Is State Center still affordable?

Changes made to the proposed redevelopment of State Center in Baltimore raise a number of questions and could ultimately mean that the project is unaffordable.

That is the key finding of a seven-page analysis of the project completed by the Department of Legislative Services, which details a number of questions about increases in rent costs and how it would affect the state’s operating and capital budgets. Those questions come at a time when Republican Gov.-elect Larry Hogan and the General Assembly will be asked to deal with budget deficits that will exceed $900 million by fiscal 2019.

The Nov. 17 analysis also prompted fiscal leaders in the legislature to request a hearing on the project in advance of a Dec. 17 Board of Public Works meeting where the project could receive final state approval.

“The changes raise issues for committee consideration,” wrote Warren G. Deschenaux, director of the department’s Office of Policy Analysis. “Of greater importance, however, are changes in the state’s fiscal condition that call into question the affordability of this undertaking on both the operating and capital budgets.”

Last month, Deschenaux briefed members of the legislature’s Spending Affordability Committee. During that briefing, he told legislators that the state faces a nearly $300 million projected budget shortfall in the current budget year and another $600 million next year. That structural deficit would grow to $931 million in fiscal 2019 — the first year the state would be required to pay rent of $18.5 million on the State Center project.

That rent payment is based on a 2009 agreement. Deschenaux and his analysts wrote that “the cost of construction materials and financing have changed since 2009” and could mean increased financial liability for the state.

“All of the components of the rent should be higher than in 2009,” the analysts wrote.

Deschenaux, in his letter, wrote that the rent payments would likely count against the state’s debt affordability ratios.

Plans to redevelop the 28-acre westside property bordering Preston Street, home to 1 million square feet of office space, the Fifth Regiment Armory and about 3,500 state employees, date back to 2005.

In 2008, the now-defunct Struever Bros. Eccles & Rouse, at the time State Center LLC’s managing member, withdrew from the project during the depths of the recession. Instead of rebidding, the state selected Ekistics LLC to take over as the project’s managing partner, which resulted in opponents filing a lawsuit.

Talks to redevelop the property date back nearly 10 years. The state ultimately entered into a public-private partnership to redevelop the property at a cost of about $1.5 billion. The state would pay guaranteed rent on the property, which would help the developers secure financing and lure additional investors and tenants.

But the project was delayed by lawsuits.

This spring the project appeared to have regained momentum when the Court of Appeals ruled that opponents of the project, which included businesses and property owners funded by attorney Peter G. Angelos, waited too long to challenge the procurement process in court. That decision vacated a ruling by a trial judge that the project had not been competitively bid.

The analysts concluded that the “additional lease cost of State Center would cause the state to exceed its debt limitation criteria that debt not exceed 8 percent of state revenues.”

Additionally, the development group, which is only contributing 33 percent of the costs of the public-private partnership, has made a number of changes to the proposal including:

• Increasing in the amount of space leased to the state. Originally, the state was expected to lease a total of 490,000 square-feet at above 2009 market prices. The state would now lease about 525,000 square-feet

• Reducing the size of an underground parking garage by nearly 350 spaced to just 580 spaces. Only 50 spaces would be available for public parking and state employees, who do not currently pay for parking, would be required to pay at least $50 a month—an expense analysts said should be part of collective bargaining with state employees’ unions.

• Acknowledging that one of the four private investors in the project has since dropped out.

• Proposing a grocery store in the Fifth Regiment Armory building and to in turn rent space originally set aside for the grocery store to a private charter school.

“It is unclear if many of these changes make sense,” analysts wrote, specifically questioning the appropriateness of a charter school in a transit-oriented development project as well as whether the armory could be retrofitted for a grocery store and if such a retailer would be viable.

Analysts provided a number of recommendations to legislators, including revisiting enabling legislation for the project in order to return some oversight to the General Assembly. As it stands, if the project were approved then lease payments are guaranteed and not subject to appropriations.

Additionally, analysts wrote that the state “may wish to reevaluate its options as it relates to the state’s continued occupancy of the building and facilities located at State Center.”

Among the options outlined are:

• Do nothing and continue to occupy the current property and forego redevelopment plans.

• Have the state pay for the renovation and replacement of the buildings. Such an option would likely exceed state debt limits, possibly require an increase in the state property tax rate and cause an undetermined number of planned projects to be delayed.

• Sell the property and rent new space.

• Buy out the current developer and re-bid the redevelopment project.

• Legislators are scheduled to hold a hearing Tuesday with state officials to ask questions about the project.

Sen. Edward J. Kasemeyer, D-Howard and Baltimore Counties and chairman of the Senate Budget and Taxation Committee, said he has asked O’Malley and the Board of Public Works to not make a decision on the project on Dec. 17.