The public takes a dim view, when it comes to money for developers and investors. Tax breaks and subsidies are variably called extortion, bribes, nepotism, or corruption but rarely an investment in the future of a city. Popular sentiment pits neighborhoods against downtown, affordable housing against convention centers or old downtown against downtown expansion areas. Most city residents are convinced that too much money flows into the pockets of those who need it the least. It doesn't help that city government and developers are in a tie for the bottom rank in public opinion, maybe still ahead of Congress and lawyers. The fact that today "money for developers" rarely comes from budgets but from mortgaging predicted proceeds, that only materialize if the development in question gets built, is too complicated even for some local politicians to grasp and suspiciously smacks of CDO's (Collateralized Debt Obligations) and other creative tools of virtual money creation that brought us the financial crisis. Some economists point out that the race to the bottom (of taxes) between cities in a relentless competition for investors rarely benefits the public while it depletes public resources.
The case in question
|HarborPoint (front, proposed) and Harbor East (left, completed)|
Clearly, it isn't always easy to see what one is looking at, corruption or investment? Let's try to figure it out for the case of the 27 acre prime piece of real estate jotting out into the Inner Harbor which used to be the Allied Chemical Plant site and is now dubbed HarborPoint (Jay Brodie, the former President of the Baltimore Development Corporation, BDC, called it "the best piece of real estate in America").
The site is supposed to get $107 million dollars through TIF bonds right now after it already got tax breaks as a Brownfield and a 2012 empowerment zone designation. Those breaks combined are estimated to be worth another $113 million over time. (Baltimore Brew). The issue is red hot in Baltimore, the Mayor held a press conference side by side with the developer, city council people are issuing statements and the media are buzzing with arguments for and against the TIF bond financing and the tax breaks.
This is not going to be an easy story, it has many sidebars and necessarily meanders. Since its represents a case typical for the rebirth of an industrial city as a knowledge community, it is worth the exploration and, as always, it helps to have some facts before forming an opinion.
The old Allied Baltimore Works
|The Allied Signal "Baltimore Works" when smoke was still rising with the Inner Harbor in the background (until 1985)|
Parts of the old Allied Signal Chromium Plant ("Baltimore Works") were still standing when we gathered in Allied's "Superintendant's Building" to talk about the future of this site. Peaking through between the hulking ruins one could glimpse the water and a perfect view of downtown. This prime location brought together the Fells Point community representatives and the Allied Signal people and their consultants to talk about the presence and the future. The year was 1991 and the major point of discussion was the pollution that the 140 year old factory had left behind and that could blow around during the anticipated demolition of this Baltimore waterfront icon. EPA, MDE and Allied Signal were about to sign a consent decree defining clean-up action and desired outcomes. Hexavalent chromium, a substance that is dangerous when inhaled while airborne and which also pollutes the water when seeping out of soil, was the main concern. It present everywhere since chromium had been processed here since 1845 and the harbor had carried heavy chromium loads from water seeping out of the contaminated soils. For the City and the community it had been a foregone conclusion that nothing could ever be developed here. They planned for a cap and a 27 acre open space, possibly fenced off.
Brownfield remediation, capping and development
But Allied Signal had other ideas and saw a development site. (see 1992 SUN article). It had convinced EPA to agree to a remediation plan that allows development. However, a development plan would have to be approved not only by the usual city agencies but also by EPA. This is why a large consultant team had been assembled to plan remediation AND development and design a strategy that made both not only physically possible, but acceptable to EPA and the community. Reaching the point where EPA would give the site a clean bill of health would take 10 years and over $100 million dollars paid by Allied Signal until a successor, Honeywell could buy the site with an approved remediation plan. Included in the acceptance were 1.7 million square feet of mixed use development (mostly office, some retail, a little housing) which were submitted to the City as a Planned Unit Development (PUD). The plan showed a waterfront promenade, a six acre park that was considered a holding site for a potential "world class" public use comparable to the Sidney Opera and staggered height limitations ending at 180' maximum height.
|Diagram of the remediation plan from an Allied Signal newsletter published when EPA was still reviewing the concept|
Given that Fells Point was rich in battle tested community groups who had shown their savvy some time back when they defeated the freeway plans that had threatened to destroy historic Fells Point, it was no surprise that the community had wrestled major concession from the site owner. That the hired consultants largely had the trust of parts of the community, namely Enterprise and Struever Brothers as development consultants, Cho, Wilks and Benn as urban designers and a host of well renowned engineering firms that knew how to contain and remediate contaminated brownfields helped but didn't make almost 18 months of meetings and negotiations an easy process. My involvement was initially as was project manger for the architecture firm and later as an independent consultant. I haven't been further involved since 1994.
Harbor East, a precedent?
