City has lost $25 million in bad development loans Impact of program remains murky


For two decades, Baltimore has struggled to rebuild itself from the waterfront to the inner city, luring developers with hundreds of millions of dollars in loans.

The aid was targeted for projects that bankers deemed too risky to finance on their own, projects that helped create jobs and stabilize neighborhoods as Baltimore transformed itself from a dowdy old port city into a national attraction. Today, many of those projects are flourishing -- the glitzy hotels near the Inner Harbor, a Charles Street shopping arcade, an East Baltimore textile company, senior citizens' housing in North Baltimore.

But others did not fulfill their promise, leaving a legacy of debt at City Hall.

Now the city is at risk of losing as much as $60 million from developers who are not repaying their loans -- an amount equal to next year's budgets for the city's housing department, library system and state's attorney's office combined.

City records show that Baltimore and the state have already lost $25 million in defaulted loans for bankrupt hotels, failed businesses, and botched revitalization projects since Mayor William Donald Schaefer turned City Hall into a bank for developers in 1976.

More than 200 projects received government aid since then, and city records show that 50 have now been written off by finance officials or classified as troubled -- in danger of not being repaid. But measuring the successes and failures of Baltimore's loan program is difficult. City Hall has not even kept count of how much money was doled to developers during Baltimore's boom years, how much has been repaid and how much has been lost.

And city administrators say they can't assess the impact of the projects they funded with local and federal money because they've never tracked how many jobs were created or how much the property rolls increased. Mayor Kurt L. Schmoke, whose administration inherited the loan program from Mr. Schaefer, said he doesn't have the people or money to perform such a detailed analysis.

Baltimore isn't unique in having only a murky picture of what it accomplished with huge investments of public money. Other cities across the nation have also failed to analyze their loan programs, economists and urban specialists say. As a result, cities don't learn the lessons of history; they don't discover what works and what doesn't.

"Cities just haven't been very good at that," said Marc Levine, who heads the urban studies program at the University of Wisconsin-Milwaukee and is writing a book on Baltimore's economy during the Schaefer years. His research shows that cities often made loans haphazardly instead of as part of a coherent strategy. "There's no clear evaluation criteria: Were jobs created? Were goals met?"

Baltimore's loan program had laudable goals, but the record of non-payment shows the risks that accompanied them. The ventures that failed, for example, include G & M Oil Terminal, a minority-owned company that hoped to employ 100 people but instead went bankrupt; the Fishmarket, an entertainment complex near the Inner Harbor that is now closed; and the Pimlico Center, a Northwest Baltimore apartment renovation project that is now a vacant eyesore.

Even some successful projects haven't returned the city's money. The Omni Hotel, bustling with conventioneers, or Tindeco Wharf, a fully occupied apartment complex in Canton, haven't generated enough revenue, as defined in their loan agreements, to require regular loan repayments to the city. Baltimore's finance officials consider those loans troubled because an inability to make payments now raises doubts whether owners can come up with the balance later.

The repayments were to be the source of a municipal loan fund. Baltimore, hard pressed for money after years of federal cutbacks, could use that money for new development loans, to help first-time homebuyers or to fund anti-poverty and education programs.

Old arguments

For some critics of the city's investment decisions, the troubled loans revive old arguments. For years, neighborhood activists and some City Council members questioned the wisdom of the city's loan policies.

"It seems to me the city is so anxious to get this development that it gives away the store -- and the store is city taxpayer dollars," said City Councilman John Cain, D-1st.

But Mr. Schaefer and others defend the investments as worthwhile. They contend that even though many loans weren't repaid, it would be wrong to consider those deals failures. Some created jobs; some boosted the tax base; some improved the city's image, thus attracting tourists and new developers.

"The intent of [federal development loans] was to have projects built in distressed cities," said Robert C. Embry, Jr., a former city housing commissioner and top federal housing official during Baltimore's renaissance.

He says he's not concerned if federal Urban Development Action Grant funds -- which make up about a third of Baltimore's troubled loans -- remain unpaid. "If the money was paid back, that was just gravy," he said.

During Mr. Schaefer's 15 years in City Hall, he and finance officials rarely talked publicly about the risks of the development loans. Routinely, they pledged that the deals were safe and the money wisely invested.

"Each one of these projects that the trustees are involved in are sound fiscally -- not what I would consider risks," Mr. Schaefer said in a 1980 interview.

Now he says, "We tried to get every dollar back, every dollar. But you take some risks. You do take risks."

Determined to jump-start private investment in the city, Mayor Schaefer decided in 1976 to found a City Hall loan bank, called the Loan and Guarantee Program.

The loan program's trustees -- the city treasurer and finance director at first -- funneled millions of dollars into hotels, houses and new businesses, augmenting bank loans and guaranteeing private loans with government funds. About half the loan money came from city bond funds; the rest was from a combination of federal programs. Occasionally, the state kicked in small amounts of money.

Mr. Schaefer started his renewal efforts at the decrepit Inner Harbor, where he hoped to draw tourists. With much cajoling -- and a $10 million loan -- the city convinced the Hyatt company to build a showplace hotel on Light Street.

The gamble paid off, with the Hyatt Regency deal generating $25 million in loan repayments for the city. That money was recycled to help build the Scarlett Place condominiums and Festival Hall, expand the Convention Center and install $1 million worth of public toilets at the harbor.

Thanks to the Hyatt and other early successes -- including the Loft I apartments on Paca street, Cindarn plastics in the Park Circle industrial park and the Cadillac-Fairview office building downtown -- Baltimore's bank became a nationwide model. The U.S. Conference of Mayors even wrote a handbook teaching other cities how to copy Baltimore's "creative financing" techniques and bypass red tape.

