Paul M Gardner returns to us with a meaty, delicious diatribe on the tax travesty known as Harbor Point.
In 2012, Councilman Pete Welch proposed a bill that would place advertisements on the sides of Baltimore City fire trucks based on the idea that the new revenue could prevent the looming, permanent closure of 3 fire companies that summer. While the Councilman wasn’t entirely sure how much money could be raised from these ads, or how much it would cost to keep the fire companies open, and even though the idea of rescuing the fire companies at all would soon be abandoned entirely, the response from the people was universal; this was a great idea. “Anything that brings revenues and protects public safety is worth considering,” said Councilman Welch, but the Mayor’s Office disagreed, the plan was killed, and the companies were closed under protest from fire fighters and the people who live nearby and have the most to lose.
But the Welch Plan wasn’t a complete waste of everyone’s time. The Councilman unintentionally helped show us the difference between what is important versus what is important and worth paying for. Most importantly, it showed us the true spending power of relatively small amounts of tax revenue. We may not know how much Councilman Welch hoped to raise with his bill, but we know that Truck Company 15, one of the busiest fire companies in Baltimore City in 2011, was closed to save around $300,000. Attempts could be made to justify the cuts by pointing to the city’s falling population, but that logic doesn’t hold up based on what we hear from the Mayor’s Office. They’re saying the people are coming back, that the 20,000 that have left since 2007 were an aberration and the momentum is actually going in the other direction. They say 10,000 new families will move to Baltimore City over the next 10 years, and when they get here these 10,000 families will expect a fully functional Fire Department to be in place, not one scraping by from the effects of harsh but tragically unavoidable budget cuts. No, the truth is we could lose 20,000 or 200,000 and it won’t make the city physically smaller, won’t make response times shorter, and won’t diminish the effects of these cuts. Closing fire companies compromises the health and safety of the people who no longer live just a few blocks away from a fire company and we did that to save just a few hundred grand.
Something similar happens when you close down a rec center. Like the cuts to the Fire Department, a $1.5 million cut to the Rec & Parks budget the same year resulted in another $300,000 shortfall that led directly to the closing of 4 city-run youth rec centers. The destruction isn’t as obvious as a burning building, but thousands of children in Baltimore City, as well as their parents, depend on these rec centers. Whether it’s the physical activity offered to these children at a time when inactivity and poor diets have become the norm, or the exposure to positive adult role models who serve their communities in their limited free time that the kids might not find elsewhere. Or something as simple as keeping a child busy and cool during a long, hot summer afternoon, or providing a quiet place to read a book or do some homework. By all accounts the importance of the services these rec centers provide to their communities is undeniable.
These obligations we make cuts to are investments in every sense of the word, and the external effects of shutting them down are far more costly than what we gain in the short term. These vital services were cruelly shuttered to save the city what amounted to around $600,000, or about 0.026% of that year’s budget, the exact amount approved without controversy by the city’s Board of Estimates in early April 2013 for new toner and inkjet cartridges. But the miniscule savings we enjoy are an illusion, and they evaporate the first time a fire unnecessarily spreads to a second location, or the next time a child commits a serious crime in the middle of a hot afternoon and becomes the responsibility of the state. What we get in return for saving 0.026% of the budget is nothing compared to what we give away. A fully-functioning city government can’t operate without ink and toner, but an actual city can’t live without public services, and given the opportunity we chose to compromise one but not the other. The idea that the only parts left in the budget to cut are a busy fire company and 4 rec centers that serve only the poorest communities in Baltimore is unacceptable, and an idea we must reject.
But the choice was never to make copies or put out fires, the choice is, as it’s always been, whether to properly fund the real, essential needs of the city or to continue to make cuts that disproportionally affect the most deserving and least connected. If we can’t find such a small amount of money to fund essential services then we must acknowledge our failure as a modern city and own that shame. Or, find the money.
So where should we look? Maybe the people should pitch in more. But the people are already taxed to their breaking point. The property tax rate in Baltimore is 2.268%, twice as high as the surrounding counties, and it’s been that way for most of the decade. It is, without question, one of the greatest forces that encourages people to move from the city to the counties. But it used to be higher, much higher in fact. In the 90s the property tax rate went up to as high as 5.90%, a shocking number that would be enough to convince any rational adult that owning property and investing in Baltimore is an awful, awful idea. But the rate has been incrementally lowered to a point where it is only twice as high as it should be, and we would be wise to leave that number be.
