The Mall That Ate Katy

Big money, big lobbyists, big tax breaks. The Mills Corporation is bringing one of its "megamalls" to Katy, and it's hardly business as usual in the little town on the prairie.

She hasn't seen it yet, of course, but Jinny Baker knows it'll be big. How could something that's being promoted as a super-regional value- and entertainment-oriented megamall not be huge?

Megamalls are a creation of the Mills Corporation, a Virginia-based developer that wants to plop one of its products down on a 542-acre parcel of native prairie and wetlands near Katy, about a quarter of a mile from Baker's home in the Pin Oak Village subdivision.

The new Katy Mills would be a sprawling 1.6-million-square-foot building housing a dozen or so department stores, 200 discount outlets, theme restaurants and a food court, and a 30-screen movie theater. Free parking would be available for some 12,000 cars.

If that were all, Baker and her neighbors could probably adjust. But the Mills Corporation's grand plan is to surround this casbah of consumerism with another 472 acres of hotels, office buildings, strip malls, restaurants and a par-three golf course. The freeway interchanges at Pin Oak and KatyFort Bend County roads, which connect Interstate 10 to Katy, would be retooled to handle traffic from an estimated 18 million mall shoppers a year.

Last week, the Mills Corporation opened the 1.5-million-square-foot Grapevine Mills just north of the DallasFort Worth International Airport. It was the sixth megamall built by Mills since the opening of Potomac Mills outside of Washington, D.C., in 1985. A half-dozen others are in various stages of development, including one that will be built alongside the new ballpark planned for Candlestick Point in San Francisco. Mills has also formed a partnership to build megamalls in Europe.

Basically a huge shell filled with as many discount outlets as possible, a megamall is built for speed. The idea is to keep development costs at about $100 per square foot -- two to three times below the average for commercial development -- and then produce sales at the hand-over-fist rate of $300 per square foot by attracting 15 to 20 million shoppers a year. In 1996, the megamall formula added up to $1.5 billion in sales by Mills outlets.

And as long as Wall Street doesn't slow down, Mills probably won't either. As a publicly owned real estate investment trust, or REIT, the Mills Corporation avoids corporate income taxes entirely by returning at least 95 percent of its earnings to shareholders. When dividends are high, REITs can tap the market for cash with which to buy more property. Mills has almost doubled its portfolio of megamalls in the last two years.

But Mills is also angling for a public subsidy of its Katy project, through a mechanism created by the state Legislature that puts property tax revenues in the hands of private developers. It's called a tax-increment financing district, or a TIF, and it's traditionally been used to fund housing or economic development projects in blighted urban areas.

Mills won tax-increment financing worth $27 million from Grapevine taxpayers to pay for the streets, sewers, bridges and utilities needed to service its megamall, in return for assurances that the forfeited property taxes would be more than covered by new sales-tax revenue. According to Mills, the Katy megamall could generate $3.8 million of additional sales taxes each year -- enough to double the city's budget overnight. Factor in sales and property taxes from development drawn by the mall, and the project will, as a Mills official put it, "help the city grow in a financially responsible manner."

But before Mills can avail itself of the tax breaks, it needs the blessing of Katy Mayor Hank Schmidt and his volunteer city council. Considering that Schmidt had yet to schedule a public hearing on the proposed TIF district, the Mills Corporation's request last month to erect a sign along I-10 announcing the new megamall seemed a little premature to critics like Jinny Baker.

Council met to consider Mills's signage, as well as four other mall-related ordinances, on October 13. The meeting drew about 100 people, including Baker and some of her neighbors. At first, they were simply annoyed because Mills wanted to post a sign that would exceed by about 25 feet the maximum height allowed by the city code. Then Baker noticed something far worse: The sign announced that Katy Mills would open in the fall of 1999.

"Has it been proven to each and every one of you that this is a good idea?" Baker asked the five men and one woman on the Katy council. "Are the benefits so great that they're worth giving up $41 million in taxes? Where are the numbers?"

Bill Smithson, one of Baker's neighbors, told the council that he moved to Katy to raise a family in the peace and quiet of a small town. That would no longer be possible, he said: "This mall will be a direct contrast to the kind of community I saw when I came here."

If those plaintive cries registered with Mayor Schmidt and the council, it wasn't apparent. They listened politely but were not moved to offer any assurances. After a perfunctory discussion, the council unanimously approved all four mall-related ordinances, including the placement of the sign to announce the grand opening of Katy Mills just two years from now.

After the meeting, Baker was still puzzled by the swiftness with which the city council had rolled over for the Mills Corporation.

"This isn't exactly business as usual around here," she said.

