Build State Center

Our view: The project isn't perfect, but the state's case for a public-private development is more persuasive than that of its opponents

April 10, 2011

The two sides in the controversy over the plan to redevelop the State Center complex of government offices in midtown Baltimore were in court this week, but the arguments there over the methods used to select the project's development team are a mere sideshow. Whether the state followed the appropriate procurement law is certainly important, but it is not the real reason why a group of downtown property and business owners — most notably, attorney Peter G. Angelos — have filed their lawsuit. They want to stop the project altogether, not just force the state to rebid it under a different procedure, and their motivation is quite clearly their own financial interest. They want state workers in office buildings downtown, and they want the rent and business that would come as a result.

That said, they have raised important questions about whether the state is paying too much for the deal, whether the tax breaks being offered are excessive and whether the project will have the effect of robbing vitality from one part of town to bring it to another. Regardless of what happens in court, those policy issues deserve consideration.

The rent

As part of the master agreement with the project developer, Ekistics, the state has agreed to a long-term lease for approximately 500,000 square feet of office space, which will replace what several agencies now occupy in the dilapidated buildings on the State Center site. The contract calls for the state to pay an "all in" rate of $36 a square foot — that includes $25.85 per square foot in base rent, plus the costs of maintenance, housekeeping, etc. The opponents of the project say that's significantly more than the going rate for office space downtown, which they peg at about $20 per square foot. The state would be much better off, they say, just moving the 3,500 workers at State Center into vacant office space downtown.

But the opponents fail to consider several factors that make the price comparison less stark. They do not consider the ground rent the state will charge for the site or the profit-sharing agreement between the state and the developer. Under the terms of the agreement, the state is to receive 7 percent of the profits from the project, plus ground rent, estimated to total $134 million over the deal's 50-year lifespan. That assumes only the first phase of the project is completed and would increase if all five phases — which include many more residences, offices and retail spaces — come to fruition. Furthermore, redeveloping the site as part of a public-private partnership puts it back on the city and state property tax rolls.

And moving all those workers downtown wouldn't be free, either. The opponents of the development say there is more than 2 million square feet of vacant office space downtown, more than enough to accommodate the nearly 1 million square feet worth of offices the state envisions eventually building at State Center. But that doesn't mean that the downtown office space is in an appropriate size or configuration to accommodate the agencies without splitting them up within and among buildings. And the opponents seem to expect that cutting the downtown vacancy rate in half would have no effect on the going rents.

The subsidies

Opponents claim that the state is on the hook for $314 million in tax breaks for the developer. The state says this is not true and that the document where that number appears was in error. In any case, it is important to remember that only the first phase of the project has been approved so far, and no tax incentives have been finalized.

There are two kinds of tax breaks that could be a part of the deal: tax increment financing to help pay for infrastructure improvements on the site and a payment in lieu of taxes. The state has requested a PILOT from the city that would set its property taxes at $2.50 per square foot, which the Baltimore Development Corp. estimates is about 87 percent of what it would pay otherwise. The city has not yet approved the PILOT, but it is worth considering that the offer is $2.50 a square foot more than the state is paying now. The developers say they anticipate requesting a TIF of $10 million-$15 million for the first phase of the project, but they have not yet done so.

The drain on downtown

If State Center is fully built out according to the 15-year plan, it will include 1 million square feet of state office space but also 1 million square feet of offices for other tenants, plus 250,000 square feet of retail space, 1,400 housing units and other amenities. The project's opponents say that will inevitably mean that some or all of the state workers now housed in downtown buildings will be moved to State Center, further depressing the city's real estate market. Presently, state workers take up about 700,000 square feet in downtown Baltimore.

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