It is worth mentioning that back then the adjacent and now bustling Harbor East site sat largely empty with little more than publicly funded streets, bulkheads, sidewalks and lights and an award winning development plan by Stan Eckstut, the architect who had just completed New York's Battery Park redevelopment.
|Inner Harbor East after roads were built but all parcels were still vacant (1994)|
|Harbor East 2009, almost fully built out|
It is important to introduce this site into the story because it serves as the test case for both for proponents and foes of the TIF financing plans. Harbor East has gone through the same debate 20 years ago allowing us now plenty of hindsight. The development on that site was not as difficult, no cap was needed since it happened simply on the land of a burnt down sawmill. Only trouble was, there were no roads, no water and sewer and the bulkheads along the water were in terrible condition. And there was no willing developer. In fact, it was Mayor William Donald Schaefer who had pushed for development and made his friend, the mega baker Paterakis, do it. Paterakis was initially reluctant: "I am a baker, not a developer". Schaefer and after him Mayor Schmoke sweetened the deal with $20 million of public money for the missing infrastructure (according to some sources it was more like $30 million). Either amount seems like peanuts, compared to the $107 million TIF bonds requested now by Paterakis' former partner, Michael Beatty. Still, the amount would have represented up to 10% of the total construction cost. (Back when the city built the streets of Harbor East out of the city's capital budget, the anticipated and projected development cost was estimated with $300 million). Many considered the whole idea a pipe dream. In fact, for years the site looked like a dream gone bust or like some kind of driving range for practicing drivers, traffic circle and all, but no buildings in sight.
Today, of course, Harbor East is the shiniest piece of Baltimore and is much glitzier than the famous but aging Inner Harbor. According to the developer's website " Harbor East is a $1.67 billion mixed-use development on Baltimore’s waterfront. Replacing a landscape once characterized by derelict warehouses and factories, Harbor East is now defined by modern amenities and luxuries, gleaming architecture and high-rise towers." Today hardly anybody would say that Harbor East isn't a huge success and that its tax contributions and jobs are vital for the city. The $20 million subsidy has long proved to be a prudent investment instead of a folly, directly dollar for dollar but also through the boost it provided for the economy of the city at large. Interestingly, while the public cost remained, of course, the same $20-30 million that were needed to get the infrastructure constructed, the actual value of completed construction more than quintupled from then anticipated $300 million to the noted $1.67 billion. This means the public subsidy was, in fact not 6.77-10% of the total development cost but turned out to be more like 1.2%. The public streets and walks were no big deal. It was a bigger deal that the first large project on the site, the Wyndham hotel, (now Marriott) not only scuttled the award winning masterplan but also received $75 million in PILOT tax relief, a matter that had been gone to court and had been called "pure fiscal insanity" by community lawyer John Murphy in 1999. To date the hotel had 13 property tax free years (except $1/yr).
The Harbor East and Harbor Point comparison. Similarities and differences
Can Harbor East's success be the blueprint for HarborPoint, a project estimated to have a $1 billion build-out cost for its nearly 3 million square feet development after a PUD amendment that added more than 1.2 million squarefeet to the original PUD plan and significantly increased the height limits. The Mayor sure thinks so. (see press release). Once again it would appear that the public infrastructure cost alone would be 10% of the total investment. If one adds the EZ and brownfield tax breaks, than the dollars may total well over 20%. Unless, of course, the total development cost of HarborPoint would explode in the same manner as it did at Harbor East. Once again, there are many who think the whole development will never happen.
|The proposed Exelon building with the trading floor to the right. Design and rendering by Elkus Manfredi Architects, Boston.|
But before we get carried away with the similarities, we need to understand a few significant differences: First, the Harbor Point infratsructure cost wouldn't come straight from the city budget (although Councilman Stokes wants it to come from there) but from bonds which would be served by the future tax payments of the project. (The Tax Increment Financing approach). Obviously, the TIF construct and the direct tax credits work cross purpose since the payback rate is much slower when the tax payments themselves have already been substantially cut by tax benefits. (As Baltimore Brew's journalist Mark Reutter aptly pointed out, although he didn't mention that some of theCity tax losses from the EZ are offset by the State).
The second difference is that Harbor East is a capped site requiring all kinds of complicated techniques to allow for development. While the clay and membrane cap can be penetrated for piles, it can not be dug up in any big way. To run utilities and give buildings basements, it is proposed to build a large cover almost over the entire site which becomes one gigantic underground parking deck and is the place where water, sewer and electric conduits run. To create a somewhat convincing edge around the peninsula where the promenade is supposed to run, the concrete deck is concealed with landscaped berms, terraces and ramps for access and covered with enough soil to allow street trees and green plazas. The developer maintains that without the TIF and tax credit, development would not work on this site due to the large "stranded cost" for the extra construction needed to place the infrastructure. Not for Exelon, even less for other possibly less well heeled investors.