How could it be? How can a town like Katy, which only recently landed its first McDonald's, hope to withstand the Mills Corporation and its super-regional, value- and entertainment-oriented megamalls?

Katy is a town of just over 8,000 people, including a few who still get around town on a horse. A few residents still tend livestock in their yards. They pay their utility bills in person and catch up on gossip while waiting in line at the post office. Each October, the town celebrates its heritage with one of the nicest rice harvest festivals around.

Katy Mills wouldn't necessarily destroy every vestige of local character, but what remains of small-town Katy would exist alongside one of the largest shopping centers in the country.

But why choose Katy, Texas, for the site of a megamall?
The main reason, of course, is Katy's proximity to Houston. Mills typically builds its malls 20 to 25 miles from a major city, because the markets for such cities can extend as far as ten times that distance from them. The Mills megamall in Gurnee, Illinois, is visited daily by nine or ten tour buses from Chicago and Milwaukee. At Sawgrass Mills near Fort Lauderdale, plane loads of bargain-seeking Latin Americans fly into the nearby airport every week.

The Mills Corporation started shopping the Houston market well over a year ago and was considering at least three potential sites near Katy. One was two miles east on land owned by the Interfin Corporation at I-10 and the Grand Parkway, where a "regional" mall called Williamsburg was proposed but never built. Mills was negotiating a purchase of the Interfin property when it abruptly signed a contract to buy the 542-acre site south of I-10, between KatyFort Bend County and Pin Oak roads.

A Mills spokesman says the switch in locations was made because the developer felt access from the freeway would be more difficult at the Grand Parkway interchange. But Giorgio Berlenghi, president of Houston-based Interfin, says Mills never gave him a reason for dropping the Grand Parkway site.

"Of course, we don't believe there is a problem whatsoever with our location," Berlenghi said. "That site was always going to be a mall."

A more likely explanation for abandoning the Interfin land was the need to move the project into Fort Bend County. That apparently became necessary when Harris County passed up the chance to pay for the needed road and utility improvements at the location.

"I basically told them we'd love to have the mall," recalls Steve Radack, commissioner of Harris County Precinct Three, "but that this precinct, at least, would not agree to build their roads."

Mills's property-tax package for the Katy project will have to be approved by the city of Katy, Fort Bend County and the Katy Independent School District -- a process the company is hoping to complete in time to break ground by the end of this year.

Meanwhile, a competing team of developers has announced plans for an 850,000-square-foot discount center two miles away at the old Williamsburg Mall site. That project, called Houston Premium Outlets, is a partnership between Simon DeBartalo Group, the nation's largest publicly traded real estate company, and New Jerseybased Chelsea GCA Realty Inc.

The Chelsea-DeBartalo partnership plans to begin the first phase of its trademark "village-style" discount center by the end of the month, posing the prospect that, by the new millennium, two huge new shopping centers will be open within two miles of each other.

At the moment, neither developer professes to be too concerned with the other's progress. Mills has engaged in similar standoffs, most recently in Arizona, where it eventually formed a joint venture with the competition. That's unlikely to be the case here: Houston Premium Outlets is by far the most ambitious project ever taken on by Chelsea, whose concept has been every bit as successful as the Mills megamall.

But can they both survive? Perhaps, says Mark Kissel, a retail analyst from Washington, D.C. Right now, Kissel says, Mills and Chelsea are competing for a core group of discount outlet tenants, such as the Off 5thSaks Fifth Avenue and the Donna Karan Company Store. The project that breaks ground first would most likely attract those tenants, putting the competitor at a distinct disadvantage.

"It strikes me as a lot of retail space to be dumped into that market," says Kissel, who briefly worked as a consultant to Mills on the Katy project. "It's sparsely populated out there. Sure, there will be great growth, but you're talking about almost three million feet of space."

As one might expect, the competition is being followed closely by the people of Katy. The battle line over the Katy Mills mall has been drawn along I-10, which separates the town of Katy on the north from the mostly vacant prairie land to the south. The site of the proposed megamall is a large, diamond-shaped tract dotted by wetlands and framed by I-10 to the north, Pin Oak Road to the west and KatyFort Bend County Road to the east.

Immediately south of the tract are Pin Oak Village and Falcon Point, two quiet suburban enclaves just beyond the Katy city limits in unincorporated Fort Bend County. Life on this side of I-10, with its modern architecture and landscaped lawns, seems to have little in common with Katy proper, where the townspeople have lived and worked and raised families for more than 100 years. North of I-10, Katy meanders low to the ground, on large lots between wide and well-worn streets. The houses and the people are older. Near the place where Katy was founded along the San Felipe Trail, a small historic district has taken shape.

