There are two premier luxury hotels in Baltimore. One pays the city millions of dollars a year in profit sharing and rent, while the other gets millions of dollars of property taxes rebated under a program criticized by a City Council task force report.

The bottom line? According to the city’s own calculations, the bigger and newer Marriott Waterfront at Harbor East generated $24 million less in total revenues for Baltimore between 2002 and 2009 than the Hyatt Regency Hotel in the Inner Harbor.

What’s more, the Marriott’s low revenue stream will stay in effect until 2022 – over which period the hotel’s owner, John Paterakis Sr., will be excused from an additional $40.5 million in property taxes based on the current assessed value of the hotel.

Overall, the tax breaks for the Marriott will amount to about $61.5 million over 25 years.

Different Structures, Different Outcomes

To see the property tax distortion that took place after the city started its PILOT (Payments in Lieu of Taxes) program to spur commercial development in 1997, look no further than these two hotels.

Such a “side-by-side” comparison was conducted for the Public/Private Development Financing Task Force appointed by City Councilman Carl Stokes. The Brew obtained a copy of the February 2011 report, which was prepared by the Baltimore Development Corp. (BDC) at Stokes’ request.

Theoretically, the two hotels should be paying roughly the same in city taxes and other revenue.

The Marriott generated $48.6 million in total revenue (including hotel occupancy taxes, real estate taxes and parking garage taxes) while the Hyatt generated $53.9 million.

But fully $21 million in real estate taxes was rebated to the Marriott under the PILOT program, while the Hyatt got only $3 million abated through a PILOT grant for a more recently built parking garage. That – plus different profit-sharing agreements with the city – account for the gap in the revenue streams from the two properties.

City Got Equity Share of Hyatt

The Hyatt Hotel was conceived by the late Mayor William Donald Schaefer as a way to convert the Inner Harbor redevelopment district into a popular tourist zone.

The city owned the land on Light and Conway streets. Schaefer cut a deal with A.N. Pritzker, owner of the Hyatt chain, to lease the land and fund infrastructure costs in return for profit-sharing with the Pritzker family if the hotel was a financial success. In effect, the city became an equity partner in the hotel.

Opened in October 1981, the 488-room hotel was a roaring success. A $10-million federal UDAG grant was quickly paid off, and the hotel soon was generating up to $4 million a year in profit sharing for the city.

In contrast, the 752-room Marriott deal was the city’s first PILOT.

The theory behind PILOTs is to encourage development in districts that need major infrastructure improvements and have little chance of obtaining private financing.

The property at Harbor East was not owned by the city but by Paterakis, who had been amassing mostly derelict industrial land between his commercial bakery operation at Fells Point and the Inner Harbor.

Paterakis had ambitious plans to make the area the next big harbor development, but he wanted government assistance to help pay the bill. That’s when the city – led by BDC president M.J. “Jay” Brodie – seized upon a PILOT to “seed” the project, which was considered highly speculative.

100% Property Tax Forgiveness

Under a PILOT, a developer typically pays the original base property tax, plus 5% of the assessed value of the improved property, resulting in a 95% tax forgiveness.

But the PILOT negotiated by Brodie and approved in August 1997 by the Board of Estimates (under then-Mayor Kurt Schmoke) went a step beyond the normal structure.

It rebated fully 100% of Paterakis’ property tax, requiring his company, H&S Properties, to pay just $1 a year in real estate taxes for the next 25 years. The abatement included both the hotel and a 620-space parking garage. (Retail property was excluded from the PILOT abatement. It results in about $40,000-$50,000 in property taxes paid annually to the city.)

The BDC analysis found that the assessed value of the Marriott hotel and garage rose from $102 million in 2002 to $148 million in 2009. This actually increased the value of the tax rebate Paterakis receives under the PILOT program from $2,379,090 in 2002 to $3,349,967 in 2009.

10% vs. 66% Profit Sharing

The largest tax revenue stream from the Marriott currently comes from the city’s occupancy tax on hotel guests. It generated nearly $21 million in tax revenues between 2002 and 2009, the BDC reported.

The city also has a profit-sharing plan with Paterakis. The city receives $594,000 and 10% of the net cash flow after all expenses and debt service – a far cry from the 66% net cash flow the city gets from the Hyatt Regency.

Not surprisingly, the Marriott and Paterakis have paid substantially less under the profit sharing than the Hyatt and Pritzker family.

Whereas the city picked up $17.3 million in profit-sharing revenues from the Hyatt between 2002 and 2009, just $1,899,653 accrued from the Marriott profit-plan during the same period. (In fact, profit sharing came only in two years, 2006 and 2007.)

Mayor Stephanie Rawlings-Blake and other city officials have stoutly defended the PILOT program, saying that without it, many city development projects in recent years would never have been built or rehabilitated.

But PILOTs and a related tax program called TIFs (Tax Increment Financing) have come under increased scrutiny.

Last week, protesters affiliated with Occupy Baltimore held a protest in front of the BDC offices, saying the agency was too willing to hand out “blank checks” to developers. On Sunday, more than 500 protesters marched on Harbor East calling on Paterakis to donate his tax rebates to help rebuild city schools and provide other services to those not living at affluent Harbor East.

Paterakis: Hard to Make a Buck

Michael Beatty, president of Paterakis’ real estate arm, H&S Properties Development Corp., did not respond to a phone call and voicemail message seeking comment yesterday.

But a delegation of the protesters from the group BUILD (Baltimoreans United in Leadership Development) spoke with Paterakis on Saturday, according to the group’s co-chair, Rev. Andrew Foster Connors.

Paterakis replied to their critique by noting his plan to give money to a charter school and a jobs program, and pointing out that the Marriott pays the hotel occupancy tax (as do all hotels in the city).

Paterakis also complained about how difficult it is to make a profit these days, according to Foster Connors.

“We listened carefully to him explain to us his hope that one day Harbor East would be profitable enough to provide for his own grandchildren.”

In addition to the Marriott Hotel, the Paterakis group received PILOTs from the city covering a large portion of three new buildings the group built at Harbor East – Legg Mason Office Tower, Laureate Office Building and Spinnaker Bay Apartments.

Last year, Paterkis was rebated $6 million in city property taxes through the PILOTs and paid $4.3 million in property taxes not covered by the tax savings mechanism.

By far, the largest tax rebate ($3,998,160) was made for the Legg Mason Tower, which was completed in 2009.

– Fern Shen contributed to this story.