No, the people pay their share. Let’s talk about who doesn’t.
Harbor Point is a proposed 27-acre development on the former site of the Allied Chemical chromium plant on a piece of land between Fells Point and Harbor East. This 3,000,000 square foot, $1.5 billion mixed-use development will include 1.8 million square feet of office and retail space, 1,000 residences, 250 hotel rooms, 7,000 parking spots, a 9 acre park, and will be the future east-coast home of the Exelon Corporation and the 350 foot tall Exelon Tower. The developers are John Paterakis and Michael S. Beatty, co-founders of H&S Properties Development.
The project is being co-financed by hundreds of millions of dollars of Baltimore City tax dollars in the form of two main tax breaks. These tax breaks are accomplished by using common financial tools for urban redevelopment known as Tax Increment Financing (TIF) and inclusion within a state Enterprise Zone (EZ). A third type of tax break, a Payment In Lieu Of Taxes (PILOT) has also been commonly used to encourage development in places likes Harbor East and the Inner Harbor, but as of now Harbor Point has not applied for one.
With a TIF, bonds are issued by the city on behalf of a specific project like Harbor Point, and the money raised from that bond sale is conditionally given to the developer to help finance the project. The Baltimore Brew describes this as being essentially a tax-free loan from the city, but I think it’s more than that, because the city would stand to be repaid from a tax-free loan. With a TIF only the bond market gets repaid. Instead of paying property taxes to the city, the developers use that money to repay bondholders, and it only becomes a loan once you forget that the developers get to keep the original bond revenue and apply it to the project.
In the case of Harbor Point, the value of the TIF will be $107 million. The city of Baltimore will forgive $107 million in future tax revenue to finance a piece of a private development that we won’t own. But it could have been worse. We were ready to give them $155 million, we wanted to give them $155 million, but the developers didn’t want to pay so much interest on the bonds and they asked for the TIF to be lowered. That didn’t stop the Baltimore Development Corporation from taking credit for the reduction. Darrell Doan, Director of Real Estate Development for the BDC, stressed that the reduction of the TIF was due to the tough negotiating stance of the BDC, even though a spokesman for H&S Properties had already confirmed that the developers wanted it lowered. Doan went on; “In theory it shouldn’t cost the city any current dollars,” he said, conspicuously leaving open the possibility of Harbor Point costing the city many future dollars.
The $107 million TIF is not the only major tax break the project will enjoy. Harbor Point’s inclusion within one of the state’s Enterprise Zones (EZ) entitles it to an additional tax break worth $169 million, to be split equally by the city and state. By being within an EZ, the developers will receive an 80% reduction in property taxes over the first 5 years, about $21 million per year. The tax break reduces 10% each year after that, and then expires after year 10. It works out to a $104 million tax break in the first 5 years, and $65 million more in the next 5.
The state-approved EZ districts are meant to encourage redevelopment in areas suffering from poverty or neglect. Eligibility for inclusion within an EZ requires a potential neighborhood to suffer from 150% of the state average for unemployment, poverty levels at least 125% the national average, more than 70% of residents with under 80% of median family income, and a loss of population combined with chronic abandonment of property. Harbor Point does not pass any of these requirements.
Which is why in April 2012 the BDC removed Harbor Point’s EZ designation. Since the tax break offered by the EZ is split between the city and the state, Governor O’Malley sought to limit the state’s exposure to the tax break and reduce the number of eligible acres of Enterprise Zones from 22,000 to 13,500. On July 10th, 2012 Governor O’Malley approved the new map for Enterprise Zones, and Harbor Point was not included.
But not long after having it removed, the BDC began an ‘expansion application’ process to restore Harbor Point’s status as an Enterprise Zone. Nothing had changed. The area didn’t become poorer, or more unemployed. Harbor Point still failed every core requirement for EZ status. Sensing an opportunity, H&S Properties also sought to expand the EZ around Harbor Point to include other properties owned by Mr. Paterakis along the Thames Street waterfront and the east-side of Central Avenue south of Eastern. This expansion of the EZ border would make other Paterakis-owned properties eligible for another $81 million in future tax breaks. Later that fall, the City Council supported the recommendations from the BDC, and Harbor Point’s EZ was restored. These 2 tools for urban redevelopment will combine to give Harbor Point around $276 million worth of tax breaks, with Baltimore City forgiving over $191 million on our own. This is in addition to the $30 million in repairs the city committed itself to making on Central Avenue. And a possible future TIF to build a bridge to handle the additional traffic to and from Harbor Point. And the nearby properties the city transferred outright to H&S Properties to speed up the development process.
