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Tax breaks for developers – economic development or corporate welfare?

You may not understand PILOTs, but your tax dollars support them.

pilots and tifs legg mason

Legg Mason switched its headquarters from downtown to this 24-story building at the Harbor East development.

Photo by: Fern Shen

Twelve downtown and Harbor East buildings received $14.5 million in property tax breaks last year, a report by a city agency shows, with a single developer, John Paterakis Sr., securing $9.4 million, or 65%, of the total.

Earmarked to some of the ritziest addresses in the city, such as the Legg Mason Tower and the Baltimore Marriott Waterfront, where a hotel room begins at $319 a night, the rebates are likely to fuel further criticism of Baltimore’s property tax system.

Taxes have emerged as a political hot potato, with three mayoral candidates challenging Mayor Stephanie Rawlings-Blake to reduce the city’s real estate tax rate, which, at 2.268 cents per $100 of assessed value, is twice that of surrounding counties.

Yesterday’s report by the Baltimore Development Corp. to the city Board of Estimates highlights another aspect of the controversy – that the city has awarded huge tax breaks to projects it deems essential to retain jobs or boost tourism.

The tax breaks come through an obscure tax mechanism known as PILOTs (Payment in Lieu of Taxes) administered by the BDC, the city’s economic development arm, and approved by the mayor and Board of Estimates.

John Paterakis Sr. receives the lion's share of PILOT tax breaks. (Photo from bankscontracting.com)

John Paterakis Sr. receives the lion's share of PILOT tax breaks. (Photo from bankscontracting.com)

Under a PILOT, a developer pays the original base property tax, plus 5% of the assessed value of the improved property, resulting in a 95% tax forgiveness over a negotiated period of time, usually 15 to 25 years.

Take the Marriott Waterfront Hotel, a 750-room luxury hotel situated in Harbor East. The city entered into a 25-year PILOT in 1997. Last year, Harbor East Ltd. (a Paterakis company) paid $49,566 in property taxes and was excused of $3,374,525 in taxes under Marriott PILOT.

This arrangement will last until 2022.

In the case of the new Legg Mason Tower, also owned by the Paterakis group, the building was given a 15-year PILOT and the parking garage a 25-year PILOT. Several parcels of the property are excluded from the PILOT rebate, most notably, a Four Seasons Hotel under construction.

According to the BDC report, a Paterakis company paid $2,274,510 in real estate taxes last year. At the same time, it was forgiven $3,998,160 in taxes. The property is currently assessed at $193 million by the state.

In September 2009, Paterakis, the owner of H&S Bakery, pleaded guilty to two misdemeanor campaign finance violations filed by state prosecutors as part of the corruption probe that ensnarled Mayor Sheila Dixon, who resigned from office in early 2010.

Paterakis agreed to pay $26,000 in fines and was barred from donating to Baltimore politicians until his probation ended in January 2012.

State Prosecutor Robert A. Rohrbaugh said at the time that “cozy relationships” between developers and elected officials are “devastating to the public confidence in the honesty and fairness of our governing institutions.”

The Baltimore Marriott Waterfront hotel received generous city tax breaks, as did other buildings at the city's high-end Harbor East development. (Photo by Fern Shen)

The Baltimore Marriott Waterfront Hotel received generous city tax breaks. (Photo by Fern Shen)

Essential to City’s Future

M.J. “Jay” Brodie, president of the BDC since 1996, said that without PILOT tax breaks, private developers would walk away from projects that are key to the city’s future.

“The city has certain tools, and this [tax rebating] is the main tool in our tool kit,” he said, in an interview yesterday after turning in the report to the Board of Estimates.

“But for these additional city financial incentives, our belief is that these projects will not be built. The economics did not make sense.”

PILOT tax structures (in orange) are concentrated in downtown Baltimore and the waterfront. The latest PILOT development (No. 3) is located in midtown. (BDC Report)

PILOT tax structures (in orange) are concentrated in downtown Baltimore and the waterfront. The latest PILOT development (No. 3) is located in midtown. (BDC Report)

In its report to the Board of Estimates, the BDC cited increased hotel and parking taxes, as well as the personal income taxes generated by people living or working in the new buildings, as proof that the tax breaks benefit the city.

For example, Centerpoint Apartments, a recipient of $970,870 in tax rebates last year, generated an estimated $638,009 in parking, real estate and personal income taxes, the BDC said.

