City share of profit sharing is zero

The Baltimore Sun

Big breaks given by Baltimore officials to spur major downtown projects over the past decade came with provisions that the city would share in profits.

But Baltimore has yet to see one cent as a result.

The projects include successful ventures such as the Power Plant, home of the nation's first ESPN Zone and a Hard Rock Cafe; the Baltimore Marriott Waterfront hotel in Harbor East, which draws conventions as well as tourists; and luxury apartments renting for more than $2,000 a month.

Profit sharing is also part of a $33 million tax break proposed for a new Legg Mason headquarters tower in Harbor East.

City development officials say they aren't concerned.

"This is not unexpected," said M. J. "Jay" Brodie, president of the Baltimore Development Corp., the city's economic development arm. "We continue to monitor each project."

The BDC says that collecting part of the profits was never the goal in any of 10 deals struck since 1997. The point was economic development.

The deals in general are designed so that the city gets a share only if the projects end up performing better than projected, the BDC says.

"The profit sharing is a way of the city saying if the development is more successful economically than any of us thought, then we the city would like to have a share of that increase," Brodie said.

That comes as news to some elected city leaders, who said they were figuring on hard cash.

The tax break for H&S; Properties Development Corp. - which is developing the 24-story skyscraper that money manager Legg Mason will move into in 2009 - is being considered by the City Council and also needs approval by the Board of Estimates. The profit-sharing details haven't been ironed out yet.

But experience suggests Baltimore shouldn't count on profits from the developer's 15-year lease with Legg Mason, with rent over that time totaling as much as $230 million. In most cases the city can't start collecting until a developer's returns exceed an agreed-upon threshold, typically around 15 percent. Beyond that, Baltimore would get a share, ranging from 10 percent to 25 percent, depending on the project.

"We don't really expect to see the profit sharing," said Irene E. Van Sant, project analysis director for the BDC, who said the city's payoff comes in the form of jobs and the various taxes generated.

"The profit sharing is really just a way to keep developers on their toes, to make sure they present good financial information."

Experts say profit sharing, though common between developers and private landowners, is a fairly unusual provision in economic development deals.

Good Jobs First, a nonprofit that researches economic development policy, knows of a handful of other cities that have gone that route - Dallas and Chicago, for instance. But officials in both cities say it's too early to judge their success because the projects haven't finished construction.

Some see the concept as an empty promise to make tax breaks easier to swallow. The BDC said it could not estimate the value of the subsidies approved for the 10 profit-sharing deals, but they add up to a substantial sum.

"It's purely window dressing ..." said George Liebmann, executive director of Calvert Institute for Policy Research Inc. in Baltimore, a limited-government think tank. "If the city wants to get money out of these projects, it should avoid giving away its tax base."

Richard P. Clinch, director of economic research at the University of Baltimore's Jacob France Institute, thinks the city isn't likely to see much money. But he believes profit-sharing provisions can serve a worthy purpose.

"It puts the city and developer on the same page, working to make the project a success," said Clinch, who reviewed most of the profit-sharing agreements for The Sun. "I think giving a subsidy to these critical developments - many of these developments were critical, were transformational - was necessary, and the profit sharing was necessary to justify it to taxpayers."

The city signed its first profit-sharing agreement in the late 1970s with the Hyatt Corp., developer of the Hyatt Regency Baltimore on Light Street. The city donated the land, used a $10 million federal loan and issued parking revenue bonds for the garage to become an equity partner in the pioneering Inner Harbor hotel, which opened in 1981. In exchange it stood to get two-thirds of the profits.

It has paid off. Over the years, the city has collected nearly $43 million, including about $3.4 million in the fiscal year that ended in June 2006, the most recent figure reported.

The difference between the Hyatt deal and the more recent ones, Brodie said, is that the city put up substantial money. But that project has left other officials with the assumption that all profit-sharing deals mean money for the city .