So let’s call it $300 million. $300 million for 1.8 million square feet of new office space at a time when we already have so much available office space downtown that we’re awarding additional tax breaks to other developers to turn some of that extra space into apartments. To subsidize a project that failed to properly inform local neighborhood groups of their plans to increase the size of the development by 1,000,000 square feet and 1,000 new residences until it had already been decided. For another new hotel.
But there are others who have and will continue to argue against the assessment that tax breaks are gifts to developers. The tax revenue we forgive never would have existed if not for the development, they argue, and we would have had to spend money on infrastructure eventually. A large amount of tax breaks can be rationalized because they were the difference between the project happening or not, that is, if the developers can be believed. At the end of the day, the city has a brand-new billion-dollar development that we didn’t have before, and if it cost us anything it was only tax revenue we might never have realized, they argue. It’s free money. Free for the city to borrow, free of consequence, free to be misspent. Whether or not you agree with this viewpoint depends entirely on your opinion of the investment opportunity Harbor Point represents. Harbor Point was an environmentally contaminated chromium factory that sat barren for years and the city has the opportunity to develop the land.
However, Harbor Point is not a chromium factory. It is 27 acres of downtown, waterfront property. It has a marina, it has a Morgan Stanley building, it already has 4,000 parking spots. It’s located between two of the most expensive and highest income neighborhoods in the city. The idea that this property would not have been developed had it not been for exactly $276 million in tax breaks is absurd. It could’ve been, it would’ve been. If these breaks represent the difference between the first shovel hitting the ground or not then H&S Properties would not have committed themselves to building Exelon Tower without first having the tax breaks secured, and they surely wouldn’t have allowed the EZ status to lapse. If their margins were so thin, that there really was a $300 million gap between what the job cost and how much they could do it for, they would never have been so careless.
But even then, even if you buy into the notion that Harbor Point could not have happened without hundreds of millions of dollars’ worth of tax breaks, you’re still accepting the premise that subsidized luxury housing is good for the net health of Baltimore City. A lot of people still live in Baltimore, not by choice, but by circumstance. Too poor and too unemployed to pack up and move to a place that is willing to provide an ambulance in a reasonable amount of time. But for a lot of us that isn’t the case. For many our decision to live in Baltimore is an economic irrationality. We live here in spite of the taxes, the rent, the schools, the obnoxious cuts in public safety, the apathetic and uninspired city government, the absurdity of forcing yourself out of bed in the morning after a long night of supporting local businesses to find that 10 cars on your quiet little side-street had been ticketed at 8:03am. We stay for the people and the food and the art and the music and the booze and the museums and the monuments and the universities and neighborhoods downtown offer little of that.
So the idea of investing in people who might live here one day and directing them downtown is as perplexing as it is frustrating. The city has decided that it’s in our interest to forgo hundreds of millions of tax dollars for the potential of developing new neighborhoods, to help subsidize the cost of living for the next generation of white-collar Baltimore. Fine. But it begs the question..
..Who are these people? Who is this potential condo buyer we give so much to appeal to? Are we talking about someone who wants to live in Baltimore but doesn’t already? Someone who sees the appeal of living in a city, but not outside a culture-free bio-dome like Harbor East? Someone whose first choice was not Baltimore City, but still wants to live here anyway and only if we develop Harbor Point? Someone willing to buy a condo downtown, but whose backup plan isn’t another neighborhood in Baltimore City but a lonely house in the county? We give up a lot of money to appeal to this person, so who are they? What are their names?
Because if the goal isn’t to import thousands of the people I just described then what we’re talking about is poaching people from other neighborhoods, which is great if you have apartments to rent downtown, but terrible for the city if we’re indirectly paying for someone to move from one neighborhood to another. There is no benefit to the city by subsidizing a move from Federal Hill to Harbor Point.
