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December 20, 2010
Downtown Baltimore City Property Owners Sue To Stop No-Bid, $1.5 Billion State Center Project That Circumvents Maryland's Procurement Laws
A group of prominent downtown Baltimore commercial property owners, supported by the analysis of a highly regarded economist, filed suit today in Baltimore City Circuit Court to halt the heavily taxpayer-subsidized $1.5 billion State Center project on the grounds that competitive bidding laws have been ignored or circumvented.
The project improperly diverts business from the downtown area, with a devastating impact to the City, downtown commercial property owners, retailers and the taxpaying public.
First conceived during the Ehrlich Administration, the State Center redevelopment has evolved into a mammoth mixed-use construction and leasing project a mile north of the City's downtown business center. It now envisions over 1.5 million square feet of commercial office and retail space intended primarily for State use but that also will compete with downtown rental and retail businesses.
According to the lawsuit, the State Center project one of the largest taxpayer-supported developments in City history will siphon business away from Baltimore's Central Business District (CBD), leaving the City's core office and commercial area "blighted and decaying."
Presently, there are over 2 million square feet of vacant space in the core CBD. As the lawsuit states, adding "an enormous, commercially unsupportable supply of office space" outside of the core CBD, with favorable taxpayer-supported financing, will cause "long-term commercial vacancies, blight and business flight" from the CBD.
In addition, the state currently leases over 700,000 square feet in the CBD which, according to the Developer's consultant would need to be largely diverted to State Center for the project to be viable thus further draining the downtown commercial district.
The suit alleges that the project will have "an immediate, devastating financial impact on the CBD and Commercial Property Owners" who are private entrepreneurs operating without taxpayer support. The result "will be catastrophic, immediate and will impact negatively the CBD for decades" and will damage the city's tax base.
According to the lawsuit, "the CBD cannot remain viable under these circumstances."
The General Assembly's own Department of Legislative Services, in a May 2009 analysis, noted "high commercial office vacancy rates and a high inventory of housing in Baltimore City raise questions about the viability of this undertaking."
Indeed, DLS found "there is no compelling reason why the State agencies need to be grouped together at State Center" given the over-abundance of far less expensive, comparable office space downtown.
"The current State Center proposal is not in the best interest of the State," DLS concluded.
The commercial property owners maintain the entire State Center project is legally flawed because of its failure to comply with State competitive bidding laws and procedures.
According to the lawsuit, the State's procurement laws, "intended to protect taxpayers," and prevent "government give-aways" have been "ignored and violated."
The lawsuit alleges the development and the lease-back deal with the private Developer selected without competitive bidding "circumvent[s] the State's mandatory procurement laws," providing the Developer and other private parties with "windfalls" worth hundreds of millions if not billions of dollars.
At its inception in 2005, the original Developer was given the Project, including exclusive negotiating rights, without competitive bidding. Thereafter, on multiple occasions, State agencies have altered the scope of the Project without competitive bidding.
On July 28, 2010, State agencies submitted the First Amendment to the Master Development Agreement. This document extensively changed terms and conditions of the original contract; substituted new individuals in the Developer group; reassigned multi-million dollar obligations from the Developer to the State, and set in motion up to $314 million in City taxpayer subsidies, known as a Tax Increment Financing plan ("TIF"). All of this was done without competitive bidding.
Under the proposed TIF, City taxpayers will forego up to $314 million in future property taxes on the office and residential buildings $10 to $20 million in Phase One alone funds that are badly needed to support vital City services.
In addition, the State agreed to sign long-term leases with the Developer, thus filling most of the project's commercial space at prices "substantially above" market rates for "similar" commercial space presently vacant in the CBD.
In the First Amendment to the Master Development Agreement, the State also agreed to assume the Developer's initial obligation to construct a parking garage at State Center saddling taxpayers with an additional $28 million debt obligation on a structure the Developer deemed too financially risky to build. On Dec. 15, 2010, the Board of Public Works authorized an increase in the amount of taxpayer-funded, MEDCO garage bonds to $33 million.
According to Dr. Anirban Basu, a noted economist with the Sage Policy Group, Inc., "adding almost a million and a half square feet of new commercial space outside the City's Central Business District will likely have irreversible, adverse consequences, including blight and commercial flight from the downtown area and an increased tax burden on City businesses and residents."
David E. Johnson, senior vice president of Lexington Charles Limited Partnership, which is a plaintiff in the lawsuit, said, "Commercial property owners have invested tens of millions in revitalizing downtown buildings as part of the vision of Baltimore's renaissance. It is sad to see there's so little regard for the future of the Central Business District."
"Those promoting the State Center project don't understand the devastating impact this will have on the City of Baltimore and its downtown commercial hub, which already is struggling. No city can thrive without a vibrant Central Business District. And it's not just the property owners who will be devastated. It's also the downtown shops and restaurants that depend on a high concentration of office workers."
The downtown commercial property owners are asking the Circuit Court to find this deal "was entered into in violation of State procurement laws" and thus must be declared invalid.
"The State's procurement laws are intended to protect taxpayers by ensuring that government projects are competively bid that's especially important when taxpayer funds are used to lease and construct State facilities," said Alan M. Rifkin, lead counsel.
"It is regrettable that we are at this juncture," Rifkin said. "Compliance with the competitive bidding laws is not optional or discretionary."
Plaintiffs in the lawsuit include the following downtown properties: St. Paul Plaza Office Tower, LLC; Lexington Charles Limited Partnership; 301 Charles Street, LLC; Park Charles Apartments Associates, LLC; Park Charles Office Associates, LLC; 501 St. Paul Street, LLC; St. Paul & Franklin, LLC; RoboPark, LLC; Charles Plaza, LLC; 39 W. Lexington, LLC; Baltimore Condo 2-8, LLC; Fayette Garage, LLC; Charles Towers, LLC; The Marlboro Classic, LP; and Redwood Square Apartments, LP.
Alan Rifkin is the managing partner of Rifkin, Livingston, Levitan & Silver, which has extensive experience in state contract and procurement matters. One of his partners, Scott Livingston, is the author of "Contracting with the State of Maryland" as well as many legal articles and a monthly newsletter on the state's competitive bidding statutes.
For information about the legal aspects of the lawsuit, contact Alan Rifkin, 410-269-5066.
Downtown Baltimore City Property Owners Complaint (PDF)
State Center Docs (PDF)