Spinnaker Bay Apartments generated $1.2 million in tax revenues, chiefly from the estimated income taxes of its 300 residents, and the Marriott Waterfront generated $3.6 million in parking taxes, personal income taxes, business personal taxes, energy taxes and hotel taxes.

Challengers: Lower Everyone’s Rate

Three candidates for mayor – Joseph T. “Jody” Landers, Catherine E. Pugh and Otis Rolley – have pledged to drastically reduce the city’s property tax rate. As part of their promise, the candidates have touched upon ending tax benefits to big developers with varying degrees of vehemence.

The most detailed platform comes from Landers, former executive vice president of the Greater Baltimore Board of Realtors. “I will stop the practice of doling out special tax breaks to a select group of developers and property owners and instead concentrate on reducing the property tax rate on all property,” he vows in campaign literature.

Mayor Rawlings-Blake has termed property tax reduction “pie in the sky” and suggested that the city could not afford such tax reductions without crippling city services. As City Council President and a member of the Board of Estimates, she approved the latest PILOT rebate (in 2009) for the Legg Mason Tower, and as mayor she has defended the PILOT program.

Jay Brodie talks about his "but for" philosophy for handing out tax breaks to developers yesterday. (Photo by Mark Reutter)

Jay Brodie talks about his "but for" philosophy for handing out tax breaks to developers yesterday. (Photo by Mark Reutter)

Asked yesterday if the city’s high property tax rate was a major disincentive to build in Baltimore, Brodie said this perception was an oversimplification. “Is the property tax a problem in terms of Baltimore’s competitive position,” he asked. Answering “yes,” he added that there were other factors.

He cited the borrowing climate, whether the project “was a union or nonunion build” and the physical condition of the site as very influential to a developer deciding on the location of a project.

“If the city could write more checks for more infrastructure, that would be a good thing,” he said, but added that the city has a limited budget and cannot enter into a joint venture with a private developer or become an equity member of a project.

Ryan O’Doherty, a spokesman for Rawlings-Blake who sat in on the interview, interjected to say that wealthy developers weren’t the only people who got tax breaks.

O’Doherty said the city also offers generous tax incentives to regular citizens who buy and rehabilitate vacant houses. The news media do not adequately publicize this fact, he said.

Brodie said that BDC’s longstanding principle for awarding developer tax breaks was the “but for” rule, meaning that a project would not be built “but for” the use of tax incentives. “This is always a judgment call after a lot of study. All I can say is this is a real process that has gone on for a long time.”

He added that the system had many checks and balances. “If there was no public process, if nobody had ever been turned down and every request was granted, if the city was simply a reflex action and we said ‘fine’ every time to every request, that could be a problem. But that’s not what goes on.”

City Rejects Some Requested Breaks

Brodie said his office has spurned developers asking for handouts.

He cited the BDC’s decision not to grant the Rouse Co. a $14 million tax break to renovate Harborplace as one example. The BDC also turned down tax subsidies sought by developers of The Eden, a residential building, near Harbor East.

In both cases, the developer went ahead and completed the project without public subsidies.

Yesterday’s report also disclosed information on another tax finance program known as TIF (Tax Increment Financing).

TIF uses the increased property taxes that a large project generates to finance the cost of bonds issued by the city on behalf of the project. Instead of being allocated to the city, the developer’s property taxes are used to pay off the bonds, thus decreasing the flow of property taxes to the city until the bonds are paid off. In essence, a TIF is a tax-free loan to the developer.

TIF financing was used for the Hilton Baltimore Convention Center Hotel, Mondawmin Mall, Clipper Mill and HarborView, among other projects.

It has been approved by the Board of Estimates to aid the 4.8-million-square-foot mixed-used Westport development envisioned by developer Patrick Turner on the shores of the Patapsco River.

TIF district financing has been proposed recently by Downtown Partnership, a business group, to convert largely vacant office buildings into apartments along Lombard Street, Redwood Street and other parts of downtown.

– 2010/2011 TAX PROFILE OF BUILDINGS AWARDED PILOTS —

HARBOR EAST

NOTE: The four properties listed below are owned by the Paterakis group.