Mayor Sheila Dixon said yesterday that she's concerned the city hasn't yet reaped a share of profit from any of the deals struck in the past decade. She said she would speak to the BDC.

"What can be done in the future as we structure these deals to make sure we'll get profit sooner rather than later?" she said.

Councilwoman Helen L. Holton, head of the taxation and finance committee and among those who voted to send the Legg Mason deal to the full council, remembers the Hyatt deal well. She calls profit sharing a way to create "a new, sustainable source of revenue."

If the later projects have not yet produced revenue, it could be time for the council to request a review, she said: "The profit sharing needs to be structured in such a way so that the city does receive money."

Councilman Keiffer J. Mitchell Jr., vice chairman of the taxation and finance committee, said he had no idea the deals weren't bringing in money - or that BDC officials don't really count on any.

"They never explain that," said Mitchell, a candidate for mayor, adding that there ought to be "closer scrutiny on these so-called profit-sharing plans."

The devil is in the details when it comes to profits, experts say. A key consideration - besides how much the developer earns before the city gets its cut - is how long it takes for a project to start turning a profit once construction finishes. Tony Casalena, managing director for the Baltimore office of Sperry Van Ness, a national commercial real estate brokerage firm, said a variety of factors play a role, such as the cost of financing, but "one would want to see a rate of return after a year."

Some of the city's profit-sharing projects are clearly too new: The much-delayed Zenith apartment complex on the west side only just began leasing, for instance. A smaller west-side residential project is still under construction.

But the Cordish Co.'s Power Plant opened 10 years ago and the Baltimore Marriott Waterfront in 2001.

Under a 75-year lease with the city, the Cordish Co. has been paying just $1,000 in annual rent; that break - good for a decade - ends this year. After that, the city is due 22 percent of the net operating profit, calculated after operating costs, real estate taxes and management fees are paid. The first profit-sharing rent payment - for next year - would be paid in 2009. Cordish Co. pays the full real estate property tax on the city-owned property.

Across Pratt Street from the Power Plant, Baltimore City Community College is getting about $1.3 million a year in rent and residuals for the land under the Lockwood Place complex of offices, retail and parking.

David S. Cordish, chairman of the Cordish Co., said the Power Plant is prospering and should start paying a share of the profits as rent. The rental break was crucial to the project's success, he said. In the mid-1990s, the Power Plant site was closed up after two failures to redevelop it as an entertainment destination. The city's subsidy, Cordish said, gave him the flexibility to offer sweeteners that persuaded Disney to pioneer the first ESPN Zone there and convinced Hard Rock Cafe and Barnes & Noble to move in.

Cordish said profit-sharing agreements are often part of his deals with other cities.

"Obviously this arrangement leads to extra bookkeeping and auditing," he said in an e-mail. "One has to be willing to be an open book. We can do that, but most developers are uncomfortable with it."

The city gave H&S; Properties, developer of the Marriott Waterfront hotel, a grant, a low-interest loan and a big tax break. The total city property tax bill during the 25-year subsidy period: $25. In return, Baltimore asked for 9 percent on the money it put into the project - $6.6 million - once the developer earns 15 percent on its investment. The city is also due 10 percent of profits, if any, once both parties get their piece.

Given the hotel's success, Van Sant said the BDC now hopes to receive payments before the hotel's 10th anniversary.

Other deals vary. The two-year-old Spinnaker Bay apartments in Harbor East, developed by the Bozzuto Group and H&S; Properties, has a 20-year phase-in of property tax on the building, where rentals are 94 percent occupied and average about $2,200 a month. In exchange, the city wants a quarter of the net profit once the developer hits a 15 percent rate of return.

Brodie said the bottom line for him is that development and the subsidies requested have to make economic sense - with or without the possibility of the city getting a piece of the action.

"Profit sharing is an extra, or frosting on the cake," he said.

lorraine.mirabella@baltsun.com jamie.smith.hopkins@baltsun.com

Sun reporter Stephanie Newton contributed to this article.

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