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Blatstein poised to cash in on Philly police HQ plan

City officials say the arrangement is a win for taxpayers, because it allows the developer to charge less. But compared with other recent property transactions and historic-renovation projects, it appears to be no bargain.

The former home of the  Inquirer, the Daily News, and is set to become the future headquarters for the Philadelphia Police Department.
The former home of the Inquirer, the Daily News, and is set to become the future headquarters for the Philadelphia Police Department.Read moreED HILLE / Staff Photographer

Conversion of the Inquirer Building on North Broad Street into the Philadelphia Police Department's new headquarters – stacking up to be the second most expensive historic-rehabilitation project of its kind in city history – comes with an extra bonus for the plan's developer: a federal historic-renovation subsidy said to be worth $40 million.

Building owner Bart Blatstein's deal with the city allows him to retain funds generated by the federal historic tax credit being sought in connection with the $280.3 million plan for the 93-year-old tower at 400 N. Broad St., rather than using those proceeds to offset specific project costs.

City officials say the arrangement is a win for taxpayers, because it allows Blatstein to charge less. But compared with other recent property transactions and historic-renovation projects, it appears to be no bargain. And, an Inquirer and Daily News analysis found, it seems likely to translate into a big windfall for Blatstein.

It also ends Blatstein's years-long effort to find a use for the oddly configured property consisting of the 18-story tower that once held editorial offices of the Philadelphia Inquirer, Daily News and ,and a sprawling industrial annex designed for printing and distributing newspapers.

Bill Luff, the Philadelphia-based founder of the commercial real estate consultancy CRE Visions LLC, said no other centrally located properties would have met the city's need for office space, holding cells, and other specific police requirements.

"He's sitting there with a massive project that only has a few viable uses," said Luff, who had marketed the building in 2009 for a former owner. "Then somebody shows up with a really complex requirement. … It just seems like the stars were aligned."

But David Thornburgh, president and chief executive of the government-watchdog group Committee of Seventy, said the arrangement deserved extra scrutiny, given that the city has just abandoned an equally costly plan to move police to the former Provident Mutual Life Insurance Co. building at 4601 Market St. in West Philadelphia after spending $50 million.

"It does raise the stakes," Thornburgh said of the abandoned plan. "The last thing you want to do after making this kind of decision is to give away the store, or be perceived as giving away the store."

Blatstein spokesman Frank Keel declined Thursday to comment about the newspapers' analysis of the deal.

Last month, City Council approved the plan to lease, and ultimately acquire, the 468,000-square-foot building, which has been empty since the departure of the Inquirer, Daily News, and in 2012, to replace the dated four-story police headquarters at 750 Race St. known as the Roundhouse.

The vote followed private talks between city officials and Blatstein. Further discussions are being held to finalize the deal's financial structure and specifics of the lease, with the goal of having the building ready by 2020, city spokeswoman Lauren Hitt said in an email.

Blatstein paid $22.7 million in 2011 for the newspaper building, parking structure, and two adjacent empty lots that are not part of the deal with the city.

In 2014, an effort to develop the building into a casino resort faltered when a gambling license was awarded to a competing proposal in South Philadelphia. The following year, Blatstein made an unsuccessful bid to obtain a $5 million state development grant for a 125-room boutique hotel on part of the property.

Hitt said that other buildings were considered for the new Police Administration Building but that none would have been able to accommodate additional city functions — such as its morgue and toxicology lab  — and police district offices that are also bound for the new site, so the other choices would have ultimately cost more.

Under the Council-passed plan, a subsidiary of Blatstein's Tower Investments Inc. will redevelop 400 N. Broad and lease it – along with the adjacent 590-space parking structure at 1501 Callowhill St. – to the city for nine years at a rate of up to $15.6 million a year, after which the renovated properties will be acquired by the city. The lease payments will count toward the final purchase price.

The deal was designed to leave the property in Blatstein's possession for a period covering construction and the first five years of occupancy, so the project could qualify for historic tax-credit support, city officials have said. Under municipal ownership, the project would not qualify for the credit, because cities pay no taxes.

