Dubious Deal

Special tax zones are already stimulating growth-a thriving cottage industry of attorneys, lobbyists, high paid consultants, developers and questionable financial projections

If developer Greg Baxter never gets a dime of the $10 million in public money he needs to carry out his City Park project along White Oak Bayou, it won't be because city officials didn't try.

Last December, City Council agreed to commit future property tax revenues from Baxter's planned development — an apartment complex and a shopping center — to finance public improvements, including the extension of East T.C. Jester Boulevard through the near-north Houston site.

But a few months later, it was learned that Baxter had misrepresented to city planning officials the environmental condition of his land, a former oil and gas field. Then county commissioners notified Baxter that they weren't interested in subsidizing his venture with $2.4 million of future county property taxes.

The city's TIRZ policy is increasingly controversial: On July 20, 1,200 people protested a proposed TIRZ for the Memorial City area.
The city's TIRZ policy is increasingly controversial: On July 20, 1,200 people protested a proposed TIRZ for the Memorial City area.
Vinson & Elkins attorney Robert Randolph provides legal services to nearly a dozen TIRZs while helping legislators broaden the state law on tax-increment reinvestment.
Phillippe Diederich
Vinson & Elkins attorney Robert Randolph provides legal services to nearly a dozen TIRZs while helping legislators broaden the state law on tax-increment reinvestment.

On April 21, Houston planning director Bob Litke sent a memo to Mayor Lee Brown, recommending that City Council withdraw its support and "allow this development to get built, if at all, through normal private sector processes."

Litke told Brown that state and federal regulators had determined that Baxter's environmental testing of the site was flawed. He also advised the mayor that without the county's participation there wouldn't be enough money to pay for the renovation of a neighborhood baseball park that Baxter had promised area residents.

"[I]t would be difficult to justify reducing the project costs by eliminating the park improvements in the plan to make the numbers work," Litke wrote to Brown.

Less than two weeks later, though, Litke reversed field again. In another memo to Brown, Litke said the developer and "various" Baxter consultants satisfied him that the site was environmentally safe. Litke also said Baxter had reworked his financial plan to accommodate all the promised public improvements without the county's participation.

None of this, however, appears to be true. At the time, Baxter still hadn't provided additional soil samples requested by the federal Environmental Protection Agency. And Baxter's new financing plan seemed to work, not because the developer found additional funding, but because his consultants arbitrarily increased their estimates of how the redevelopment would affect the taxable value of the land.

Here's how they did it: When City Councilmembers originally approved Baxter's project, they agreed to create a tax-increment reinvestment zone, or TIRZ. Property taxes collected above the current amount would go not to the city, the county and Houston Independent School District, but to a special fund for 20 years. The City Park "redevelopment authority," a nonprofit corporation whose board members are appointed by City Council, would sell tax-exempt revenue bonds to generate some $5.5 million for public improvements within the zone.

Baxter would use that funding to help develop the land, which, according to his financial consultant's estimates, would raise its taxable value from $1.5 million to $31.5 million by 2002. By 2018, that additional $30 million in value would generate about $9.9 million in new property tax revenues, which would be used by the redevelopment authority to pay off the bonds. After that, the property goes back on the tax books, and the city, county and school district begin reaping the revenue benefits of the City Park development.

When Harris County declined to divert future property tax increases, that created a shortfall that would make it impossible to cover the bond debt. The most immediate solution was to revise the property value estimates, which is exactly what Baxter's financial consultants did. For no other apparent reason, they raised the projected value of the City Park redevelopment from $31.5 million to $35.3 million and extended the life of the zone from 20 to 30 years. That more than covered (on paper, anyway) the $2.4 million Baxter wouldn't be receiving from Harris County.

Mayor Lee Brown agreed to delay a vote on the project until next week, to give councilmembers more time to study Baxter's latest figures.

However, Baxter's financial sleight of hand appears to be paying off. Litke has recommended that Council approve the City Park plan.

Brown's postponement of action on City Park was a rare pause in the torrent of TIRZ activity on Council's agenda in the past six weeks. Since June, the Brown administration has created five new tax-increment zones and nearly tripled the size of another. More than half of the 17 TIRZs created by the city since 1990 have been approved in the last 12 months, and three more will be considered by the end of the summer, a pace that has some elected officials suddenly worried that the city may be abusing tax-increment reinvestment.

While the long-term benefit to taxpayers can only be guessed at, the city's TIRZ policy has spawned a thriving cottage industry among a small circle of land planners, public-finance lawyers and bond attorneys. Armed with an intimate knowledge of the state TIRZ law, a complex statute that lends itself to broad interpretation, these consultants have become a direct conduit between the city's real estate developers and its elected officials.

Lately the connection has seemed particularly tawdry. Last month, for example, City Council approved a TIRZ for Metro National Corporation, which owns the Memorial City Mall. At a heated public meeting that drew 1,200 opponents of the TIRZ, one astute individual presented a blow-up of recently filed campaign reports: In the previous two weeks, Mayor Lee Brown had received more than $30,000 from Metro National executives and the consultants who prepared the corporation's TIRZ proposal. A half-dozen councilmembers had also received contributions from Metro National and its consultants.

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