H&S; hotel tax break is upheld; Md. high court rules city had a right to grant exemption; $75 million to be forgiven; $1 in taxes a year for 25 years for a $117 million hotel


The state's highest court ruled yesterday that the developer of a 750-room hotel under construction east of the Inner Harbor is eligible to receive $75 million in city tax breaks.

The Court of Appeals reversed a Baltimore Circuit Court judge's decision that struck down the 25-year package for H&S; Properties Development Co., the real estate arm of baking company executive John Paterakis Sr.

The lower court's ruling late last year prompted the General Assembly to empower the city to grant another tax break of about $74 million -- $1 million less than the original city deal -- over 25 years.

Yesterday's ruling means H&S; will receive the more generous of the city packages for its $117 million hotel. The ruling also appears to put an end to a contentious debate between the developer and community groups opposed to the subsidies and the project.

"We're excited about the reversal," said Michael Beatty, vice president of H&S; Properties Development. "We always thought that we had the right position on this project from the beginning."

Carolyn Boitnott of the Waterfront Coalition, a collection of neighborhood and small business groups, said she was disappointed.

"It is a defeat," said Boitnott, the lead plaintiff in the case. "We were hopeful, particularly in this case, that we would have been successful. They would have paid a little more in taxes."

In a statement, Mayor Kurt L. Schmoke said, "All the developments surrounding this project seem very positive. This is simply another positive development. I am looking forward to seeing a world-class hotel constructed at the water's edge."

The case focused on development deals known as payment in lieu of taxes, or PILOTs. In their lawsuit, Boitnott and other plaintiffs argued that a 1998 ordinance that effectively limited H&S;' property tax payments to $1 a year for 25 years -- a total benefit of $75 million -- was invalid.

The plaintiffs argued that the city would have "record" title to the hotel but not legal title -- in violation of another 1998 ordinance that limited municipal tax exemptions for hotel projects to city-owned properties.

"The city has none of the incidents of ownership of property," the plaintiffs argued before the appeals court. "It doesn't have the right of possession, and will never have it. It has no right of enjoyment, and receives no income from the property."

Arguing that "record" title was adequate, city officials said the state PILOT law requires municipalities to forgo use and possession of properties of private entities.

"Thus, by definition, the city always has less than a perfect, unencumbered estate" in properties that are subject to PILOT agreements, the city argued to the appellate court.

Baltimore Circuit Judge Richard T. Rombro sided with the plaintiffs. "[It] does not seem that this arrangement complies with any definition of ownership," Rombro wrote.

He ruled that the city's use of the property under the initial PILOT was severely restricted, without rights to mortgage or convey the property. "It can, in effect, do nothing with the property," Rombro wrote.

After that decision, the General Assembly passed legislation allowing the city to provide a second, different, PILOT, which would have required payments of $40,000 in property taxes annually, or $1 million over the course of the 25-year tax break.

The city and the developer appealed Rombro's ruling. In an opinion citing precedent dating back to 1862, Chief Judge Robert M. Bell of the Court of Appeals reversed Rombro's ruling and effectively upheld the original PILOT.

"That the parties have restricted drastically the city's right to use or enjoy the property is not fatal to the city's ownership claims," Bell wrote. "As we have seen, some restriction [of ownership] is inherent in the lease of the property."

Pub Date: 9/24/99

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