Baltimore's agreement with the Rouse Co. on Harborplace has a provision for profit-sharing, but the city has never received any money from that arrangement even though the festival-style pavilions have been profitable, according to interviews and documents.
The reason is that the agreement allows the Rouse Co. to deduct additional expenses when calculating the city's share of the profits, accountants and financial officials say.
Without those additional deductions, Harborplace would have shown an annual positive cash flow of $160,000 to $1.5 million in recent years, documents on file with the city show.
But when those additional deductions are factored in, Harborplace has shown a bookkeeping loss of $535,000 to $1.1 million in recent years for purposes of computing the city's share of the money, those reports show.
The amount of money Harborplace generates for Baltimore and the terms of the agreement governing the relationship between the city and the 15-year-old waterfront restaurant and retail complex are a matter of intense interest after last week's announcement that the Rouse Co. wants the city and the state to pick up two-thirds of the cost of a proposed $20 million refurbishment of the development.
Dana A. Forgione, associate professor of accounting at the University of Baltimore, said the terms of the profit-sharing agreement were clearly favorable to the Rouse Co.
"I think [the company's] interests are clearly protected," he said. "It's like, 'You get your share after my share is covered.' "
A Rouse official said that during most of its 15 years, Harborplace has made money but it was poured back into the project.
"The Rouse Co. has taken no cash out of the project," said Robert Minutoli, a Rouse Co. senior vice president overseeing Harborplace's refurbishment.
Rouse Co. executives, Mayor Kurt L. Schmoke and some economists argue that it would be wise to pump public money into the proposed renovation because of Harborplace's importance to the city's downtown area and because of the millions of dollars it has generated in city and state property, sales and income taxes over the past decade and a half.
But some lawmakers are questioning whether it is appropriate to use public funds to subsidize a profitable company, especially when the city and the state are showing little or no revenue growth and are facing the potential loss of millions of dollars in federal aid.
The lease negotiated in the late 1970s between the city, which owns the land, and Harborplace Limited Partnership, an affiliate of the Rouse Co. which built the two pavilions, was for 75 years.
The lease called for the Rouse Co. to pay annual ground rent to the city, which last year amounted to $92,190, and property taxes on the buildings, which last year were $1.068 million.
It also called for the city to receive an annual sum equal to 25 percent of the "net cash flow" of the pavilions.
As defined by the lease, "net cash flow" is determined by taking Harborplace's operating income and subtracting such generally accepted costs as operating expenses, debt service payments and ground rent. But it also allows the Rouse Co. to subtract 10 percent of its operating income and 10 percent of its "equity investment," which includes the total of the original $10 million of its own money the company put up for the project and the sum of all the money it has spent on the development for construction improvements.
For example, last year's statement submitted to the city by the Rouse Co. showed Harborplace had operating income of $10.46 million; operating expenses of $5.95 million; debt service payments of $2.51 million; ground rent of $92,190. That would leave $1.91 million.
But subtracting 10 percent of the Rouse Co.'s operating income, or $1.04 million, leaves just $950,000. And subtracting 10 percent of Rouse's equity investment, or $1.75 million, leaves a loss of $880,000 for purposes of calculating the city's share of profits.
Two former city officials involved in the original deal with the Rouse Co. -- M. Jay Brodie, the former city housing commissioner, and Martin L. Millspaugh, the former president of the Charles Center-Inner Harbor Management Corp. -- said in separate interviews that the profit-sharing clause was included to give the city a chance to share in extraordinary profits, not ordinary ones.
"It was what you might call a 'windfall profits' clause," said Mr. Brodie, who is the choice to become the new head of the city's economic development agency, into which Charles Center-Inner Harbor was merged in 1991.
But some city officials are suggesting that the clause be reviewed if the city indeed puts more money toward the project.
Mr. Minutoli, the Rouse senior vice president, said the company would consider that suggestion along with any others.