New terms on city’s deal to buy Inquirer building for new Philly police HQ threaten to increase cost for taxpayers

Mayor Jim Kenney’s deal to borrow $252.5 million to transform 400 North Broad Street into a new police headquarters could cost taxpayers more than City Council anticipated when it approved the agreement last year. The project is already the second-costliest historic rehab of its kind in Pennsylvania history, according to the Philadelphia Inquirer.

The potential cost increase stems from a change to the deal’s financing. From the beginning, the purchase included a complex arrangement involving $40 million in federal historic preservation tax credits that will go to developer Bart Blatstein and a $252.5 million loan that the city plans to assume ultimately. The latest change affects the terms of the loan — which will cover $39 million for the vacant Callowhill building, an industrial annex and its adjacent parking structure, as well as a $209.5 million renovation. (An additional $22 million for furniture, equipment, and other move-in costs will be paid for through the city’s annual capital budget.) The loan is expected to hit Philly’s balance sheets in nine years when the city plans to buy the former Inquirer headquarters from Blatstein. The city will lease the 95-year-old, 18-story Beaux Arts tower for the department’s use until that point.

The lease-to-own arrangement is intended to allow the developer to take advantage of the preservation tax credits, which Blatstein can use to defray renovation costs, but government is not eligible to use.

A letter signed by Blatstein that accompanied the agreement approved by the City Council in June specified that the project would be financed with a 19-year assumable loan “at a fixed rate not to exceed 3.75 percent.” The letter also stated that the financing “may provide for different or other terms so long as such terms are acceptable to the city’s Director of Finance in his or her sole discretion.”

The agreement itself, approved as a council bill, did not include any specific loan terms but instead stated that Blatstein would “use all commercially reasonable efforts,” to secure financing at the “best competitive rates.”

Eight months later, the deal is moving forward with financing in place. But instead of the 19-year loan with a fixed interest rate of 3.75 percent that Blatstein agreed to pursue in June, the approved will be paid out over the next nine years at a 4.02 percent interest rate, with an option to refinance when the term ends in nine years.  

The new deal will mean smaller payments in the short run because the payment schedule is backloaded, meaning the annual payments are set to increase after the nine years. In the long run, this would cost the city more. That’s because the amortization period — the time span where the city is incrementally paying off the loan — will be longer under the new terms. The original deal would have cost the city about $365 million at the end of the 19-year term. The cost of the new deal is impossible to predict, but it is likely that interest rates will be higher from their present near-record lows. If the remaining debt is refinanced after nine years at five percent, the cost would come in at over $405 million. At seven percent, it rises to more than $430 million.

When the city refinances in nine years, future officials could decide to amortize the remaining balance — about $200 million — over an additional 30-year period, which could add hundreds of millions more to the final price tag. In short, the longer the amortization period, the smaller the payments every year but the larger the overall cost.

City Councilman and real estate developer Allan Domb helped the city’s finance director Rob Dubow negotiate the original council-approved deal. With his experience in real estate, the city’s well-known “condo king” helped knock $10 million off the original $49 million purchase price — the city got $7.5 million shaved off the initial cost of the building and will get an additional $2.5 million when the historic tax credit period is over.  Domb also secured the language specifying a 19-year, fixed-rate loan. Domb said he hoped to save future political leaders from having to return to the market in the future when interest rates are likely to be higher.

“I wanted to lock the interest rates in now when they are the lowest they’ve been in 60 years and not kick the can down the road,” said Domb, a longtime critic of the city’s business practices. The businessman ran for council on a pledge to bring his real estate savvy to the public sector.

Kenney has steadily maintained that the plan to turn the North Broad landmark into a new police headquarters is a favorable deal for taxpayers. The plan shouldn’t be compared to other renovation or real estate transactions because of its unique needs and complexity, Kenney’s former spokeswoman Lauren Hitt told the Inquirer last year. Hitt was responding to the newspaper’s analysis that found the $90-per-square foot price the city will pay to acquire the newspaper’s former home is more than other comparable buildings sold recently for redevelopment.

The city never received an independent appraisal for the building.  Officials say the building will be appraised before it changes hands.

City spokeswoman Ajeenah Amir told PlanPhilly the new terms do not change the Kenney administration’s positive view of the deal. “We don’t anticipate that the change in the deal will have added to our cost, but won’t know until the end of the initial lease term,” the Amir wrote in an email.

Amir said that the city can’t comment on what the rate could be in nine years when the city will face the choice of refinancing or swallowing a lease hike. The terms brokered by Domb proved ultimately unworkable, she said.

“There were discussions about pursuing a 19-year fixed rate to finance the deal with Councilman Domb, but no financial institution was interested in providing us the financial structure that the Councilman negotiated,” Amir stated in an email to PlanPhilly.

Blatstein declined to comment for this article.

There is little question that the deal Domb negotiated was complicated, and that the financing stipulations included in the agreement between Blatstein and Dubow aren’t standard. A typical commercial loan term is usually less than ten years, and securing a competitive interest rate like 3.75 percent might have been easier with that kind of a conventional product. Domb, for his part, believes that the city should have done more to hold Blatstein to the terms of the original agreement, no matter how difficult they might have been to deliver.

“The burden was on the seller to provide this,” Domb said. “In the real estate world, if the seller is going to provide this, and it’s not available, the seller should have gone into the market and buy the rate down or pay for it.”

Kenney administration officials dispute Domb’s understanding. “The City and the Landlord [Blatstein] worked together in conducting a request for proposal process to solicit interested financial institutions to provide the loan for the project,” Amir wrote in an email.     

David Thornburgh, president of the Committee of Seventy, a local government watchdog group, said the whole arrangement is representative of larger governmental trends that raise questions of risk and reward for taxpayers. “The city shouldn’t be in this position, “ he said.

“The traditional perspective is that the risk and the potential upside should belong to a developer or business entity. Not the city. But those lines have been blurred over the years in Philadelphia, and in other cities, about who exactly is supposed to carry what piece of the risk.”

That question of risk drove Domb and fellow Councilman Bobby Henon to introduce legislation last month that would require the city to commission an independent appraisal before most acquisitions and before it sells municipally owned properties assessed internally by the city as worth more than $200,000.   

One building that would fall under the domain of the proposed law is the police department’s current home at 750 Race Street. Officials have said in the past that the 55-year-old, four-story icon known as the Roundhouse for its brutalist architecture, will likely be sold for private redevelopment. “Should the city decide to sell, an appraisal will be done,” Amir said in an email.