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Harbor Point TIF bonds will be used as collateral

The controversial tax increment financing bonds, or TIFs, to be issued to Harbor Point developer Michael Beatty this winter will not directly fund public infrastructure at the $1 billion project as pledged by Beatty to the City Council last summer.

Instead, the $36 million — the total of the first set of TIF bonds to be sold for the project — will be used as collateral to M&T Bank for a private $181 million construction loan it is making to Beatty Development Group LLC, documents approved by the city Board of Finance last month say. In a more traditional TIF, the money from the bonds is used to pay directly for infrastructure.

Beatty will not put up more than the $9.8 million he has already invested in planning and development of the Harbor Point project to date for the construction, the documents say. Another bank, JPMorgan Chase Bank, N.A. will own 90 percent of the project’s signature building, the 23-story tower that will house Chicago-based energy giant Exelon Corp.’s regional headquarters and a trading floor.

The city’s Board of Estimates voted Wednesday to approve five development agreements in order to set the TIF bond sale in motion later this month or in early February.

City Comptroller Joan M. Pratt issued the only dissenting vote after she questioned why she was denied a review of an appraisal of the Harbor Point property made by M&T Bank this fall.

The complex financial details of the TIF sale were outlined by Stephen M. Kraus, chief of the Bureau of Treasury Management, during an hour-long meeting at City Hall in December. Minutes later, the Board of Finance voted to approve the first of three TIF bond sales for the Harbor Point project. Kraus refused requests to make the underlying documents public.

But a closer inspection of the documents, obtained by The Daily Record, shows how the deal was put together by city finance officials, the Baltimore Development Corp. — the city’s quasi-public development agency — and Beatty.

“At closing (of the TIF bond sale), no cash will be exchanged,” the documents state, of the first batch of TIF bonds that Beatty’s development group is buying.

“The (TIF) bond shall instead be placed with the trustee (M&T) and as the permitted infrastructure costs are expected, a like amount of the bond principal will be released and interest will begin to accrue and be paid on the drawn balance.”

Wednesday’s Board of Estimates vote moved the Harbor Point TIF sale closer to fruition. Among the approvals was an agreement between the city and Beatty’s Harbor Point Open Space Corp. LLC, an entity formed Oct. 16, 2013 with attorney Mark P. Keener, of the Gallagher, Evelius and Jones law firm, listed as the resident agent and Beatty as the sole director, state records show.

Beatty courted Exelon to select the Harbor Point property for its local headquarters nearly two years ago. He has said he plans to break ground on the 872,945-square-foot Exelon tower and a 750-space parking garage this winter, which will require him to drill through a protective cap placed over toxic hexavalent chromium left at the site by its former tenant, Allied Signal, after a $100 million cleanup.

In a statement emailed Wednesday, Beatty Development Group Vice President Marco E. Greenberg said the corporation was delighted with the Board of Estimates’ vote.

“Today’s Board of Estimates approval is a critical step toward completing the tax increment financing for the public improvements at Harbor Point,” the statement said. “We look forward to starting construction in the coming weeks and getting to work creating new jobs and opportunities for local businesses.”

The Board of Finance documents state that a private finance group hired by the city estimates that the Exelon tower and other development at the site will ultimately result in a “hypothetical” value of $249.5 million.

Exelon is expected to fully occupy the 23-story building by January 2016, the documents predict.

The details of the financial deal the city approved with Beatty include a $181 million construction loan from M&T Bank to the developer and $67 million in investments in the Exelon tower by an entity known as the JPMorgan Chase Bank, N.A. — Comingled Pension Trust Fund that will yield a 90 percent ownership in the tower by the national bank.

The documents state that Beatty will encounter “no profit or loss” on the first phase of the development because M&T Bank executives have agreed to set an interest rate for the construction loan to mirror the interest rate of the TIF bonds — estimated to be 3.42 percent.

After the Exelon building is built, the initial TIF bonds will be resold in July 2016 on the private market to new investors as part of a “limited bond offering” totaling $39.7 million, the documents state. Kraus said such a resale would save the city about $5 million in interest costs during the construction of the Exelon tower.

Beatty will not make a profit off the resale of the bonds, he added.

In the statement he emailed Wednesday, Greenberg said of the TIF deal: “The approved structure is similar to other TIF projects in Maryland and was designed to reduce interest costs to the city although at greater risk to the developer.”

Overall, though, the developer will pay the city a 15 percent profit-sharing portion — after Beatty achieves a 20 percent profit, the documents state.

In the meantime, Kraus said he anticipated that Beatty will be forced to pay a special tax on the TIF bonds for up to 10 years because the project will not generate enough property taxes to cover the TIF repayment costs.

The special tax, paid to the bondholder, will be no more than $1 million a year, Kraus said.

M&T Bank officials said in a letter to Kraus dated Nov. 5, 2013, that they had formed a strong working relationship with Beatty over the past 10 or so years. Beatty and H&S Bakery owner John S. Paterakis are former partners who built the existing development at Harbor East.

“We are presently working on finalizing materials to present to our highest internal loan approving committees to obtain final approval … so that we may fully commit to close and advance funds on both loans,” wrote Barbara L. Simmons, administrative vice president at M&T Bank in the November letter to Kraus.

Simmons added that M&T Bank is “in discussions” with other banks to also join the Exelon tower construction loan deal.

Funds from the TIF bonds are expected to help pay for infrastructure that includes part of the costs for a new four-lane bridge spanning Central Avenue to Harbor Point, construction of new streets on the site and a “Central Square” park next to the Exelon tower.