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Joe Nathanson: Are development incentives necessary?

Note: What follows are reflections on last week’s program sponsored by the Baltimore Efficiency and Economy Foundation (BEEF). Full disclosure: I have been a consultant for BEEF, in 2006 and 2011.

The event in Harbor East’s Legg Mason Tower started off with the sober quality of an academic seminar. The visiting lecturer came from out of town to deliver his views on the use of incentives to advance local economic development, buttressed by a 50-page paper. Before the proceedings concluded, the passions that had been evident in the deliberations involving Tax Increment Financing (TIF) for Baltimore’s Harbor Point project had bubbled to the surface once again.

The recent gathering was a forum dealing with the question, “Are Incentive Programs an Essential Tool for Baltimore’s Redevelopment?” Billed as “an Interactive Discussion of TIFs, PILOTs, Enterprise Zones”, the morning session was sponsored by the Baltimore Efficiency & Economy Foundation (BEEF), a civic watchdog organization, now in its 15th year operating in its current format. Through research papers and problem-solving task forces, the foundation’s mission is to be a catalyst for better Baltimore city governance.

Serving as moderator for the program was M.J. “Jay” Brodie, the retired head of the Baltimore Development Corp. Brodie made a case for the use of incentives, reminding the audience of the decades-long loss of population and the eroding tax base that have placed Baltimore city on an uneven playing field. To manage its budget the city has a property tax rate twice as high as rates prevailing in the surrounding counties. As a result, the city has resorted to using incentives, such as TIFs, to move development forward. The TIF uses the future property tax revenues attributed to a project to pay off the bonds issued at the start of a project to fund infrastructure and other project-related costs.

Sometimes you hit a home run. A case in point: a BDC loan extended to a startup firm with two employees located on Wicomico Street, in one of the city’s older industrial districts. Those two were Kevin Plank and his brother, Scott, the founders of Under Armour.

Attorney Gregory Hummel, in for the day from Chicago, next took the podium. Hummel is a senior partner with the international law firm Bryan Cave LLP, who has advised clients nationally and internationally in matters relating to the use of tax credits or tax-exempt debt for economic development. His hometown has used TIFs extensively, with more than 150 TIFs active as of the end of 2012. Indeed, TIFs are credited with playing a major role in the renovation of many of Chicago’s public schools, though not without controversy.

As the conversation turned to the several panelists distributed around the room, City Councilman Carl Stokes voiced his opinion that an aggressive program of property tax reduction would reduce the need to offer development incentives. Developer Bill Struever, principal at Cross Street Partnership, presented his view that problems start with the state real property assessment process. Citing a residential unit at one of his earlier developments, Clipper Mill, the problem is one of under-assessment. Starting with an assessment well below the purchase price, followed by a downward reassessment, the homestead tax credit would ensure that the local tax collector will never capture revenues reflecting the true market value of the property.

Ultimately, as one might have expected, the conversation came around to the proposed Harbor Point project, where Beatty Development Group LLC has planned a mixed-use development, highlighted by the new Baltimore headquarters location of utility giant Exelon Corp. Over heated community opposition, the project secured a $107 million TIF designed to fund streets, public utilities and public open space, in addition to the benefits of being located in a state enterprise zone.

Reflecting on the acrimonious debate over the summer months, Brodie suggested that the criticism of the project at times became very personal, directed at the principal developer, rather than the merits of the project. He expressed the concern that this type of opposition might discourage other developers from investing in the city.

Councilman Stokes was not persuaded by this concern. Rather, after repeated rounds of incentives being made available to developers, he is still waiting to see the benefits accruing to his constituents.

While the notion did not come up in the free-ranging forum, perhaps Baltimore might consider a Community Benefits Agreement that could account for the needs of affected, off-site communities.

After all, there is a precedent for this in Maryland. Consider the legislation that provided grants to designated local communities affected by the location of casino slot machines or racetrack facilities. Of the state’s total proceeds, 5.5 percent are allocated as “local impact aid”. Under the law, for example, the Pimlico community is the beneficiary of about $2 million annually from this source of funds.

Is this something for BDC to consider in future projects, serving the interests of both local communities and private developers?

Joe Nathanson heads Urban Information Associates, Inc., a Baltimore-based economic and community development consulting firm. He writes a monthly column for The Daily Record and can be contacted at [email protected]