The developer of the Legg Mason building in Harbor East sold a majority stake in a transaction that reportedly values the property at nearly $300 million.
The sale comes weeks after the city agreed to accept $1.5 million to cancel an accord that required the owner of the 24-story office tower and garage to share profits with the city.
The potential profit reaped by developer H&S Properties Development Corp. in the sale revived questions about a deal that has been controversial since the city backed it a decade ago, saying it helped retain Legg Mason's headquarters in Baltimore.
CoStar, a real estate research firm that tracks sales, reported that H&S sold a 56 percent stake in the tower to CBRE Global Investors in a deal that valued the property at nearly $300 million. CoStar said it had not confirmed the $481-per-square foot valuation with parties to the transaction, which would significantly outstrip other recent office sales in Baltimore.
Representatives for H&S, which said in 2015 it was seeking an investor for the property, did not respond to requests for comment. Pam Barnett, a spokeswoman for CBRE, also declined to comment on the size of the equity investment, which CoStar estimated at about $165 million.
Barnett said the firm was drawn to the 100 International Drive building for its strong, diverse tenant base and location in Harbor East. The investment increases CBRE's presence in Baltimore, after the firm purchased the Hanover Brewers Hill apartment complex for $142 million last year.
"This trophy-quality asset is one of the highest quality buildings in Baltimore and the Mid-Atlantic region," she said in a statement.
The reported valuation demonstrates that Baltimore's office market has improved, said Robert Manekin, a senior vice president at the JLL brokerage firm and a longstanding industry observer. It follows recent sales of the Transamerica Tower at 100 Light Street for $121 million — or $190 per share foot — in 2015 and the Morgan Stanley building in Harbor Point for $89 million — or $341 per square foot — in 2014.
"The recent sales of trophy investment properties, culminating with this transaction, really demonstrate the increasing strength, stability and growth of our office market in downtown Baltimore," Manekin said.
H&S, founded by the late John Paterakis Sr., a politically connected bakery magnate, and still controlled by his family, completed the tower for money manager Legg Mason in 2009.
To help finance the development, the city agreed to a payment in lieu of property taxes or PILOT deal that limited tax increases to 5 percent of the property appreciation, applying to the offices for 15 years and to the parking garage for 25.
In exchange, the firm was required to share 25 percent of its profits with the city, after making a 15 percent return.
The deal stirred a political firestorm in the city amid allegations of impropriety. Paterakis plead guilty in 2009 to two misdemeanor campaign finance violations and paid $26,000 in fines. He was accused of exceeding the allowable donations limits by contributing $6,000 toward a re-election poll commissioned by retired City Councilwoman Helen L. Holton. Holton pleaded no contest to violating campaign finance law but was cleared in 2011 of a more serious bribery charge because there was not evidence she voted for the deal with H&S because of the contribution.
Last month, the Board of Estimates agreed last month to lift the 2009 profit-sharing requirements in exchange for the $1.5 million payment. The change was critical to allowing the recent investment deal go through, said William H. Cole IV, president of the Baltimore Development Corp.
Cole said the city's analysis found that it was "highly unlikely" that the city was sacrificing money by changing the rules, even with the entry of a new investor. The firm hasn't crossed the 15 percent threshold since the agreement was put in place.
Cole said he could not provide the details of the analysis Friday. He said the city was aware of the price H&S Properties expected to receive for the stake, but he could not confirm the figures.
Board of Estimates members either declined to comment (Mayor Catherine Pugh), were not available (City Council President Bernard C. "Jack" Young) or did not respond (Comptroller Joan Pratt).
M.J. "Jay" Brodie, who negotiated the agreement as former president of the Baltimore Development Corp., said profit-sharing was included as a way to guard against the possibility of excess developer profits. He said he didn't have enough information to judge whether lifting them opens up that possibility.
Former City Councilman Carl Stokes, an outspoken critic of many of the city's economic incentive packages, said the board should not have agreed to lift the profit-sharing provisions, slamming the move as "corruption."
"It's indecent," he said. "The developer walks in without a mask, without a gun and says, give me the taxpayers' money and the city leadership says, 'Here. Take not only what you asked for but here's some more."
It's not clear how much the PILOT has saved the owners on property taxes. It produced a rebate of nearly $4 million in the 2011 fiscal year, according to BDC records. The building owners paid about $400,000 in city property taxes in the most recent tax year, after a credit of about $3.5 million.
The foregone revenue comes at a time when the city faces shortfalls of $130 million in the school budget and $20 million in its own budget. The city has lost state money for schools under a funding formula that takes into account declining enrollment and the rising value of city property without considering city subisides for any development.
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City Council members contacted Friday said they want to know more about the recent transaction, as well as other profit-sharing agreements the city has in place.
"I'd like to see what's out there and that we know that we're operating in good faith because we need this money," said City Councilwoman Mary Pat Clarke.
The activist group Baltimoreans United in Leadership Development has spoken out about the Harbor East subsidies in the past, saying they did not produce sufficient returns for the city. On Friday, Rev. Andrew Foster Connors, co-chair of the group, said he wanted to know more about the recent changes.
"It's hard to know what exactly was just given away," said Connors, adding that he is concerned about what it means for the city's other profit-sharing arrangements.
"Once you've agreed to something ... you expect that that agreement would hold and if a party needs to change the agreement, sometimes for reasonable circumstances, that should require the community's involvement in the case of a public subsidy," he said.