Take Spinnaker Bay apartments in Harbor East, for example. That building’s PILOT gave them a tax break of $1,062,700 in 2011, but generated around $1.2 million in other tax revenues, mostly from the income taxes of the 300 people that live there. But are we assuming that had it not been for the tax break awarded to the building, and Spinnaker Bay never been built, those 300 people would have moved to DC? Or is it far more likely that they would have found someplace else in the city to live, that however lovely Spinnaker Bay is on the inside, and whatever its modern amenities, it wasn’t the ultimate factor for those 300 people when they were deciding what city to live in. An H&S Properties project, Spinnaker Bay enjoys a PILOT that will last until 2024, and they will end up with $20 million in tax breaks, about $63,500 per apartment.
To their credit, Exelon is bringing employees with them to help fill up the 1,000 new residencies, at least in theory. It isn’t clear how irrational the average Exelon employee is. Will they ignore the fundamental problems that chase others from the city? Will the married couple ignore our public school situation? Will the young employee choose Harbor Point because of its central proximity to all the other much more fun neighborhoods? Will any of them ignore the crime? The taxes? Has anyone asked these people if they want to live in a city? Or next to where they work?
Most importantly, can we even be certain that the tax breaks we’re allowing will even be used to support the development of Harbor Point the way we’ve been told they would? From the February 1st, 2012 edition of the invaluable Baltimore Brew:
One crucial aspect of the headquarters deal with Maryland is that all city and state tax incentives received by a developer must be transferred to Exelon. So the gas and electric company will be getting a nice tax break over the course of its office lease.
The Exelon Corporation is a billion dollar energy producer. The market capitalization of the outstanding shares in their company is $31.8 billion. Their profits in 2012 were $2.495 billion. That’s $6.8 million a day. That’s $300 in the time it takes to read this sentence. We’re closing fire companies and rec centers for the amount of profit they make while sleeping for 2 hours. It is immoral for the Exelon Corporation to receive a tax break of any kind from our desperate city.
Harbor Point is a bad deal. There was a better deal out there but we don’t have anyone fighting for it. The TIF is a giveaway, the EZ is a fraud, but the truth is we never had a chance. When the developers are the driving force behind these breaks then redevelopment is fundamentally guided by people who don’t represent us, and don’t have the interests of the city in mind, but do have an idea of how we should spend our money. Such pessimism would be unthinkable in a less jaded world, but we know better, and even if we didn’t, we know that Mr. Paterakis, the gentleman at the heart of the Harbor Point project and owner of H&S Bakery, pled guilty to violating campaign finance laws in 2009 for providing payment to Councilwoman Helen Holton, then Chair of the City Council’s Taxation and Finance Committee, the committee responsible for approving tax breaks for developers. A year later Council Bill 10-0594 was passed, creating the Harbor Point Development District, making the property eligible for the 9-figure tax breaks it would eventually receive.
Instead of being driven by developers, tax breaks should be instituted by eager council members with specific ideas of where a targeted subsidy would do the most good, not in terms of pure tax revenue, but quality of life. The battles between council members for tax breaks in their districts should be ferocious, unforgiving and deeply personal, befitting and inspired by the unforgiveable levels of poverty in the neighborhoods they represent. Instead we have a system where tax breaks are proposed by developers, prodded forward by unelected businesspeople, and approved, largely without protest, by passionless elected officials. However the final part hasn’t happened yet. The Baltimore City Council has not given final approval for Harbor Point’s TIF.
Young, Stokes, Mosby, Scott, Henry, Clarke, Kraft and Cole; 8 Council members who have voiced concern over this bill in the past, or have condemned it outright like Councilman Kraft. Others who had abstained from the last vote on the TIF, or like Councilman Stokes and Councilman Mosby who bravely voted against it. Council members who have to see what a giveaway this is, and others who could benefit from the perception that they aren’t just party insiders. 8 Council members who should vote against this bill, or at worst, send it back to committee, and cut it in half.
If promises of a TIF were been made in the past, break them. These were made in bad faith, in back rooms, and out of sight. They were made before the representatives of the people could have their final say, and we are not bound to them. We can’t blame developers for doing everything within their means to get the best deal possible, we depend on them to do this. But if this is what they were promised, we are in no position to deliver.
No, the shame of Harbor Point will be ours, not the developers, and not just for Harbor Point but the tax break after this and the next 10, the 20 before it and the 20 after that. When we wake up years from now and realize that nothing has changed then the fall will be complete and it will belong to us. Vote against this tax break. We have nothing at stake but the health of our people, the opportunities of our children, and the soul of our city. Developers do not own Baltimore, but occasionally we’re going to have to prove it. This is how we do it.