Baltimore's Port Covington TIF deal and concomitant community benefits package

Kevin Plank, founder of Under Armour separately owns a real estate development company, Sagamore Development, and his firm has been pursuing a big redevelopment project in a part of the city's formerly active industrial waterfront now called Port Covington, which is adjacent to I-95.

This project succeeds another project for the same area, then called Westport, that went for nought because of the recession ("As Plank announces Westport acquisition, city's hopes are high," Baltimore Sun).

The project will include a new headquarters for Under Armour, more than 14,000 units of new housing, other office and retail development, and public space and infrastructure improvements.

The total value is expected to be about $5.5 billion.

To fund the new infrastructure for the area, Sagamore is asking the city for $660 million in "tax increment financing," which is a huge amount for any city, let alone Baltimore, a city with declining revenues and multiple priorities.

In return, the firm has agreed to a reasonably large community benefits package ("Port Covington $135M deal with BUILD, city hailed as end to 'business as usual' in Baltimore," Baltimore Business Journal) but negotiating it was not without controversy, and pitted nonprofits against each other.

Interestingly, on Wednesday, Kevin Plank representing both Under Armour and Sagamore Development, published a full page ad in the Baltimore Sun to communicate their side of the story.

BE SURE TO CLICK THROUGH AND READ THE AD.

Community benefits packages.  See the past blog entry "Community benefits agreements: revised (again)" for more discussion on the general issue of proffers and getting a reasonable economic return.

In 2014, there was a very interesting article on the topic, with a concerted negotiating group and strategy for a project in Southeast DC ("Ward 8 group wants millions from Congress Heights developer") in the Washington Business Journal, but I could never get the firm City Partners, to talk with me about it. From the article:

A collection of Congress Heights-area community leaders is seeking millions of dollars from the development team planning a 446,000-square-foot mixed-use project atop the Congress Heights Metro station.

A draft community benefits agreement drawn up by "A Community Coalition for Responsible Development,"or ACCORD, includes demands for office space, financial assistance for local nonprofits, revolving working capital funds for subcontractors, attorney's fees, jobs and job training, and reduced rents for retailers. ...

ACCORD includes Advisory Neighborhood Commission 8E, the Congress Heights Community Association, Congress Heights Community Training & Development, Lead the Way Foundation and Ward 8 Council Against Domestic Violence.

Its requests are extensive. Square 5914 has not signed onto the agreement.

The provisions include:

• A minimum $2 million financial support for ACCORD, paid out over 20 years, to support Ward 8 nonprofit organizations that provide recreational, social services, and educational programs.
• A 1,000-square-foot office space for 10 years, with three 10 year extensions, for ANC 8E, at a cost of $1 per month.
• Attorney fees up to $25,000 to pay for the negotiation of the community benefits agreement.
• A $200,000 revolving working capital fund to ensure that small subcontractors can cover payroll and other costs on a weekly basis.
• Guarantees that the general contractor will spend at least 40 percent of its project funding on certified business enterprises, 50 percent of which much be located within Ward 8.
• Providing at least 30 percent of its construction jobs to Ward 8 residents.
• Setting aside 8 percent of the total amount of residential square footage for households earning less than 80 percent of the area median income.
• Employment training for graduates of occupational skills training programs, with the Far Southeast Collaborative and OIC getting first preference.
• Two street level retail spaces for local businesses, at 75 percent of market lease value, plus assistance with initial tenant improvements.

FWIW, I don't imagine this proposal got very far.

There isn't all that much in the way of "big profits" on such properties in weak real estate submarkets.

To pay big community benefits you have to expect either that the property was government owned and was sold below cost or that there is great profit to made.  Instead people believe that "community benefits" are in order as a price to pay to be able to enter a community (see the past blog entries "In lower income neighborhoods, are businesses supposed to be "community organizations" first?" and "What community benefits are supposed to be versus what people think they are about" and "Jamaica Plain group drafting deal to negotiate with Whole Foods," Boston Globe).

But it is interesting that like in Baltimore, allied groups collaborated and negotiated jointly, and they are thinking big.

