East Baltimore Development Inc. and the city Department of Housing and Community Development want to cash out a $2.1 million debt service account funded by EBDI and replace it with a taxpayer-guaranteed bond.
But an official with the federal Department of Housing and Urban Development said the move, approved by the city’s Board of Estimates last Wednesday to pump more cash into EBDI’s coffers, must also be approved by HUD.
“HUD must approve the substitution of the collateral security for a Section 108 loan, including the proposal from Baltimore,” said Maria Bynum, a spokeswoman at the agency’s regional office in Philadelphia.
“If the city were to fail to make a payment when due on the Section 108 loan and [Community Development Block Grant] funds were insufficient to cover the amount due, HUD would access the collateral security identified in the Section 108 loan agreement,” she added. “The risk would be whether the collateral security was available to cover the amount due.”
The board’s vote will increase the amount that city taxpayers have committed to the EBDI project because of new debt service for the surety bond, according to a top city official. The public commitment so far totals more than $212.6 million, according to the findings of a five-month investigation by The Daily Record published earlier this year.
The city’s action is the latest in a string of financial maneuvers to finance portions of the $1.8 billion redevelopment of 88 acres of Middle East, a community just north of Johns Hopkins Hospital. The nation’s largest urban redevelopment project, now 10 years old, is far behind schedule despite the relocation of longtime residents in more than 1,300 households and the demolition of nearly 670 houses and buildings.
The debt service account was created by EBDI as required collateral to repay a $21.2 million HUD loan, called a Section 108 Loan, granted in 2004.
The HUD loan is scheduled to be repaid through 2024 with federal CDBG funds and will ultimately cost taxpayers $28 million with interest.
The requirements of the HUD loan stated that EBDI establish the debt service account with $2.1 million. That sum totals one annual payment on the loan and provides a safety net if CDBG funds are cut or eliminated by federal officials, Bynum said.
Maryland’s CDBG funding was cut by $37 million this year, which meant a $5 million drop for Baltimore. Further cuts could be made as Congress debates spending cuts for 2012 in Congress this summer.
EBDI and the city’s housing department’s request to cash out the debt service account came before the Board of Estimates last Wednesday and was approved by its members: Mayor Stephanie Rawlings-Blake, City Council President Bernard C. “Jack” Young, Comptroller Joan Pratt, City Solicitor George Nilson and Board of Public Works Director Alfred H. Foxx Jr.
There was no discussion about the request, Nilson said last week.
“Nobody asked,” Nilson said, of questions relating to EBDI’s request, supported by the housing department. “There was no discussion about this item in any [prior Board of Estimates work sessions or] meetings.”
The need for the cash infusion and what EBDI planned to do with it was unclear, Nilson said.
“I don’t know that,” he said, when asked why the cash was needed by EBDI, which is a year late on beginning demolition for Phase II of the project, which stretches across 57 acres.
“It strikes me like it’s a straight-for situation,” Nilson said. “The $2.1 million is replaced with a city surety bond, which means that makes cash available.”
Nilson said the surety bond will carry a debt service fee that taxpayers will be responsible for, but he was uncertain how much that fee would be.
Comptroller Pratt said in an emailed statement that the funds were needed “to generally improve the liquidity of [EBDI’s] operations.”
Pratt said she recently met with Christopher Shea, CEO of EBDI, who told her the $2.1 million would be used for acquisition and demolition of buildings and relocation of remaining residents at the EBDI site, and the payment of costs associated with private sector financing.
“It was also stated that they could do more if certain funds were available and explained that this was the reason they would be seeking to substitute a surety bond for the funds,” Pratt said. “It seems that this request was submitted to generally improve the liquidity of their operations.”
Paul T. Graziano, the city’s housing commissioner, who along with EBDI requested the action, did not respond to questions from The Daily Record last Thursday.
A spokeswoman for the Housing Authority of Baltimore City said city housing officials were not responsible for the expenditure of funds by EBDI, a non-public entity.
“The city does not comment upon specific financial plans by non-city agencies,” said Tania Baker, HABC spokeswoman, in an email last Thursday. “Please refer this question directly to EBDI.”
EBDI’s Shea did not respond to a request for an interview or to questions submitted by email.
The mayor did not respond to emailed questions and phone call requests for interviews. A spokesman for Young said he had no comment.
Baker, the housing authority spokeswoman, said EBDI originally used the decaying houses in the Phase I area of the Middle East development as collateral for the HUD 108 loan.
After demolition of 669 of those houses and other buildings, that collateral vanished because replacement housing was not constructed as planned.
The original mission of EBDI was to rebuild 599 houses by now, EBDI documents show. There are now 220 houses in the Phase I footprint, most of which are rental apartments for senior citizens and other tenants.
EBDI, a nonprofit formed by the city in 2001 to lead the redevelopment, is now partnered with the city, state, the Johns Hopkins University and the Annie E. Casey Foundation in the project, according to the EBDI website.
The nonprofit development group has been stalled in its efforts to build new mixed-income housing at the site and to begin demolition of Phase II, which stretches across 57 acres in Middle East. A request for proposals for demolition of only seven acres of that site was put out by EBDI in December 2010.
Demolition was originally planned to begin last summer. It was moved to late last fall, and then into this year, according to EBDI reports and information posted on its website.
In a June 8 email, Shea said the total cost of the demolition of the seven acres and the contractor were “still in negotiation.”
That work will clear the way for construction of a privately financed public school at the site.
As for funding the upcoming demolition, Baker said: “Demolition in Phase II will be paid for with a combination of state capital funds that have been provided to the city for use in the EBDI project area and [tax increment financing bond] proceeds.”