This side of I-10, however, is just as important to the residents of Pin Oak Village and Falcon Point. It's where they send their kids to school, where they attend church, where they eat dinner and make friends. The city's apparent willingness to risk destroying the life they all share has been like a slap in the face to Pin Oak Village residents like Linda Taylor.

"We thought we were a part of the community," says Taylor, "until all this started."

To make matters worse, the city has already taken steps to annex the 542-acre site of the megamall -- right up to the property lines of the two subdivisions. That would leave Pin Oak Village and Falcon Point outside the city limits, with a megamall between the subdivisions and downtown Katy.

"To them, that mall is clear across the freeway, out of sight, out of mind," Paschal Gagliardo, a Falcon Point resident, says of residents across I-10. "All they've heard is how it's going to bring in all this tax money."

Naturally, that prospect holds a certain appeal to the city's elected officials. Councilman Walter Pope says he's only seen an artist's conception of Katy Mills, but he was encouraged by what he saw on a recent visit to Grapevine Mills.

"There are not many people who drive out to Katy from Mason Road just to go shopping," says Pope. "If they have a reason to be out here, they might just make a trip across the interstate into town and visit some of the local restaurants and shops and so forth."

Since pulling into town in January, the Mills Corporation has been keen to prove itself a generous neighbor. One small example of that generosity was this year's Katy Rice Harvest Festival, which was brought to you, in part, by the Mills Corporation.

Perhaps more symbolic of the developer's motivation is Mills's offer to build a $12-million auditorium for the Katy Independent School District -- if the school district agrees to join the TIF and forfeit some of its revenue for the next 20 years.

Mills's largess is doled out by Elizabeth Link, a consultant and former Mills employee who is acting as project director for the Katy megamall. Link's job is to sell Katy Mills to Katy officials, secure $41 million in property-tax breaks for the project and close the deal before the Chelsea-DeBartalo project at Grand Parkway breaks ground.

Toward that end, Link, a tall, leggy Midwesterner who refers to the Katy project as "my mall," spends a lot of time in Katy, where she moves easily within a certain circle of local society. She's often squired around town like a minor celebrity by Johnny Nelson, the Katy city administrator, or Herb Appel, head of the Fort Bend Economic Development Council. Sometimes, they eat lunch at Jill's, a bright, carefully appointed restaurant owned by Councilwoman Jill Des Lauries. They're occasionally joined by Mayor Hank Schmidt, who owns the local funeral home.

But perhaps the most unusual friendship Link has struck up is with local environ-mentalists. Although surrounded by development, the 542-acre TIF district is nonetheless within the boundaries of the 250,000-acre Katy Prairie habitat for migratory birds. That means the Mills Corporation may need an environmental permit from the U.S. Army Corps of Engineers, which administers the country's wetland reserves, before it can build the mall.

In New Jersey, a half-dozen environmental groups are battling Mills's plan to fill in 206 acres of wetlands, even though the developer has promised to refurbish another 380 acres of marshes nearby (see "Mall Rat," page 11). Evaluation of the Katy Mills site to determine how much of the tract is wetlands has yet to be completed. It probably won't matter. In exchange for assurances from the Sierra Club that local environmentalists will not actively oppose the mall project, Mills has pledged a $200,000 donation to the Katy Prairie Conservancy, a nonprofit group charged with preserving the habitat.

Carter Smith, executive director of the conservancy, acknowledges that Mills has "adopted the conservancy as one of their community service projects."

"The mall land has very little conservation significance," Smith explains. "It's essentially landlocked. So this was an effort by all parties to try and figure out a way in which the Mills Corporation might help us with our conservation objectives."

As it happened, one conservancy objective was the purchase of some 5,000 acres of the Cypress Creek watershed, which supports more than 200 species of birds, including about 30 bald eagles. In July, Smith and the Mills Corporation announced that the developer's donation would be used to purchase a 554-acre rice farm in the watershed. Noting that Mills would also provide rent-free space in the new mall for the Katy Prairie Conservancy, Smith praised the developer, gushing that Mills "has truly set itself apart from other corporate neighbors."

That might have been the end of it, if not for an anonymous phone call Jinny Baker received in September. Did she know that the watershed land to be bought with the Mills donation was owned by a guy named Nelson? Sure enough, within days, the subdivision residents had confirmed that the conservancy planned to purchase the rice farm owned by David Nelson, the cousin of city administrator Johnny Nelson.

The first chance anyone had to ask Johnny Nelson about his cousin's land was at the October 13 council meeting, which was also the first opportunity for the public to offer comment on the megamall project. The room filled up early, though the high degree of civility made it difficult for an outsider to tell at a glance who was pro-mall and who wasn't. When council disappeared into a closed session, the crowd mingled easily.

