Days before Exelon Corp.’s Feb. 1 announcement that it had chosen to build a $120 million tower at Harbor Point, a frantic, last-ditch effort was underway by some in the local development community to steer the company toward the city’s central business core.
The flurry included a failed attempt by Pikesville developer Stephen Gorn to gain a $41 million payment in lieu of taxes, or PILOT, tax break at the site of the former McCormick & Co. spice plant — a quest that raced through the board of the Baltimore Development Corp. and into the office of Mayor Stephanie Rawlings-Blake at lightning speed.
Meanwhile, on the other side of the city’s glittering waterfront, Michael S. Beatty was sealing the deal.
As president of Harbor East Development Group, owned by H&S Bakery magnate John Paterakis, Beatty had lured Exelon and Constellation Energy Group executives to commit to a 27-acre parcel adjoining 70-acre Harbor East, in part because it had two tax breaks, Beatty explained in a lengthy interview at The Daily Record this week.
And he makes no apologies.
“The simple fact is, if you looked around Baltimore City right now, what you’ll find is few buildings built over the last 10 to 15 years without some form of assistance, some form of an Enterprise Zone credit, a PILOT or some other reason why they get done,” Beatty said. “It’s too expensive to really develop it in this type of environment without having some type of reduction in the tax rate.”
Long Island native
The 46-year-old developer is a native of Long Island, N.Y., who has been in Baltimore for 22 years. During much of that time, he has helped oversee the conversion of a strip of land east of the Inner Harbor from a collection of rotting warehouses to the city’s hottest gold coast.
Today, Harbor East holds Baltimore’s glitziest real estate. The enclave of tall buildings is an urban canyon of luxury that includes a Four Seasons Hotel, the headquarters for Legg Mason, the Johns Hopkins Carey Business School, a Whole Foods grocery, and upscale retail, condominiums and apartments.
The community should add an estimated $1.5 billion to the city’s economic base once fully built, a private study by University of Baltimore economist Richard Clinch said, and generate $58.5 million annually in city and state tax revenues.
The Harbor East area was built with the help of tax breaks — in one case, the successful 752-room Baltimore Marriott Waterfront Hotel pays $1 per year in property taxes under two 25-year PILOT agreements approved by the city in 1997. The total real estate taxes rebated under the PILOT between 2002 and 2009 was $21.1 million, Baltimore Development Corp. records show.
Adding on to that development by expanding to the east was natural growth, Beatty said of the efforts to attract Exelon as part of the planned 1.8 million-square-foot Harbor Point development that already holds the eight-story Thames Street Wharf building, home to a Morgan Stanley business services center.
“We were pitching our own project to Exelon and Constellation to show ‘Here’s what we can deliver, here’s the Enterprise Zone credit that’s in place right now, here’s the [tax increment financing] benefits for you’ — and at the end of the day they chose that site,” he said.
“The vision for the overall property is you’ll see a mixed-use development. We will have one of the best parks in downtown Baltimore that goes along the waterfront. We hope to finalize a deal that brings US Lacrosse back into the downtown part of the city and have an incredible playing field that’s part of this park environment. We intend to make the entire area an environmentally friendly project.”
The six-month courtship of Exelon by the Harbor East Development Group began well before the Chicago-based company’s $7.9 billion acquisition of Constellation was approved by the Public Service Commission on Feb. 17. The energy giant plans to establish energy trading and renewable development businesses here, which will employ 4,500 workers.
TIF to be requested
The tax incentives that Exelon and Constellation plan to use at Harbor East are a TIF they plan to request to pay for infrastructure at the now-barren site, and state Enterprise Zone tax credits, which will relieve the energy giant from paying 80 percent of property taxes for the first five years and 50 percent of property taxes for another five years.
“So they made a decision that ‘Yes, we can move ahead and build a building based on a certain set of economics,’” Beatty explained.
But some members of the Baltimore City Council have said they plan to fight the TIF request for a yet-to-be-determined amount. That, said Beatty, would amount to bait and switch.
“I think it’s completely disingenuous and probably pushes tenants away from our city if all of a sudden you turn around and say based on this set of framework, ‘You’ve agreed to do this fantastic thing, move employees here and build a building, and by the way, we’re going to take the tax rate and jack it up on you,’” he said.
