thirds of whom officials estimate will come from outside the city. On the East Pratt Street project, where it is calculated that the average income of a resident will need to be $96,000 - $96,000! - to afford units with monthly rents of $1,400 to more than $3,000, income taxes are calculated to be about $9.3 million over the 20-year life of the PILOT.
In the early years of the projects, they are expected to generate more than $1 million in property and income taxes a year - more than six times what the city currently receives from the parcels.
At last month's Planning Commission meeting, BDC President M.J. "Jay" Brodie noted another, albeit less quantifiable, benefit.
Adding the Water Street and East Pratt Street developments with such downtown apartment conversions as the Munsey Building on Calvert Street and Saratoga Courts on East Saratoga Street, Brodie said: "You begin to form a community. You begin to create a demand for retail services."
But for the PILOTs, that might not happen.