Weak markets and the tension between revitalization versus new construction.  The Port Covington project also sheds light on a big problem faced by weaker market cities, the tension between reinvestment in existing places versus investment in the production of brand new development on brownfield and "grayfield" sites, where industrial or other sites are converted to new uses, but while there are other buildings elsewhere in the city accommodating many of these uses already.

The site formerly known as Westport.  Baltimore Sun photo.

New construction vs. stoking demand for existing underutilized property.  Part of the problem is the issue of demand.  Baltimore's problem economically is weak demand for real estate/commercial activity, and building new may merely shift tenants around, rather than create (or attract) new economic activity.

In fact that was the root of the difficulty of launching the Westport project, because there was already so much vacant extant property elsewhere in Baltimore, financiers weren't interested in creating even more commercial space ("Westport Waterfront's woes loom particularly large for surroundings," BBJ).

Similarly, this has been an issue in Philadelphia, with the construction of the new Comcast headquarters, which comes at the loss of tenants for other properties ("Will new towers boost Philly rents, or cut them?," Philadelphia Inquirer, because demand for commercial space isn't increasingly substantively commensurate with the additional commercial space delivered through the project.

Tenants seeking special concessions or modern spaces move to the new space, leaving older spaces vacant..

An economically substantial anchor is key to big new projects.  Generally, these kinds of projects, especially at this scale, are fraught with risk, but having a large anchor tenant like Under Armour reduces the risk considerably.  Port Covington is less risky and much easier to finance compared to Westport, but it's still not a slam dunk.  Hence the request for TIF funding, which reduces how much traditional financing the project needs to move forward, especially at the earliest stages where costs mount and revenues are nonexistent.

Executive jobs vs. "back office" jobs and the return to the city movement by corporations. While there is the visibly evident trend of large corporations moving back to cities (past blog entries "Smart Growth America report on businesses moving back to center cities (and suburban core business districts)" and "A lesson that seeing is believing: Panasonic's new building in Newark, NJ as an example, positive and negative, in businesses coming back to the city center"), it is not lockstep.

Some cities, like Washington and Philadelphia, don't seem to be big beneficiaries of such movement ("Businesses moving back to the center: not a universal trend"), and in many places, other firms continue to move to the suburbs.

Furthermore, companies moving back aren't moving everyone back, but mostly "command, control, and coordination" positions ("Leaving for the city," Economist). continuing the multi-decade trend of separating lower value ("back office") positions and either outsourcing them or moving them to lower cost locations.

One Court Square Citibank complex in the Long Island City district of Queens.

For example, in the 1980s Citibank moved certain functions to Long Island City from Manhattan ("Citi-Owned LIC Site Could Give Rise to a 40-Story Building," Curbed NY), and other financial firms moved "back office" functions to Jersey City ("Lehman Bros. to Move 900 Back-Office Jobs to Jersey City," New York Times, 1993; "Jersey City remains attractive to corporations," Jersey Journal) and elsewhere.

This helped them cut costs.

In weak real estate markets, there isn't the same imperative to real estate costs.  What makes Under Armour unusual is that at this stage of the company's development, they haven't separated out "back office" jobs from their corporate campus, the way that companies have done so in higher value real estate markets.

Managing corporate real estate costs.  I haven't been keeping up with the Harvard Business Review now for the past couple years, which is unfortunate because it usually has some conceptually provocative writings.

But long before I was involved in urban revitalization, when I was doing business television production, I remember coming across the first article by "Sandy" Apgar of Baltimore in the mid-1990s, and finding it very interesting.

-- "Uncovering Your Hidden Occupancy Costs," Harvard Business Review, May-June 1993, which was followed by

-- "Managing Real Estate to Build Value," Harvard Business Review, November-December 1995,

Today this is nothing new ("Changing Office Trends Hold Major Implications for Future Office Demand," CoStar Group; "Law firms in D.C. are shrinking, leaving behind vacancies," Washington Post); National Strategy for Real Property, The White House/Office of the President) but 20 years ago it was a big deal.