Harbor Point developer to buy project's city-issued bonds
By By Luke Broadwater and The Baltimore Sun
Aug 16, 2013 | 3:55 PM
The developer of Harbor Point plans to buy the initial offering of city-issued bonds for the $1.8 billion project, accruing millions in interest from the controversial public financing deal, city officials confirmed Thursday.
Developer Michael S. Beatty's Harbor Point Development Group LLC plans to purchase about $35 million of the $107 million in bonds and would earn an estimated 6.5 percent interest rate, enabling him to pay for a construction loan.
Stephen M. Kraus, the city's chief of treasury management, said the arrangement would save the city money because a private sale is cheaper to orchestrate than a public bond offering. But the plan was criticized sharply by opponents of the financing deal, in which the city floats bonds to pay for infrastructure and other improvements at the development site.
"This revelation makes the deal stink even more," said Bishop Douglas Miles of Baltimoreans United in Leadership Development, who has spoken at City Council hearings against the so-called tax increment financing, or TIF, for Harbor Point. "If [Beatty] can afford to buy $35 million worth of bonds, he could have afforded to invest in the project and reduce the TIF. This is greed in its ugliest form."
The City Council gave preliminary approval this week to the public financing, which has drawn hundreds of protesters to City Hall. A final vote is expected next month.
With tax increment financing, the bond sale proceeds are used for improvements — in this case parks, roads and other infrastructure — and future property taxes generated by the development are used to pay off the bonds.
But critics argue that tax increment financing deprives the city's general fund, which pays for police, firefighters, teachers and other city services, of the increased property tax revenue. They say it's risky and amounts to little more than corporate welfare.
Supporters, including Mayor Stephanie Rawlings-Blake, argue the project would swell the city's tax rolls and create thousands of jobs.
The tax increment financing is part of about $400 million in public subsidies for the project, including more than $110 million in tax breaks.
Kraus said the sale of bonds to Beatty would save the city about $6.5 million in financing, legal and other costs. Beatty would hold the 30-year bonds for three to four years during the first phase of construction, Kraus said. Depending upon how long the bonds are held, they could accrue up to $9.5 million in interest, which the developer plans to use to pay for a construction loan. The city's consultant projects the bonds will earn about $5.5 million in interest.
Harbor Point is the planned home of energy giant Exelon's new regional headquarters, as well as a Morgan Stanley facility, other office buildings, residential towers, stores and a hotel.
The city has sold tax increment financing bonds directly to a developer once before — as part of the $15 million tax increment financing deal for Mondawmin Mall in 2008. Kraus said that deal has "worked well."
Thomas B. Lewis, a partner at Harbor Point's law firm, Gallagher Evelius & Jones, emphasized the developer plans to funnel the interest earned on the bonds back into the development by paying for a construction loan and to re-sell the bonds eventually.
"The interest rate on the bonds held by the developer will match what the developer will pay to the bank on the construction loan, leaving him with no mark-up, no profit and no benefit from holding bonds," Lewis said.
And, he noted in an email: "This overall approach accomplishes the funding of the infrastructure at a greatly reduced financing cost to the city."
Such arguments hold little sway for opponents of the financing.
City Councilman Carl Stokes criticized the sale of bonds to Beatty. Had the development team used its own money to build infrastructure, he said, the city could have seen increased property tax revenue right away instead of waiting for more than a decade, when projections show the tax revenue will exceed bond payments.
"The more you peel this onion, the more you cry," Stokes said. "The developer is the investor here. Most of the city is clear on what this is: It's not about jobs or growing the city. It's about growing this development."
The city ultimately would sell $107 million in tax increment financing bonds for the project, which would accumulate interest and fees for a total debt of $283 million.
City Council member Bill Henry, who voted against the public financing plan and argued for a smaller deal, said the developer would benefit from interest on the project's bonds. But he said the deal underscores how bullish Beatty is on Harbor Point.
"On the face of it, it's more evidence that he believes strongly in the project," he said. "It's an example of his willingness to put his own money into it."
The first phase of the project includes construction of a $10.4 million bridge connecting Central Avenue to Harbor Point, a $2 million contribution to the Crossroads charter school and other infrastructure projects.
City officials referred to the arrangement for the developer to buy the bonds in documents released in June but included few details.
The Baltimore Development Corp., the city's quasi-public development arm, provided the documents to Stokes, who released them to the public. Stokes had threatened to delay a hearing on the public financing unless the Rawlings-Blake administration turned over reports showing the project could not be built without it.
According to those documents, Beatty's group requested the arrangement under which the developer would hold the bonds through the first phase of construction, and the city agreed.
The documents also showed the tax increment financing plan would increase the anticipated return for both investors and the developer, who hopes to retain a "substantial ownership" in the project. With the city financing, the rate of return would climb to 14 percent from 10.7 percent, according to the documents.
The largely vacant Harbor Point site is assessed now at $10 million, but the Baltimore Development Corp. projects it would be valued at $1.8 billion for tax purposes when it is completed years from now.
Plans include a promenade, connecting a popular walkway and jogging route from Fells Point to Locust Point, and $59 million in public parks. Those features would be paid for through the tax increment financing.
Once fully built, city officials say, the project would contribute about $20 million a year in increased property taxes to the city's budget, which could be used for schools, roads, police and other projects.
Rawlings-Blake, a supporter of the development, said earlier this week she has listened carefully to the criticism but still thinks the project would benefit the city.
"For me, this is about creating jobs, jobs for Baltimore city residents," she said. "It's about creating a diverse tax base for the city. ... Yes, it's a project downtown, but when those funds go to the general fund, that goes all over the city."