The mood shifted, however, when Falcon Point resident Jim Strong nervously asked the council if Johnny Nelson had disclosed that the Katy Conservancy land was his cousin's. Strong stressed that he suspected nothing un-toward, but, noting that ownership of the property had become something of a topic of conversation around town, he asked someone "to clear this matter up."

It's hard to ask a question like that without annoying somebody, and in this case, it probably should have really annoyed Johnny Nelson. But if it did, Nelson didn't let on; the city administrator just sat back in his chair and let Mayor Hank Schmidt handle Strong.

"If anyone is insinuating something here," Schmidt began uncomfortably, "this will be viewed pretty seriously. I'm afraid you have been misled. I've known the principals and the people involved all my adult life. The people here may be family, but they are not close family."

Johnny Nelson, who still hasn't discussed the issue publicly, did not return calls from the Press. He told a mall opponent from Pin Oak Village, however, that insinuations that he's been somehow compromised are "slanderous."

This kind of talk normally doesn't see the light of day around Katy proper, where people have known Johnny Nelson for almost 60 years. But across the freeway, outside the city limits, even the appearance of a conflict of interest is enough to generate a conspiracy theory or two among a group of people who feel they're about to be fed to the wolves.

Not that there doesn't seem to be something inevitable about Katy Mills. Until recently, city officials said it was premature to discuss the property-tax package being negotiated with Mills, but at the same time they were touting the rosy scenario for new sales-tax revenue being projected by the developer.

Last week, the city produced a preliminary financial analysis of the deal by Legg Mason Wood Walker, a brokerage and investment firm that is acting as the city's financial adviser. The six-page document predicted about $128 million in new sales taxes from Katy Mills and the surrounding development over the next 20 years. Legg Mason also estimated that once the $41-million infrastructure costs for the mall are paid off, the city of Katy, Fort Bend County and the Katy ISD will realize an additional $7 million annually in additional property-tax revenue.

Those projections are based on 100 percent participation in the tax-increment financing plan by the city of Katy and Katy ISD, meaning the two jurisdictions would forfeit all of the additional property taxes for the 20-year life of the TIF. Fort Bend County's contribution was figured at 50 percent, or roughly $600,000 a year.

Neither Katy ISD trustees nor Katy councilmembers would discuss the financing plan, preferring to wait until public hearings can be held. But at least one elected official is skeptical of the projections, particularly when it comes to the benefits that might accrue to Fort Bend County residents like Jinny Baker and her neighbors.

"I'm hoping that we're going to work out a deal that will provide these people in the county with some additional amenities, so that they get something out of this thing," says County Commissioner Andy Meyers. "They purposely moved out of Houston to get away from all the hustle and bustle they found there, and suddenly it's followed them out to where they've moved. They're not very happy about it, and I don't blame them."

Marsha Myers, who lives in Falcon Point, says any optimism that she and the Mills Corporation could peacefully co-exist faded after a brief conversation with project director Elizabeth Link over future development around the mall.

"Liz was talking about putting in a skating rink and some batting cages and then a community center, with a dry cleaners and a grocery store," Myers recalls. "I said, 'Oh. you mean a strip center?'' She said, 'No, a community center -- a place where the community shops.' "

By August, Myers and about two dozen homeowners in Pin Oak Village and Falcon Point were convinced Link was soft-pedaling the impact that 15 million mall visitors a year might have on their neighborhoods. They organized a committee and started researching the Mills Corporation, writing letters to Katy officials, requesting records and information from city hall and generally making a nuisance of themselves.

"Yeah, I've got stacks of petitions and literature they keep mailing me from Pin Oak Village and Falcon Point," says Councilman Walter Pope. "It's where I've been hearing from the most -- and they are not inside the city. I think most of the people in Katy proper support the mall. I haven't personally heard anyone within the city who is opposed to it."

That's a distinction that, under any other circumstances, probably wouldn't be made. But Pope, who has visited Grapevine Mills and deems it "first class," says that the subdivision residents' opposition to the mall is selfish and misguided -- especially since they pay no property taxes to the city. Pope pointed out that Mills has promised to build a landscaped berm for the homeowners, as well as directional lighting "so it doesn't look like the Fourth of July over there."

The residents of Pin Oak Village and Falcon Point believe the only way they can stop the megamall is by killing the tax-increment financing district that the Mills Corporation wants. They are hoping to replicate what happened in 1994, in Columbus, Ohio, when the local school district chose not to contribute property taxes toward a megamall -- a decision that killed the project.

