After yesterday’s Board of Estimates meeting, in which Mayor Catherine Pugh accepted $1.5 million from the Paterakis family in order to clear the way for the sale of their Legg Mason Tower, Baltimore’s chief development officer, William H. Cole, said:
“It’s a great deal for the city. For the first time we’re getting a very large lump-sum payment on an old PILOT that had profit-sharing.”
If deemed “great” by the head of the Baltimore Development Corp., the Legg Mason deal must be described as “super great” for the Los Angeles real estate conglomerate that is under contract to buy a portion of the high-rise building.
And it will be downright stupendous for the Paterakis clan.
As an official with an understanding of the transaction privately put it: “They’re flipping the building, and the new buyer does not want profit sharing with the city. So they’re buying the city out – cheaply.”
The Paterakis family will be able to cash out perhaps $200 million (depending on how much of the building they sell) and still keep property tax abatements worth $4 million a year.
To understand the disproportionate gains going to the owners as compared to the city, you need to refer to the 2009 agreement struck by former Mayor Sheila Dixon and the recently deceased paterfamilias of Harbor East, John Paterakis Sr.
Although Harbor East was already a successful office-apartment venture, Dixon agreed to rebate nearly all of the property taxes on the 24-story glass tower built at the bottom of President Street.
FROM THE BREW ARCHIVES:
• A taxing tale of two Baltimore hotels (11/15/11)
Part of the city’s reasoning for the huge tax break was to keep Legg Mason from moving its headquarters to Baltimore County and retaining 600 jobs.
But equally compelling – as underscored by evidence arising from Dixon’s own embezzlement trial six months after the approval of the Legg Mason PILOT – was the enormous clout of John Paterakis.
Here was a power player who had gotten what he wanted from City Hall for decades.
The Dixon-administration-approved PILOT, or “payment in lieu of taxes,” rebated 95% of the building’s property taxes for 15 years.
This saved Paterakis’ H&S Development Co. $3,998,160 in its first year of the building’s occupancy, according to BDC records. Additionally, it should be noted, the Paterakis family picked up 10 years worth of “EZ” (Enterprise Zone) tax credits from the state.
In the following six years until now, the city’s PILOT agreement has (depending on your point of view) saved a prominent family $24 million or deprived the city – now facing the layoff of hundreds of school teachers because of a looming $130 million budget deficit – of the same amount.
Two More “Flips” Allowed
There was, however, a proviso in the PILOT agreement that said the city would receive “25% of excess net proceeds after the developer achieves a 15% cumulative return on equity.”
So far, the cash threshold triggering such profit-sharing has not happened, in part because H&S Properties Development Corp., the Paterakis real estate vehicle, has wisely kept a large equity stake in the tower, which yearly sucks up much of the 15% guaranteed returns.
This strategy changed when H&S decided to put the building on the market. CBRE Global Investors is now under contract to buy a large portion of the tower.
But CBRE won’t do the deal with the profit-sharing provision intact.
Thus, H&S’s offer of $1.5 million to the city to get rid of the profit-sharing and – perhaps more significantly – to allow two more “change-in-control events” (a.k.a. “flips” of the building’s ownership) during the seven years remaining of the PILOT.
When questioned yesterday by The Brew, Cole explained the city’s reasoning this way:
“When it [the PILOT] was approved, it was never anticipated that the city would see any real profit-sharing. You don’t do these deals if there’s profit to be made. You are providing the support to help a marginal project to be viable.”
But the Legg Mason Tower is scarcely marginal – it boasts some of the highest rents in the city, is fully leased, and is under contract to sell at an extraordinary $480 per square foot, according to the Baltimore Business Journal.
That makes the 650,000 square-foot property worth about $312 million. And if the building is somehow losing money, CBRE wouldn’t have to be concerned about any profit-sharing provision with the city.
The $1.5 million payment not only smooths the way for the property’s sale to CRBE, but will benefit H&S for years to come. In December, the company told the BBJ that it plans to retain “an active and significant ownership and management interests in this trophy asset.”
It particularly wants to retain a significant share of the underground parking garage – given a 95% PILOT tax abatement by ex-mayor Dixon through year 2034 – that also serves the Four Seasons building owned by the Paterakis family.
No Objection from Pugh
The newly-installed Pugh administration was not forced to follow this path and amend the PILOT agreement.
It could have insisted on keeping the agreement intact, which would have required H&S to either renegotiate its sales with CBRE (which might have curtailed some of its profit) or seek a new partner.
Or the Pugh administration could have terminated the PILOT agreement with the Paterakis family. That would free the building’s owners of any future profit-sharing.
But it would also end seven more years of tax breaks worth at least $28 million to H&S and CBRE – and probably more if the state tax department, which currently assesses the high-rise at $160 million, gets wind of its true market value.
“Has it ever occurred to the BDC to say, ‘We can’t solve every problem you have, Mr. Developer. A deal’s a deal. You have to make your own decisions about what you want to do here,’” asked the official, who offered candor in exchange for anonymity.
Bill Cole insisted yesterday that the $1.5 million payment by H&S “is far above what we believe the city would get in the remaining seven years of the PILOT.”
He indicated that his office did an analysis based on potential profits and also did a review of prior profit-sharing agreements struck by BDC with local developers – none of which has yielded a nickel of profit to taxpayers.
Our source scoffed at this explanation, saying, “I bet it’s what George Philippou offered them,” referring to the longtime lawyer for H&S Properties, who is married to the youngest daughter of the late John Paterakis.
(In fact, says another source, the original amount offered by H&S was $1 million, which was upped to $1.5 million to gain Mayor Pugh’s support.)
In a statement, Comptroller Joan Pratt, who sits on the spending board, said Baltimore was gaining a guaranteed present payment against an unlikely future profit. This, she said, echoing Cole, was a good deal.
Mayor Pugh ratified the deal without comment yesterday. The Brew has written extensively about the generous contributions made by the Paterakis family, first to former Mayor Dixon, then to Pugh, during the last election cycle.
After supporting Dixon during the mayoral primary (which she lost to Pugh), the family switched allegiance and funneled $58,000 to Pugh – mostly in $6,000 chunks, the legal limit, and most of it coming on a single day, July 22, 2016.
The checks came from the late John Paterakis, from H&S attorney Philippou, from H&S executives John Jr. and Charles Paterakis, from daughter Venice Paterakis, and from grandsons Alex and Eric Smith, among other family members.