Baltimore Marriott Waterfront Hotel
Real Estate Taxes Paid: $49,566
Real Estate Taxes Rebated under PILOT: $3,374,525
PILOT in effect to 2022

Legg Mason Office Building and Garage
Real Estate Taxes Paid: $2,274,510
Real Estate Taxes Rebated under PILOT: $3,998,160
PILOT in effect to 2024 (for office building) and 2034 (for parking garage)

Laureate Office Building and Garage
Real Estate Taxes Paid: $1,499,200
Real Estate Taxes Rebated under PILOT: $954,260*
PILOT in effect to 2016

*PILOT does not apply to residential or retail space.

Spinnaker Bay Apartments and Garage
Real Estate Taxes Paid: $531,315
Real Estate Taxes Rebated under PILOT: $1,062,700
PILOT in effect to 2024*

*after 2009, taxes will rise from 5% to 75% of assessed value

WESTSIDE

Camden Courts Apartments and Garage
Real Estate Taxes Paid: $62,128
Real Estate Taxes Rebated under PILOT: $512,790
PILOT in effect to 2018*

*taxes will rise to 90% of assessed value by 2018

Centerpoint Apartments and Garage
Real Estate Taxes Paid: $280,740
Real Estate Taxes Rebated under PILOT: $970,870
PILOT in effect to 2021*

*taxes will rise to 65% of assessed value by 2021

Hippodrome Theater
Real Estate Taxes Paid: none
Real Estate Taxes Rebated under PILOT: $1,159,038
PILOT in effect to 2022

Redwood Towers Apartments
Real Estate Taxes Paid: $75,000
Real Estate Taxes Rebated under PILOT: $11,627
PILOT in effect to 2019*

*taxes will rise to $200,00o in 2015

St. James Place Apartments
Real Estate Taxes Paid: $8,128
Real Estate Taxes Rebated under PILOT: $91,260
PILOT in effect to 2021*

*taxes will rise to 75% of assessed value by 2021

Zenith Apartments and Garage
Real Estate Taxes Paid: $80,353
Real Estate Taxes Rebated under PILOT: $914,350
PILOT in effect to 2018*

*taxes will rise to 75% of assessed value by 2018

INNER HARBOR AND CENTRAL BUSINESS DISTRICT

Lockwood Place Office Building and Garage
Real Estate Taxes Paid: $472,118
Real Estate Taxes Rebated under PILOT: $854,250
PILOT in effect to 2021

Marriott Residence Inn
Real Estate Taxes Paid: $44,181
Real Estate Taxes Rebated under PILOT: $631,020
PILOT in effect to 2012*

*taxes will rise to 60% by 2012

NOTE: The Fitzgerald Apartments and Garage, at 1201 West Mt. Royal Ave., was given a 20-year PILOT in 2008, but the project was not on line for the 2010-2011 tax year

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  • Fed up

    She has to go!!!!!!!!

    • Anonymous

      Democrats have to go.  Unfortunately, I don’t see too many others waking up.

      • Anonymous

        “Fed up” and “Metacom,” turning this into a dem v. repub does not help solve our problems. Give us your ideas! Give us your solutions! These practices are historic, you can’t tag one person with the system. We cannot solve problems through name calling. Tell us what you think should be done instead of name calling. If you have no ideas to propose, then you are just trolling. Go away.

  • Nate

    My understanding was that PILOTs were a lump sum payment, and then the developers and property owners paid nothing until the term of the deal expired, no? Or is this an accounting standard that measures the money amortizing in equal sums year after year? (As in capital depreciation.)  If there were lump payments, did they get added to the City’s coffers for only the FY they were received?

    A bigger problem than the tax breaks per se, would be which projects and where the BDC chooses to give the breaks to. The problem is that the BDC and the City seems to go out of its way to approve any project a developer or land owner wants to develop, even if the project itself either doesn’t make sense on its face, or more often, may make sense for its own sake, but overall weakens or undermines the economy of the City by undermining the viability other developments or initiaives, e.g. Harbor Point, Westport, Canton Crossing, at the expense of the CBD, and the redevelopment of the Westside retail district. Of course, this is distinct from the property acquisition initiatives and RFPs which causes the loss of City tax revenue and increases depreciation with the perceived inevitability or actuality of acquisition for a mega-project. (e.g Oldtown and Charles North, etc.)

  • Anonymous

    Thanks for the story.  Honestly, it makes me sick that they’re getting all these handouts.  With all of the vacant offices  in the city, BDC really thinks we need more office buildings? With the financial disaster that’s the Hyatt, we need more hotels?  With the glut of vacant properties, we really need more condos and apartments?  Meanwhile I’m paying twice as much taxes and coworkers who live outside the city. 

