State Center, Phase I: The $127 Million Taxpayer Handout

Gabriel J. Michael, Jeffrey Hooke Jul 7, 2011

This paper examines the primary taxpayer subsidies for the initial phase of Baltimore City’s State Center, a project proposed to replace the current state facilities in mid-town Baltimore bordering Preston Street. Led by a public-private partnership, the project envisions a mixed-use complex containing state and private office space, retail and dining space, mixed-income housing, and a parking garage. The project has attracted significant attention as well as litigation due to its scope and expense. Lost in the debate, however, is a careful accounting of the project’s potential cost to the public. In what follows, we estimate and report this cost.

Suggested Citation: “State Center, Phase I: The $127 Million Taxpayer Handout.” Maryland Public Policy Institute and Maryland Tax Education Foundation. July 2011.

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State Center refers to a state-owned 28-acre parcel of land in mid-town Baltimore bordering Preston Street that currently contains several large office buildings, parking facilities, and the armory. Various state agencies are housed in the buildings, which provide about 1 million square feet of office space for approximately 3,500 state employees.

Due to a combination of the age of the facilities and repeated deferral of necessary maintenance, Maryland’s Department of General Services has advocated for a complete redevelopment of the site, involving total replacement of the existing buildings, rather than a more modest renovation. This redevelopment plan has been approved by the state’s three-member Board of Public Works, and does not require explicit legislative consent from the General Assembly.

The proposed redevelopment is led by a public-private partnership between the State of Maryland, Baltimore City, and State Center, LLC. State Center, LLC consists of a variety of for-profit private organizations, including: Ekistics, LLC; Linden Associates, Inc.; McCormack Baron Salazar; Neighborhood Development Company; State Center Baltimore Developers, LLC; Midtown Convergence; and TAC Companies.

Unlike traditional public projects, which are financed by low-interest public debt and result in state-owned, rent free assets upon completion, the State Center redevelopment project will be financed through a variety of mechanisms, including substantial amounts of private loans and equity, as well as public tax increment financing (TIF) bonds and state and federal tax credits. While the state will retain ownership of the land and charge a nominal land rent to the project’s private developers, the developers will own the newly constructed buildings, and state agencies will pay rent for the office space they occupy in those buildings.

Project advocates argue that the size and scope of the project, whose total cost approaches $1.5 billion and whose construction will span more than a decade, is infeasible to finance via public debt, and thus requires a public-private partnership. In turn, in order for the public-private partnership to secure the large private loans and equity necessary to complete the project, the state has contractually committed itself to a long-term lease of office space in the new buildings. By ensuring that the project has at least one major, guaranteed tenant, the developers hope to inspire confidence in potential investors.

While the State Center project has attracted significant support from the Baltimore City government and many local groups, it has also been a target for criticism. Questions about procedural issues and the lack of transparency surrounding the selection and subsequent replacement of developers abound. The initial development team was selected after a non-competitive request for qualifications (RFQ) process, rather than the more competitive request for proposal (RFP) process used in standard procurement situations and designed to ensure the selection of the most cost effective bid. Several significant changes to the development team were later made without a formal reexamination of qualifications. In part because of these events, the entire is project is currently on hold pending a lawsuit alleging that the state violated procurement laws in selecting the development team for the project.

Other opponents question the wisdom of locking the state into a long-term lease at rents significantly higher than current market rates, and whether it makes sense to invest in a large, mixed-use complex when significant amounts of office space remain vacant downtown. However, the purpose of this report is not to rehash the debate over whether the State Center project is a good or bad idea, or to take sides in the lawsuit. Rather, we aim to highlight and clarify a largely overlooked matter: the potential public cost of the project.