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News Opinion Editorial

No more Harbor Point surprises

Those who are dead set against the proposed $107 million in tax increment financing bonds to cover roads, parks and other infrastructure associated with the Harbor Point project are bound to find disquieting the news that developer Michael Beatty plans to buy the first installment of the bonds himself. To the deal's biggest critics, it sounds like self-dealing and begs the question of why Mr. Beatty can't just pay cash for the infrastructure instead of getting the city to issue bonds.

But an objective view of this development in the Harbor Point saga has to hold that it makes the deal somewhat better for the city. It saves taxpayers millions associated with the cost of issuing bonds, and it provides some reassurance about Mr. Beatty's ability to fulfill his promises — and cover the bond payments. After all, if he defaults, he's now defaulting on himself. None of that is decisive in the question of whether this deal is a good one for the city — much less whether it is the best possible deal city officials could have struck — but it does tilt the scales somewhat more in Harbor Point's favor.

Here is what it entails: Assuming the City Council approves the deal, which appears likely, it will issue bonds to pay for infrastructure associated with the project, and the bonds will be paid off through the increased property taxes generated as a result of the development. The first phase of the construction would require about $35 million in bonds, and Mr. Beatty proposes to buy them all. In order to do that, he would have to take out a construction loan. The interest that accrued on the bonds would cover the interest he would have to pay for the construction loan, and the whole thing theoretically comes out even for him.

The advantage to the city, though, is substantial. It doesn't have to pay to market the bonds, and it avoids legal fees associated with issuing them to the tune of about $6.5 million. City officials say they have entered this kind of arrangement before in a TIF deal for Mondawmin Mall.

City Councilman Carl Stokes, who is the Harbor Point deal's most outspoken opponent, is now suggesting that if Mr. Beatty has the wherewithal to buy up all those bonds, he doesn't really need a TIF to pay for the insfrastructure. Without the TIF deal, the city would get to keep the property taxes generated by the development rather than having them go to pay off the bonds.

But that's not the point. The question was never whether Mr. Beatty and his investors could raise the money to pay for the infrastructure covered by the TIF. The question was what level of city support (if any) was necessary for the project to generate a sufficient potential return to induce investment given the risks involved. Documents from the Baltimore Development Corp. indicate that the projected return for investors is 14 percent with the $107 million TIF, 10 percent without. Either of those sound like hefty returns compared to stocks or bonds, but those figures also assume all goes according to plan and there is not, for example, another recession or crash in the real estate market. Investors in real estate development can get rich, but they can also lose their shirts.

Whether the BDC could have driven a harder bargain without causing the deal to collapse is the kind of judgment call inherent in any negotiation. Whether it did the best it could is the question the City Council now has to answer. News of Mr. Beatty's plan to buy the bonds is a reminder of just how difficult it is to make calculations like that given the lack of transparency in the process.

Although the public just learned about this wrinkle in the Harbor Point saga in a report today by The Sun's Luke Broadwater, it is not a new development. Rather, it was part of the plan negotiated between Mr. Beatty and the BDC. Perhaps it was part of the discussion when the Baltimore Board of Finance endorsed the deal and sent it to the City Council for final approval; we'll never know because the board closed the meeting at which it deliberated the matter, a decision that was later ruled to have been a violation of state open meetings laws. It was mentioned, if obliquely, in a BDC analysis of the deal, but those documents never would have been made public either had Mr. Stokes not demanded them before holding a hearing on the TIF proposal.

The details of Mr. Beatty's plan to buy the first round of bonds amount to a pleasant — if modest — surprise. But the fact that we are surprised by anything on the eve of final approval for $107 million in public financing shows just how badly flawed the process is by which we arrived at this point.

Copyright © 2014, The Baltimore Sun
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