  • Tom

    Nice piece, Mark.

  • devils advocate

    This is not some idea SRB thought up. This has been going on for a long time. I would like to know it this is common in other cities or exclusive to Baltimore. Would like to hear some analysis from a impartial source.

    • http://twitter.com/MairZdoatz Mair

      TIF bonds take a bite out of KC’s skinny budgethttp://webcache.googleusercontent.com/search?q=cache:cVz6CoedlQIJ:www.bizjournals.com/kansascity/stories/2009/02/09/story3.html

      • http://twitter.com/MairZdoatz Mair

        This link works: http://www.bizjournals.com/kansascity/stories/2009/02/09/story3.html

  • http://twitter.com/MairZdoatz Mair

    From dictionary.com:
    re·bate/?r??b?t/A partial refund to someone who has paid too much money for tax, rent, or a utility.Obviously BDC uses a different reference.

  • Ktrueheart

    Appears to me that BDC is doing exactly what they were set up to do.

    The Baltimore Development Corporation (BDC) mission statement is silent on providing economic benefits to Baltimore City citizens. Instead it states its purpose is “advocating for the interests of Baltimore City employers”.

    • Ktrueheart

      Has anyone seen the contract BDC has with Baltimore City to provide economic development services?  When was it awarded?  When is it up for renewal?

  • Anonymous

    This is what you get with Democrats running the city.  That’s why I abandoned them they’ve ruined the city.

    • Rich

      And Republicans have no history of handing out lucrative tax breaks to wealthy developers and business interests? Come on!

    • Anonymous

      Somehow we have to get beyond the Repub v. Dems. This combative response does not help solve problems, it only exacerbates them.

    • Anonymous

      Somehow we have to get beyond the Repub v. Dems. This combative response does not help solve problems, it only exacerbates them.

  • Gerald Neily

    Another strong indication of how out of whack this system is: The largest tax breaks are usually given to the most valuable land, such as Harbor East. When high value land is subsidized so much, that severely undermines the value of lower value land elsewhere. The cycle is vicious,  exacerbating the disparities between favored high value areas and neglected lower value areas. Just look at Baltimore.

    The solution is a land tax. High value land would be taxed high, but new development would not, thus encouraging development. Land owners would not be able to avoid the tax by deferring development or even by selling the land. BDC has opposed this because it would take away their deal-making power, or as Jay Brodie puts it, “the main tool in their tool kit”.

    • Marc

      Well put. I think this also results in a perverse situation where only large-scale development becomes feasible. Such development is financed on the backs of homeowners (and indirectly renters) and microdevelopers (that is, the traditional scenario where many small-time builders work with single blocks or building lots to build a city at a finer grain). Since the latter process has essentially been taxed out of existence in both urban and suburban areas, we’re essentially stuck in a scenario where a complex web of subsidies and regulations makes only big-time, large-scale development feasible.

      So Baltimore tears down quarter-sections chunks of the city at a time (either that or it leaves quarter-section chunks of the city vacant, waiting for a big-time buyer to redevelop the chunk all at once) as it engages in a round-robin game of luring big-time builders to bring in “development.” Subsidies (that’s all TIF and other tax credits really are) are used to lure big-name companies, convention centers, hotels, and tourist traps. But what happens when, inevitably, the next city comes along and offers a tastier bribe? Baltimore loses those flashy companies and complexes to other cities. And eventually those other cities lose their snatched spoils to yet another round of bribing cities. What a weird form of “development,” but it’s practically the only kind of development the US has been practicing since the end of WWII.

      But I know B’more can do better – what about the intelligent way they initiated and supported the old Dollar Homes program? And even top-down, grand-scale development can be done better – like Haussmann did in Paris where the new infrastructure of boulevards and their adjacent lots were profitably sold off to many hundreds of builders each working with their own plots. A similar strategy was also used for the rapid construction of Boston’s Back Bay.

      By “land tax” are you referring to the Georgist proposal for land-value taxation as a kind of  simpler “single tax” separated from the value of buildings? (Buildings wouldn’t be taxed.) In this scenario there might be a strong incentive to fill valuable land with buildings as quickly as possible so the owners can pay their taxes via income from rents on households and businesses. I’ve often wondered if Georgist tax ideas would work, but as far as I know they’ve never been tried on a broad, coherent basis (at the scale of an entire city and its suburbs). After all, B’more’s land tax would have to be simpler, lower, and fairer than that of its suburbs, otherwise the exodus will continue.