Historic tax credits are valued at 20 percent of a project's eligible expenses, which exclude items such as finance fees and some infrastructure costs. Developers frequently "sell" those credits to entities such as big financial institutions with hefty tax bills, often for a little bit less than their face value.

According to Councilman Allan Domb, who negotiated a price reduction and more favorable interest-rate terms for the city after most of the deal's terms had already been decided, the tax credit being sought is expected to be worth $40 million.

Of the $280.8 million budgeted for the police project, $42 million will go toward buying the building in its current condition for redevelopment, as well as the parking structure at 1501 Callowhill St., according to a breakdown provided by Hitt. Another $207 million is to be spent on renovations, including "soft costs" such as architectural, engineering, financing, and legal fees.

An additional $28.3 million has been allocated for "fixtures, furniture, and equipment," including a specialized exhaust system for the morgue, biosafety equipment for the toxicology lab, and security features such as ballistic glass, crash barriers, and bollards, with an additional $3.5 million going to pay finance-related fees.

All that money, however, comes from city sources, with the federal tax credit unaccounted for as a funding stream.

Hitt disputed that, saying the tax credit is accounted for, "embedded across all the city's costs."

"Regardless of who is the direct recipient of the $40 million tax credit, the tax credits are ultimately reducing the city's costs by that amount," she said.

Hitt put the market value of the parking structure alone at $13.3 million.

Mark Primoli, an accountant in the St. Paul, Minn., area who advises on historic-credit deals, said he was unsure whether the city's effort to structure this deal to qualify for a credit would be successful.

But if the deal manages not to spook investors, the credit proceeds will likely be retained by the project's developer in addition to whatever is charged in fees for the work, said Primoli, a former tax-credit specialist with the Internal Revenue Service.

"They're getting a fee from the city, plus they'll be getting the tax credit," Primoli said after the police headquarters transaction was described to him. "It's a good deal for the developer."

Even with the deal to let Blatstein keep the credit, the city doesn't appear to be getting off cheap.

The $42 million acquisition price for the building in "as-is" condition works out to $90 a square foot. That's more than other vacant or underutilized buildings recently sold for redevelopment, including the former GlaxoSmithKline headquarters at 200 N. 16th St., which traded in 2015 for $71 a square foot, and the 2400 Market St. structure once known as the Marketplace Design Center, for which $86 a square foot was paid while still earning some tenant income in 2014, according to data compiled by the real estate services firm JLL.

The former GSK headquarters sold with rights to about 170 parking spaces in a garage shared with a nearby hotel. The 2400 Market St. sale included a parking structure with space for 450 cars, compared with the Inquirer Building's 590-spot garage on a separate parcel.

Meanwhile, the North Broad Street building's $207 million renovation budget will make it Philadelphia's second most expensive tax-credit project since the subsidy program began in 1976. The most expensive was Brandywine Realty Trust's $240.2 million rehabilitation of the former 30th Street Main Post Office, according to data from the Pennsylvania Historical and Museum Commission.

Records list the 1930s-era post office, now home to local IRS offices, at 962,000 square feet, more than double the size of the former newspaper building.

The 30th Street project received final tax-credit certification in 2011, when material and labor costs were lower than they are now. But next to more recent projects, the newspaper building's conversion also looks expensive, about $442 a square foot. That's 73 percent greater than the $256-a-square-foot average for the five Philadelphia office projects receiving historic tax credits since mid-2013 for which complete information is available from the state Historical and Museum Commission and other sources, according to the newspapers' analysis.

Per square foot, the most expensive office project to use tax credits during that period was Drexel University's conversion of a 33,200-square-foot complex of historic properties into the Dornsife Center for Neighborhood Partnerships for $12.2 million, or $367 a square foot.

Hitt said the police plan should not be compared with other renovation projects because of its complexity and the number of law enforcement and other city functions involved.

"That specialization is extremely expensive – way and above the normal construction costs you'd have to do for an office building," she said. "This will be the nucleus for the city's public-safety operations, so it has to be built to survive natural and man-made events."