Build State Center

The two sides in the controversy over the plan to redevelop the State Center complex of government offices in midtown Baltimore were in court this week, but the arguments there over the methods used to select the project's development team are a mere sideshow. Whether the state followed the appropriate procurement law is certainly important, but it is not the real reason why a group of downtown property and business owners — most notably, attorney Peter G. Angelos — have filed their lawsuit. They want to stop the project altogether, not just force the state to rebid it under a different procedure, and their motivation is quite clearly their own financial interest. They want state workers in office buildings downtown, and they want the rent and business that would come as a result.

That said, they have raised important questions about whether the state is paying too much for the deal, whether the tax breaks being offered are excessive and whether the project will have the effect of robbing vitality from one part of town to bring it to another. Regardless of what happens in court, those policy issues deserve consideration.

The rent

As part of the master agreement with the project developer, Ekistics, the state has agreed to a long-term lease for approximately 500,000 square feet of office space, which will replace what several agencies now occupy in the dilapidated buildings on the State Center site. The contract calls for the state to pay an "all in" rate of $36 a square foot — that includes $25.85 per square foot in base rent, plus the costs of maintenance, housekeeping, etc. The opponents of the project say that's significantly more than the going rate for office space downtown, which they peg at about $20 per square foot. The state would be much better off, they say, just moving the 3,500 workers at State Center into vacant office space downtown.

But the opponents fail to consider several factors that make the price comparison less stark. They do not consider the ground rent the state will charge for the site or the profit-sharing agreement between the state and the developer. Under the terms of the agreement, the state is to receive 7 percent of the profits from the project, plus ground rent, estimated to total $134 million over the deal's 50-year lifespan. That assumes only the first phase of the project is completed and would increase if all five phases — which include many more residences, offices and retail spaces — come to fruition. Furthermore, redeveloping the site as part of a public-private partnership puts it back on the city and state property tax rolls.

And moving all those workers downtown wouldn't be free, either. The opponents of the development say there is more than 2 million square feet of vacant office space downtown, more than enough to accommodate the nearly 1 million square feet worth of offices the state envisions eventually building at State Center. But that doesn't mean that the downtown office space is in an appropriate size or configuration to accommodate the agencies without splitting them up within and among buildings. And the opponents seem to expect that cutting the downtown vacancy rate in half would have no effect on the going rents.

The subsidies

Opponents claim that the state is on the hook for $314 million in tax breaks for the developer. The state says this is not true and that the document where that number appears was in error. In any case, it is important to remember that only the first phase of the project has been approved so far, and no tax incentives have been finalized.

There are two kinds of tax breaks that could be a part of the deal: tax increment financing to help pay for infrastructure improvements on the site and a payment in lieu of taxes. The state has requested a PILOT from the city that would set its property taxes at $2.50 per square foot, which the Baltimore Development Corp. estimates is about 87 percent of what it would pay otherwise. The city has not yet approved the PILOT, but it is worth considering that the offer is $2.50 a square foot more than the state is paying now. The developers say they anticipate requesting a TIF of $10 million-$15 million for the first phase of the project, but they have not yet done so.

The drain on downtown

If State Center is fully built out according to the 15-year plan, it will include 1 million square feet of state office space but also 1 million square feet of offices for other tenants, plus 250,000 square feet of retail space, 1,400 housing units and other amenities. The project's opponents say that will inevitably mean that some or all of the state workers now housed in downtown buildings will be moved to State Center, further depressing the city's real estate market. Presently, state workers take up about 700,000 square feet in downtown Baltimore.

State officials have repeatedly said that they intend to maintain the same number of workers downtown even after State Center is fully built. The only offices they say they will move from downtown to State Center are those occupied by the Maryland Transit Administration at 6 St. Paul Street, and the state has promised to replace them with other workers, though it has not said what agency will move in.

Would the eventual addition of 1 million square feet of new office space in Baltimore cause an exodus of other tenants from downtown buildings? That seems unlikely if, as the State Center opponents claim, the rents in the new development are really too high. Moreover, it is important to remember that only the first phase of the project has been approved, and it will add 15,000 square feet of for-rent office space. That would hardly make a difference to the downtown market, which consists of millions of square feet.

Transit-oriented development

State Center developers and state officials boast that the project is one of the top transit-oriented developments in the country, but the opponents dispute the notion that it should qualify as one at all. Part of their objection is technical; there's a process for official certification as a transit-oriented development, and the project didn't go through it until the opponents raised a stink. But they also question why a project that's supposed to encourage people to stay out of their cars would, if fully built out, have 5,800 parking spaces.

It's an unrealistic standard to say that a transit-oriented development should be completely car-unfriendly, and at least in the first phase, the ratio of spaces to state workers will decline. If the retail and residential components of the project, in particular, are to succeed, some parking will be necessary.

That said, the project still fails to overcome the original sin of Baltimore's mass transit system — that is, the fact that it can't properly be called a "system" at all. The light rail, Amtrak, MARC and Metro subway come close to meeting at State Center, but they don't really link up, and this project, whether in the first phase or fully built out, won't solve that. People will still have to cross busy Howard Street and traverse a block outside to get between the Metro and light rail, and they will still have to use a special light rail spur to get from there to Penn Station. It's confusing and inconvenient, and the only thing the State Center project does to improve it is to promise that one day, the walk between the light rail and Metro will be more aesthetically pleasing.

The bottom line

The state's office buildings at State Center are deteriorating so badly that it now costs about $23 a foot just to operate and maintain them. Deferred maintenance is so extensive that renovating them is no longer a viable option. That left a few choices. The state could construct new office buildings itself to replace what's there now. It could, as the downtown property owners want, move all of the workers out and rent them space elsewhere. Or it could seek to engage in a public-private partnership to redevelop the state buildings and add the other components of a mixed-use community. It picked the third option, and on balance, that was the right choice.

If the state were to build the new office buildings by itself, the project would have required the issuance of hundreds of millions of dollars in bonds. Given that Maryland is near its debt limit, that would have forced it to abandon other projects, such as roads and schools. It would have kept the property off the city and state tax rolls and would have had only a transient economic impact.

Moving the workers downtown would entail costs of its own, both in the short term and in increased operating expenses based on the likely dispersal of state agencies in different buildings. Mostly, though, it would have meant the abandonment of a 28-acre site in between Mount Vernon and Bolton Hill — a fate far worse for Midtown than anything the plaintiffs in the suit allege would happen to downtown under the current plan. Furthermore, the state would be on the hook for security and maintenance costs on the buildings or demolition until someone else bought the property.

The public-private partnership plan entails risks, too. It may wind up being somewhat more expensive than the other options, and there's no guarantee that the vibrant community pictured in the artists' renderings in the developers' promotional materials will spring to life. But it has much greater upside than any of the alternatives.

Baltimore has a history of blanching at big plans to remake the city. The Inner Harbor faced intense skepticism and opposition (notably, from the same Little Italy restaurateurs who are now a part of the State Center lawsuit). So did Camden Yards and Harbor East. But they are now a vital part of Baltimore's fabric. It's not unreasonable to think that one day, State Center might be too.

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