      • Gerald Neily

        Yes, Marc !!! The economics of infill housing actually became workable for small-time entrepreneurs for a small time in the mid ’00s in a few places like Canton, and then poof, the bubble burst and the window closed. But Bmore’s rowhouses should be ideal for unleashing entrepreneurial power.

        I’m no housing expert, but it seems the current “Vacants to Value” program does as well as it can to emulate the old Dollar House program, which was actually very expensive for the city, required lots of micromanagement, and was thus just a spit in the ocean.

        Yes, I’m talking about a George-style land tax. I gather that the reason why it’s only been done on a limited basis, albeit with success (I seem to recall reading about Pittsburgh and Harrisburg being the closest nearby), is that like all property taxes, it creates very definite winners and losers so it has to be implemented gradually, not all at once.

        I think one of the beauties of taxing land is that it WOULD NOT compete with the suburbs. It would be a fixed cost incurred by whoever owned the land, and land can’t flee to the suburbs. As long as the land was not totally worthless, someone would pay it because someone would own it. Like a property tax on buildings, it would depress value, but in the case of land (rather than buildings) that’s actually a good thing that makes a given property more affordable for a given house. The problem with taxing buildings is that it’s a tax on improvement capital, which can and does flee to the suburbs. That’s why Baltimore has magnificent houses in places like Walbrook and Lafayette Square that aren’t worth anything close to what they ought to be worth.

      • Gerald Neily

        Yes, Marc !!! The economics of infill housing actually became workable for small-time entrepreneurs for a small time in the mid ’00s in a few places like Canton, and then poof, the bubble burst and the window closed. But Bmore’s rowhouses should be ideal for unleashing entrepreneurial power.

        I’m no housing expert, but it seems the current “Vacants to Value” program does as well as it can to emulate the old Dollar House program, which was actually very expensive for the city, required lots of micromanagement, and was thus just a spit in the ocean.

        Yes, I’m talking about a George-style land tax. I gather that the reason why it’s only been done on a limited basis, albeit with success (I seem to recall reading about Pittsburgh and Harrisburg being the closest nearby), is that like all property taxes, it creates very definite winners and losers so it has to be implemented gradually, not all at once.

        I think one of the beauties of taxing land is that it WOULD NOT compete with the suburbs. It would be a fixed cost incurred by whoever owned the land, and land can’t flee to the suburbs. As long as the land was not totally worthless, someone would pay it because someone would own it. Like a property tax on buildings, it would depress value, but in the case of land (rather than buildings) that’s actually a good thing that makes a given property more affordable for a given house. The problem with taxing buildings is that it’s a tax on improvement capital, which can and does flee to the suburbs. That’s why Baltimore has magnificent houses in places like Walbrook and Lafayette Square that aren’t worth anything close to what they ought to be worth.

      • Anonymous

        It sounds like the “Georgist” proposal is a more sophisticated “ground rents” idea. That could really help. Great ideas.

      • Anonymous

        It sounds like the “Georgist” proposal is a more sophisticated “ground rents” idea. That could really help. Great ideas.

  • Gerald Neily

    Baltimore already has all the problems you raise, with or without a land tax. Taxing land instead of buildings eliminates the disincentive to improve one’s property, but if the tax rate reaches a certain confiscatory threshold, we’re in trouble no matter what. 

  • Anonymous

    We need some great minds working on what appears to be inequities in the system. If citizens understood the choices (transparency) and felt they were fair there would not be this shock of disappointment. Paterakis got 65% of the favorable tax subsidies. Maybe he’s the only guy who will take the risk. Or, maybe he’s the guy who “owns” our city. We don’t know.We need to have an administration and boards that can be trusted to really understand good development support both business and the community. When I visit a place like Portland, I am stunned by the sophistication of the city’s development. It is thorough, long-term, visionary. THAT’s what we want. We need to uproot this quagmire we have, and break out of the weird and often corrosive relationships developed in this city over decades. It’s a small town mired in old relationships. We need real renewal—of the systems, the managers, the employees, the BDC, the housing office. There are so many visionary opportunities and not enough sophisticated thinkers who understand the interdependence of business and community.

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