In Texas, as well as in Ohio and other states, TIFs are set up to freeze ad valorem rates within a specific area; as improvements are made in the district, property values rise, and revenue generated above the frozen rate is collected by a TIF board.

The TIF withholds this added tax revenue -- the increment -- from the city, county and school district for 20 years, passing it along to the developer to pay for infrastructure improvements. Link says the Mills Corporation cannot afford to proceed with Katy Mills until the city of Katy, Fort Bend County and the Katy ISD agree to pony up $41 million.

"I don't think this project would proceed without some economic package that would help pay for the infrastructure costs," Link explains.

Link has grown exasperated with the subdivision residents, particularly their belief that Mills is asking for "tax subsidies." The project director also resents the charge that she is not responsive to the homeowners' grievances. "They gave me a list of six or seven concerns," she points out. "And I've done every thing they've asked for."

Link has promised a 25-foot berm around the south end of the development site to shield the mall from the subdivisions. And it's actually in the best interests of Mills to be "very proactive" when it comes to controlling traffic, she observes, to prevent the kind of headaches that drive away customers.

"I think there are maybe a half-dozen or a dozen people who are not very excited about this project," Link says. "But I've been meeting with them. If I'd wanted to, I could have acted like they didn't exist, but that's certainly not the kind of corporate neighbor we are."

Some residents are even insulted by the notion that Mills already considers itself a neighbor of Pin Oak Village and Falcon Point.

"In a way, it would have been better if they had annexed us, too," Falcon Point resident Paschal Gagliardo says. "At least we'd get police and emergency services from the city. Maybe if somebody was looking out for us, that's something that could have been done."

At this point, it seems unlikely the residents of Pin Oak Village and Falcon Point can turn the tide against Mills. Their one slim hope is the Chelsea-DeBartalo project at I-10 and Grand Parkway. In August, the partnership announced that by next fall, Katy area residents would be watching movies on the Houston Premium Outlets' 17-screen movie theater.

Perhaps, but the subdivision residents aren't optimistic that it can stop the Katy Mills megamall, which they suspect is a done deal.

And that's the way it seemed on October 13, when the Katy City Council rolled over and approved with no discussion the four mall-related ordinances on its agenda, including Mills's request to plant a sign announcing the mall's opening two years from now.

But the item that rankled mall opponents the most was an ordinance authorizing Katy to buy the taxing rights to 408 acres of Houston's extra-territorial jurisdiction for $1.25 million. The city of Katy would then annex the land, and Mills would have the space it needs to build the megamall and any subsequent projects, such as hotels and restaurants.

The architect of this unusual transaction was lobbyist Joe B. Allen, a ubiquitous dealmaker and attorney for Vinson & Elkins, who has been hired by Mills to act as legal counsel for the Katy project. In late September, Allen started chatting up members of the Houston City Council on the $1.25-million sale of the extraterritorial jurisdiction (ETJ) coveted by Katy.

The transaction made sense for two reasons: The land was not part of any annexation strategy being devised by Houston, and Mills had said it would develop the mall nonetheless, squeezing it up against I-10 so the cash registers jingling with sales-tax revenue were all in Katy. The ETJ would be used as a parking lot.

Allen had already secured enough votes to push the sale through Council when a lobbyist for the Chelsea-DeBartalo partnership -- Sports Authority chairman Jack Rains -- jumped into the fray. Rains managed to have the Council vote delayed for a week, giving his client a chance to come up with a counter offer.

Indeed, by October 1, a number of councilmembers were pushing hard for another delay, and they appeared to have the support of Mayor Bob Lanier. But the motion to delay approval of the ETJ sale was defeated by an 8-to-7 vote, and the actual sale was approved unanimously a moment later.

That Katy would approve the transaction at the October 13 City Council meeting was almost a foregone conclusion. But the residents of Pin Oak Village and Falcon Point expected a little bit more from the Katy City Council.

During a brief discussion of the ETJ purchase, Councilman Malcolm Beckendorff noted that the language in the purchase agreement had changed, leaving some doubt as to who would be picking up the check for the land.

Mayor Hank Schmidt turned to the audience and called up a young V&E associate for clarification. As the lawyer made his way to the podium, Beckendorff said, "Now don't get me wrong, I'm not against the mall."

Not a problem, the lawyer replied. The Mills Corporation, he explained, would "advance" the $1.25 million to close the sale, with the understanding that the city was under no obligation to repay the loan -- as long as Katy Mills got built, that is.

The lawyer had started back to his seat when Beckendorff, worried about how his query might play 25 miles away, made a final request: "Please tell Joe B. Allen that I did not raise this question.

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