Public money or "no development"?
When Michael Beatty states laconically, "no TIF, no development" is this just one of those threats that developers make to get what they want or is it true? Consider this: Exelon, the energy giant that had just bought out Baltimore's Constellation Energy wants to be the first big building on the cap. To much consternation of many downtown advocates, Exelon picked Harbor East as its location in spite of sitting on an environmental containment cap and in spite of the absence of infrastructure on the site. Exelon could have gone on any of the large vacant sites in downtown, roads, water, sewer and electric would have been largely in place, paid and installed a long time ago by what, taxpayer money. Could the energy giant afford the extra cost of roads, sidewalks, parks and pipes? Maybe, I can't say. But doesn't it make sense to say that these items that make up the "public roam" that is so important in any city should be paid by the public? Especially so when we are talking about recycling a hopelessly contaminated site for which all talk about "market forces" that would take care of things in some "natural order" is hardly applicable?
The promenade, the streets, the proposed park, the square in front of the Exelon tower, all these items are supremely important elements in Baltimore's infrastructure network. Just recall how these items were envisioned for the site even without any development.
|The former Allied site today with only one building standing, the Thames Wharf for Stanely Morgan (bottom right)|
|The approved 26 acre masterplan designed by Ayers Saint Gross with the 6 acre Point Park and a public square in front of the Exelon building top center|
So how to answer the original question: Are $107 million in bonds a good investment for Baltimore?
The criteria for an answer are these:
- Will the City on balance get income it wouldn't have without development on this site?
- Will downtown, Harbor East and Fells Point be better off with the pensinsula developed rather than it being an open space?
- Would this development happen even without city investment?
The answer to the first point comes from the fiscal impact analysis performed by an independent group for the city. It states that the City would come out ahead. After 34 years and full build out the City stands to gain more than half a billion dollars in taxes alone, adjusted for inflation. (For those who want to see more detail and snapshots in a more manageable time-frame, click the link at the bottom of this blog).
The second answer is not as easy, a 27 acre world class park on par with Chicago's Millennium Park surely would be an attractive option for this linchpin between downtown and Fells Point. But lets not be naive, why would the owners do that after the gigantic remediation cost? And who would pay for the significant investment for a first rate park?
On the third point: The site developer says no. By contrast, some who are skeptical about the public money observe that now, after Harbor East is built out, it would only be logical that the next frontier is HarborPoint, even without public bonds. To which I would say that that belief in the natural forces of the market is devoid of a vision or aim. Harbor East would not have happened on its own without the vision of then Mayor Schaefer and could easily resulted in a hodgepodge of mediocre small scale aimless developments hadn't there be a clear plan and a clear strategy which also included public investment.
The next frontier for development could just as well be Upper Fells Point or the vast bakery holdings of John Paterakis that still sit between Harbor East and Fells Point. One could easily imagine that Harborpoint would sit fenced and vacant for another twenty years, just as it did so far. The current masterplan represents a clear public-private strategy with a schedule, funding mechanisms and many of the objectives the community fought for. It is worth realizing.
In coming to the conclusion that in the given case the public investment is justified and wise, I would still have some caveats:
- The Enterprise Zone should never have been extended into this affluent area and should be renegotiated in whatever way possible especially for the remainder of developments on the site.
- It needs to be sure that the proposed bonds are fully secured by the developers and that the city would not be stuck with any risk if the developments wouldn't materialize as anticipated or the developers would go bankrupt or dissolve their business.
- The part of the TIF that deals with an off-site school should be removed from the infrastructure cost list since it just confuses the issue.
- One of my reservations comes from my visions for future transportation: Parking should be drastically reduced on HarborPoint to makes this area a true transit oriented development (TOD); this would cut development cost, reduce the traffic burden for surrounding areas and reduce the cost for the expensive four lane bridge extending Central Avenue to the site and which is part of the $107 million package. The bridge should be scaled back to just pedestrians, bikes and "personal transit".
The proposed six acre Point Park and the promenade are the fruits of hard community bargaining that began in 1991. Incidentally, together these green spaces are about the size of Gezi Park in Istanbul, currently the world's most famous open space which rattled a well established national government.
As Alexander Garvin points out in his book "The Planning Game": Great cities do not just "happen". They need creative planning, risk taking and strong leaders but also community consensus and credibility. HarborPoint is too good a site to let sit fallow. It must include public investment for public benefit.
Klaus Philipsen, FAIA
Updated for added text for clarity in the conclusion section of the article. 6/16/13; 13:33h. Update for small language corrections 6/17 18:35h.
Related articles on this blog:
Why Exelon chose HarborPoint over downtown
EPA Status webpage
1992 Sun Article
June 3 Press release Mayor
Fiscal Impact Analysis