Ugly Contract Fight Mars Celebratory Day in Annapolis
While lawmakers were making history on the first floor of the Maryland State House Wednesday, an ugly contract fight with potential legal implications for the state was unfolding one floor above.
“This is probably the worst way to handle a procurement and a lease negotiation since I’ve been governor,” said Gov. Lawrence J. Hogan Jr. (R) — who knows a thing or two about real estate. “I don’t think this process has been fair to anyone.”
Wednesday was the opening day for the three-month General Assembly session, full of history and ceremony. But coincidentally, the Board of Public Works was also meeting in the State House — just the second time in about two decades that a BPW meeting has coincided with the first day of the legislative session.
More than three hours into the meeting, after the BPW had approved Hogan’s controversial amended plans to widen two interstates and the American Legion Bridge, board members turned their attention to a proposed 10-year lease to keep the Maryland Insurance Administration at its current headquarters in downtown Baltimore.
It sounded like a simple proposition: The BPW, which consists of the governor, the state comptroller and the state treasurer, doles out millions of dollars in contracts at every meeting. But nothing has been simple where the question of where to house the insurance administration has been concerned.
For the past decade, the agency has been headquartered at St. Paul Plaza, a high-rise office tower that also houses the state Attorney General’s office and other state employees. But with the lease due to run out in late 2019, the state Department of General Services put the lease out for bid in 2017.
Twelve companies bid for the lease, and in 2018, it was awarded to Montgomery Park, an office complex in an old Montgomery Ward warehouse in South Baltimore, which already houses three state agencies. Executives at Himmelrich Associates, which owns Montgomery Park, said the state would save close to $16 million over the 10-year life of the lease.
But state officials soon got cold feet. Downtown Baltimore business leaders waged a lobbying and publicity campaign against the move, warning that losing the state agency could damage an already struggling real estate market.
Maryland Insurance Commissioner Alfred W. Redmer Jr. told the Board of Public Works Wednesday that many of his agency employees began expressing concerns about the move — especially to the lack of reliable public transit in the Montgomery Park neighborhood. Redmer also said state officials “grew more apprehensive” because they felt they were getting insufficient information from the landlord about how the move would be handled — and feared a number of employees would leave the agency.
“I’m a business guy,” he said. “I know that when you move, you’re going to lose employees. But I underestimated the number of employees.”
So the state terminated the procurement contract with Himmelrich and fashioned another 10-year lease for the Kornblatt Co., which owns St. Paul Plaza — without going through the bidding process again. Himmelrich filed objections with the state Board of Contract Appeals, where the appeals were heard in the fall and are now pending.
On Wednesday, the Board of Public Works was asked to approve the new 10-year contract for the insurance administration to remain at St. Paul Plaza. But Comptroller Peter V.R. Franchot (D) raised major objections — saying the landlords at Montgomery Park were being treated unfairly. He argued that the BPW should hold off on awarding the new contract until the Board of Contract Appeals has issued a decision on Himmelrich’s appeal.
“They haven’t done anything wrong,” Franchot said. “They just happened to be awarded the contract. Then somebody didn’t sign something.”
The comptroller added: “I’m concerned by the optics of the transaction. To be honest, it makes the state look bad.”
Complicating matters, according to Franchot, was the fact that Kornblatt was trying to enact a clause in the prior lease that would require the state to pay double its rent for the insurance administration going forward if the new contract wasn’t approved by Wednesday.
The prior lease at St. Paul Plaza expired in May, and the state utilized a clause in the contract that extended the terms for six months. Since November, the state has been renting the space on a month-to-month basis. Even though Franchot decried the “strong-arm tactics of the landlord,” officials at the Department of General Services believe Kornblatt was within its rights to seek the higher rent after the Wednesday deadline.
Further complicating matters, Kornblatt representatives told the BPW Wednesday that one of the company’s lenders was putting the squeeze on the landlord and that the company’s ability to meet certain financial commitments could be threatened by the state’s inability to approve the new lease. That, in turn, could leave control of St. Paul Plaza up for grabs, they argued, jeopardizing the insurance administration’s ability to remain in the building indefinitely.
“This is being compelled by our financial institution,” said Carville B. Collins, an attorney with DLA Piper, representing Kornblatt.
“I’m sensitive to Kornblatt’s situation, but that’s their problem,” Franchot replied.
Hogan and state Treasurer Nancy K. Kopp (D) both suggested there was plenty of blame to go around, among both state officials and the two real estate companies — “not that I pity the downtrodden landlord,” Kopp said at one point.
But both argued that uncertainty about management at St. Paul Plaza compelled them to vote in favor of the contract keeping the insurance administration there for another decade. Hogan said he worried about state agencies “being homeless.”
So the board voted 2-1 in favor of signing the contract to keep the Maryland Insurance Administration at St. Paul Plaza.
Immediately following the vote, Michael V. Johansen, an attorney at Rifkin Weiner Livingston LLC representing Montgomery Park, said the company would still vote for the Board of Contract Appeals to act, but suggested a lawsuit could be the next step.
“What’s the state interest [in the Board of Public Works] decision? We can file suit in Circuit Court for lack of state interest.”