But some government officials were critical of the trustee loan bank, which made deals quickly and secretly, with only the most cursory review by the Board of Estimates.

"We know [the trustees] were sowing the seeds of no real accountability into the future," said City Council President Mary Pat Clarke, who as a councilwoman in the 1970s and early 1980s was skeptical about the trustees' methods. There were no public guidelines on who could qualify for city help, and critics groused that the bank simply promoted the Schaefer administration's pet projects and favorite developers.

In fact, some of the largest of the outstanding loans went to well-known political supporters of Mr. Schaefer. They include Henry J. Knott Sr., the contractor and philanthropist; his son, Henry J. Knott Jr.; urban developers Bill Struever and Winstead Rouse; Eastern Shore entrepreneur Buddy Harrison, and builder Victor Frenkil.

The move to hotels

As time went on, it was clear that not every deal was a winner. When City Hall tried to repeat its experience with the Hyatt by investing in other hotels, the results were not so impressive.

Today, of all the city's troubled loans, one-third of the money -- or nearly $30 million -- went to finance hotels: the Omni Hotel, the Belvedere Hotel, the Lord Baltimore Hotel, and Harrison's Pier V, which also operates a large waterfront restaurant.

The city has lost $5 million on the Belvedere, owned by a partnership headed by Mr. Frenkil, and $7 million on the Lord Baltimore. Both hotels filed for bankruptcy but are open under new management.

A partnership headed by Henry J. Knott Jr. has made no payments on a $5.9 million city loan to renovate the Omni Hotel. When the partnership bought the former Baltimore Hilton in 1984, it inherited the delinquent city loan from a previous owner. City finance officials had promised the Board of Estimates that the original loan would be repaid in five to six years, according to board records. That was 12 years ago.

At Harrison's, Baltimore's newest hotel, the city stands to lose $11.6 million in delinquent loans and guarantees. The owners -- Mr. Harrison and Silver Spring developer James I. Humphrey Jr. -- haven't even paid their $755,000 in property taxes and penalties in two years.

The losses weren't confined to the tourist industry. The Schaefer administration ran into problems, too, when it tried to preserve historic buildings.

In 1979, the city financed the restoration of the charred ruins of the Beethoven Apartments in Bolton Hill. But through a series of financial and construction mishaps, the city sank more than $7 million into a building that tax assessors say is worth only $2.3 million. Now the city's accountants don't expect to get all of the $6.3 million mortgage from the current owner, Henry J. Knott Sr., finance department records show.

'Like the German war debt'

Mr. Knott says he's just breaking even on the fully occupied building. But he's only required to make his mortgage payments if he has extra money after paying the Beethoven's other bills.

"It's like paying the German war debt," he said of his loan. "It's impossible, absolutely ludicrous. I wouldn't pay it anyway. They can have the damn building."

(In fact, the city does get the building back in about 15 years, or when Mr. Knott dies, whichever comes first.)

City Hall also lost money in some of its efforts to support minority-owned companies.

In 1988, Ainsworth Paint and Chemical Co. went out of business after the federal government, a major contractor, rejected its paint. The East Baltimore company defaulted on $1.3 million in city and federal loans and cost 33 employees their jobs.

And in its efforts to stabilize neighborhoods, the city sometimes stumbled as well. An attempt to revitalize the Park Heights corridor, for example, has instead contributed to its deterioration.

A visible symbol of that decay is an empty building called the Pimlico Center in the 5400 block of Park Heights Ave. The apartment and office building has produced no loan payments or property taxes for several years.

In 1981, after acquiring the building through foreclosure, the city sold it to a church headed by Monroe R. Saunders, a former Schaefer appointee to the city school board and the Urban Services Commission.

The church has never made a payment on a $550,000 mortgage owed to the city, say finance officials. And the city has never foreclosed. The building -- which was occupied and in good condition when the city sold it to the church -- has become the target of vandals and a haven for the homeless.

Some of the loans have gone unpaid for so many years that they might as well be grants.

Today, the troubled loans amount to 44 percent of the city's $137 million in outstanding loans to city developers.

So why doesn't the city go after them?

The city has little leverage to collect because most of the unpaid loans are second or third mortgages. Peggy Watson, the deputy finance director, said that if a property were auctioned off after foreclosure, the city would be paid last -- if there were any remaining cash to share.

"If you pursue legal recourse, a lot of times there would be nothing left for the city," she said. "A lot of loans were borderline from the beginning."

Federal and city auditors say the Schmoke administration can't even tell if some projects owe money because City Hall has failed to collect financial statements from the owners. On some loans, city officials have to monitor the project's income to determine whether there is money left after the owners pay other loans and taxes and take a management fee.

The city finance officials said that 16 developers have not answered their requests for financial documents this year. Some have failed to send statements for several years, and 10 have never turned them over. Henry J. Knott Jr., whose partnership has never made a payment on its $5.9 million Omni Hotel loan, is among those developers.

Mr. Knott did not return a reporter's calls.

City Auditor Allan L. Reynolds said the financial statements probably wouldn't make much difference. Most of the deals, he said, were "sufficiently marginal" and it's unlikely they owe the city money.,he said.

City Hall is still making loans to developers, though on a far smaller scale than before because federal aid is much tighter. Mr. Schmoke believes that such loans are important to Baltimore's future. "Cities over the last 25 years have become more entrepreneurial," he said. "If we're going to compete, we have to be involved financially in some deals."

Governor Schaefer couldn't agree more. He has no doubt that the choices made by his City Hall helped turn around the decline of his distressed city and reinvent its national reputation. There were risks, of course, but he's convinced they were necessary.

"The safe way, of course, is to do nothing," he said.


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