Comptroller Henry's Statement on the Extension to Agreement with Redwood Apartments LLLP
Wednesday Jul 20th, 2022
204 City Hall - Baltimore Maryland 21202
FOR IMMEDIATE RELEASE
Geoff Shannon, Public Relations Officer
On July 20, 2022, the Board of Estimates voted on an Extension to Agreement with Redwood Apartments LLLP. Details about the deal can be found on p. 96 of the Board of Estimates agenda. The extension passed with a vote 3-2, with the Comptroller & City Council President voting nay.
Comptroller Henry, "Mr. President, I ask for your indulgence so that I can share some additional background for this item with the Board.
Back in 2000, A&R Development entered into a 60-year air rights lease with us at 11 S. Eutaw Street, to construct this apartment building above a city-owned parking garage.
Recognizing that the challenges in building market-rate housing on downtown’s West Side at that time, the City provided two subsidies for the original project: a 20-year PILOT and very favorable lease terms. Under those terms, the developer was to have paid the city $10,000/year in rent, but only after receiving a 12% cumulative preferred return on its equity of $2.6 million. Since they appear to have recovered an average of between 5% and 6% a year, we’re now 22 years into this deal and the City has still not received any rent.
I want to be very clear about this, Mr. President - I’m not criticizing the original deal. Twenty plus years ago, the revitalization of downtown’s West Side was still emerging - it had not yet been established as a desirable residential neighborhood. I’m sure that a previous Administration was able to make the case that without City assistance in the form of a 20-year PILOT and a below-market air rights lease, the Redwood apartment building would not have gotten built.
But now, more than two decades later, the West Side is an established residential neighborhood with a strong demand for market rate apartments. Hundreds, if not, thousands of units have since been built on the West Side with far less subsidy. Now, DHCD is proposing to extend The Redwood’s air rights lease from 2060 to 2099 - which is a great deal for the owner - but objectively, there’s little justification from the City’s perspective.
DHCD has made no case that the City, or even just the West Side would be harmed if this lease extension isn’t granted. On the other hand, a 39-year lease extension adds substantial value to the Redwood apartment building - and its owner - in two ways:
1) greater net cash flow each year
2) a higher sales price, if and when they ever sell the building
In return, all that the City is getting is the 22 years’ worth of back rent - payments that we never got because the annual return never cracked 12%. We’re not even lowering that 12% preferred return for the future, so there’s a good chance that we still won’t get any rent going forward.
Without a detailed “but-for” analysis, I’m left with the conclusion that a one-time $220,000 payment substantially undervalues the 39-year lease extension. Neither I nor the Department of Real Estate have been presented with enough information to demonstrate that the proposed $220,000 payment is the maximum that the developer can pay in return for the lease extension. They've made money on this project over the years and have more than recouped their original investment $2.6 million investment.
It's one thing for the City to give needed development incentives to make a project possible, but this project is already done; I don't understand why we're still incentivizing it. I don't believe that anyone has actually shown that it is in the City’s interests - financial or otherwise - to extend this lease another 39 years for only $220,000.
Mr. President, a great deal should be a great deal for all parties involved. So, for all of these reasons, I am voting “NO” on this item."