State Center faces delay because of pending lawsuit

The planned $1.5 billion transformation of the aging Maryland government complex in midtown Baltimore is facing a delay on the first phase of construction because of a pending lawsuit against the developers.

Work to overhaul the 28-acre State Center was to start this winter with construction of an underground garage, mostly financed by the state through a planned $33 million bond sale. The sale would cover the state's $28.2 million portion of construction as well as closing costs, interest and debt reserves, while the developer was to contribute at least $4 million toward construction.

But state officials canceled plans this week to issue a preliminary offering statement and close the sale by the end of the month because a group of property owners in downtown Baltimore is challenging the project in court, Robert Brennan, executive director at the Maryland Economic Development Corp., or MEDCO, said Wednesday.

"We can't sell bonds with this lawsuit outstanding," Brennan said.

The lawsuit, filed in December in Baltimore Circuit Court against two state agencies and others, alleges that public officials failed to follow state procurement laws. It seeks to halt work on the massive project that will be built over 15 years and replace an outdated complex of 1950s-era office buildings now occupied by 3,500 state employees.

The project has been planned on state-owned property on the western edge of Mount Vernon since 2005 and includes a $200 million first phase that will house three state agencies leasing more than a half-million square feet.

Plaintiffs in the lawsuit, brought by owners of a dozen large office buildings and other properties in downtown, say they never were given a chance to compete for the state worker tenants and could have offered considerably lower rates than the state will pay at State Center.

Brennan said state officials hope to restart the bond sale process as soon as the lawsuit is resolved. "We're hoping that can happen fairly quickly," he said. "This is a really important project to the state."

He said the redevelopment would not only benefit state agencies with more modern and efficient facilities, but it also would be a "great demonstration" of transit-oriented development, bringing residential and retail spaces under one umbrella.

Despite the setback in financing, the developers and state officials, who are jointly overseeing the project, said they plan to continue with pre-construction work.

"The State Center project is moving forward," Caroline Moore, chief executive of the State Center developer Ekistics, said in a statement. "There is plenty of work to do, and we're doing it."

The state plans to keep the same number of employees at State Center, including workers at the Department of Health and Mental Hygiene, the Department of Planning and the Maryland Transit Administration. The site, which has access to light rail, Metro and train service, ultimately could include 2 million square feet of public and private office space, 1,400 rental and for-sale housing units and 250,000 square feet of ground-level shops.

Officials with the state Department of Transportation and the Department of General Services, the agencies overseeing the project, also said on Wednesday that work continues to move forward, including building design and parking plans before the project goes to financing.

Christopher Patusky, director of the transportation department's real estate office, and Michael Gaines, assistant secretary for real estate at the general services agency, said they expect the state and developer to advance when the litigation is dismissed.

But a representative of the lawsuit's plaintiffs called the bond sale's delay a positive step from the property owners' perspective.

"This is a positive step to take a breath, and it appears that's what the state's doing, to review the project, understanding that the lawsuit has been filed and there's a good reason," said David Johnson, senior vice president of Lexington/Charles Limited Partnership, owners of an office building at 201 N. Charles St.

Johnson noted that downtown is facing a high vacancy rate and that competition from State Center would hurt property values there. "The focus has got to be on what do we do with what we've got," he said. "We are competing against a public-private development team to compete for tenants that are already downtown."

Alan Rifkin, the attorney representing the plaintiffs, said it would have been impractical for MEDCO to have issued bonds that are encumbered by the State Center lawsuit.

"They did the right thing in halting the bond issuance," he said. "The entire project is a house of cards built upon enormous public subsidies, including a $33 million garage that was initially the developers' obligation and later saddled to the state taxpayers."

The lawsuit accuses the state of selecting developers without any competitive bidding and providing the developers with guaranteed long-term leases at almost double the going rate for commercial space.

"With over 2.2 million square feet of vacant office space in downtown Baltimore, it makes no sense to build another 1.5 million square feet less than a mile away from the downtown district subsidized by the taxpayers," Rifkin said. "Hopefully, MEDCO's decision will provide the policymakers of this state with an opportunity to rethink this ill-conceived project."