“Someone could make an argument that that is a huge win for the city because the [$41 million Gorn] PILOT would have cost the city a lot more than the Enterprise Zone credit would have,” Beatty said. “On our site, we were just trying to give the best proposal we possibly could to the tenant. We were trying to be thoughtful and listen to all of their needs across the board and we thought we did that, and obviously the results proved that.”
He defended the development as an extension of Baltimore’s downtown, enhanced by the geography and luster of the waterfront.
“At the Harbor East project, we have $1 billion of investment in there. That’s money that’s at risk that could have been invested elsewhere, but it was chosen to put it into this environment, into our city here,” Beatty said.
“I think it’s unfair for someone to say ‘You’re lining up at the trough for these [tax incentives].’ They’re available to anybody that has property in downtown Baltimore in an Enterprise Zone who can take advantage of that credit. They need to write a very large check to do so, because they need to put up money to build it.
“Nobody is sitting there making it absolutely all that easy to develop anywhere. It still takes risk, and hopefully for that risk and long-term investment, there is some reward at the end of the day, which there should be.”
Boss’ low profile
While Beatty carries the big stick for H&S Properties, his boss, 82-year-old Paterakis, has little need to step into the limelight. Paterakis pleaded guilty in 2009 to two campaign finance violations, both misdemeanors, for which he paid a $26,000 fine and was placed on probation through January 2012, a status that barred him from making donations to city politicians.
He has kept a low profile locally, even sitting off at a remote table during the June 2010 dedication of the Thames Street Wharf building.
The H&S Bakery, owned and operated by the Paterakis and Tsakalos families, was started in Fells Point in 1943 as a small operation. Today it is one of the largest makers of rolls in the world.
“John is one of the biggest risk takers I know,” Beatty said. “What’s different about John … is that he will never run away from anything. And John time and time again has said, ‘Well, I guess we need to work a little harder.’ And when you bump into a challenge — there’s no financing in the market, a project costs more than you thought it might cost, a tenant gets in trouble — whatever the issue is, John will just say, ‘Let’s finish. Let’s go and figure out a way to go and get this solved; we may have to write some more checks, we may have to be a little more patient, we may have to work seven days a week.’ But he’s right there with you. And that’s the difference.”
That perseverance, Beatty said, has helped to transform the development that now surrounds the bakery complex, portions of which may be moved to make way for more development as Harbor Point takes shape. The distribution center at Central Avenue and South Eden Street is a prime candidate for relocation, he said.
“I think John’s legacy is probably a lot of things,” Beatty said. “In the bakery business, he’s built an empire. John has always been very quiet about everything he does, and he doesn’t like to jump up and take credit for anything. He likes to just work hard, and if people appreciate that, great. And if he can do something great in his neighborhood in the city, that’s fantastic.
“As far as on the real estate side, John could have done a lot better building bakeries. The reality is he knows how to do that. He’s fantastic at it, and you avoid a lot of risk staying with what you know and developing it. He made a conscientious decision and his family did, too, to invest in Baltimore.”
Part of the same city
And the Harbor East and Harbor Point developments are all part of the same city, Beatty said, despite recent criticism that the location of the Exelon tower on the waterfront would harm Baltimore’s already struggling central business district, where the vacancy rate is 19 percent.
“What’s happened over time is that Baltimore has grown from what some people have determined as the old central business district, which might have been north from the harbor, and it’s clearly grown down to the waterfront,” he said. “And that’s a great thing.”
Of the Harbor East project, Beatty said new residents have come to live downtown, making the area vibrant again.
“They forgot how a great urban environment can be diverse, exciting and have amenities and also can be convenient,” he said.
When asked if he celebrated the Exelon commitment to Harbor Point, Beatty said he decided to defer, and went home to cook his family a meal.
“Developing real estate takes a long time,” he said. “We basically won the right to a lot of work for three years, so it’s a challenge. I didn’t pop the champagne yet.”
MICHAEL S. BEATTY
Hometown: Shoreham, N.Y.
Family: Wife, Nathalie, three sons, ages 18, 15, 13
Education: Graduated Villanova University
Employment History: Came to Baltimore in 1990 to work as a specialist at South Charles Realty. Joined Harbor East Development Group in 1993.
Local boards: Baltimore School for the Arts, Maryland Institute College of Art, Johns Hopkins Bayview, Gilman School, Central Maryland Transportation Alliance, Waterfront Partnership of Baltimore.