Dubious Deal

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

An example is a recent revision of the Gulfgate Mall TIRZ. Last month the Brown administration expanded the zone to include additional property surrounding the mall that is currently valued at roughly $12 million. According to the developer, Ed Wulfe, more than $45 million in additional value will be created on that property by the year 2004, resulting in an annual increment of nearly $700,000. By 2027, the redevelopment is estimated to produce $20.5 million in additional tax revenues, all of which will be pledged to pay off bonds sold to fund the public improvements.

The trouble is, Wulfe's projections assume not only that the redevelopment will create enormous new value in a down-at-the-heels part of town, but that the project will come off without a hitch. If that's true, one question that needs to be asked is, If there is no downside to TIRZ projects, why are subsidies needed to carry them out?

The answer, it seems, is because developers say they cannot afford it otherwise. That's because the city has long neglected the basics — streets, sewers and utilities — which now need extensive repair and upgrade. Another problem was the city's failure to implement a development code until the 1980s, which encouraged shortsighted development that has made it difficult to launch new projects.

The city's TIRZ policy is increasingly controversial: On July 20, 1,200 people protested a proposed TIRZ for the Memorial City area.
Phillippe Diederich
The city's TIRZ policy is increasingly controversial: On July 20, 1,200 people protested a proposed TIRZ for the Memorial City area.

"You can say, 'Why don't the developers pay for it?' But the reality is they can't," says Robert Randolph, a municipal-finance lawyer with Vinson & Elkins. "The money is not there to pay for it, and whether the fault lies in local government not requiring developers to plan the streets at the time an area was developed, the problem is there now, and there's no way to fix it."

Tax-increment reinvestment was among the tools used by former mayor Bob Lanier to reverse the 25-year trend of Houston losing residents and businesses to other parts of the county.

Lanier resisted creating TIRZs until a group of landowners from Midtown, 800 acres of abandoned buildings and vacant lots between downtown and the medical center, approached him with a plan in 1994. Today, it's difficult to deny the transformation going on in Midtown. Four large apartment complexes, totaling more than 1,800 units, and two retail centers are under construction. Dozens of town homes are planned, or already under way, in the eastern part of the TIRZ, as is plenty of commercial construction throughout the zone.

It's difficult to predict whether this boom would have occurred on its own. Certainly there was no evidence that anyone was anxious to tear into Midtown before Lanier turned it into a TIRZ. That, in time, might have changed: Metro and the city had already planned $50 million worth of streets, storm sewers, water lines, bus shelters, landscaping and sidewalks.

No doubt the TIRZ accelerated the public works, and with most of the heavy lifting being done by Metro and the city, the Midtown TIRZ could focus on specific amenities for developers. According to city records, the TIRZ is paying for landscaping and irrigation, pedestrian lighting, trees, fencing and brick sidewalks. The TIRZ has also picked up the tab on hundreds of thousands of dollars in impact fees. While these could, in some sense, be considered "public improvements," they also make the complexes more marketable, and therefore more profitable, for the developers.

But that's part of the "synergy" that makes tax-increment reinvestment so wonderful, says Charles LeBlanc, executive director for the Midtown Redevelopment Authority, the nonprofit corporation that oversees the TIRZ.

"This zone has been very proud of its accomplishments," LeBlanc says. "The proof is in the pudding. We're exceeding expectations."

The apparent success in Midtown might be the shining light of the city's use of tax-increment reinvestment, but some of the zone's corporate behavior is, at times, a little shadowy.

Until last March, the Midtown Redevelopment Authority was chaired by Doug Williams, the deputy special assistant for housing and inner-city revitalization under Lanier. Since Brown has been mayor, Williams has had a consulting arrangement with the quasi-public Houston Housing Finance Corporation. Though he's paid with public funds, Williams is not considered a city employee.

That distinction became important to Williams when he hired on as a paid consultant to Columbus Realty and Camden Property Trust, both of which had development agreements with the Midtown Redevelopment Authority. While that might appear to pose a conflict of interest, Charles LeBlanc says Williams didn't advise the developers on their Midtown projects, nor did he participate in any board discussions involving their development agreements.

"Mr. Williams would leave the room — completely," LeBlanc says. "Most of the time, I don't even think he attended the meetings if they were on the agenda."

Likewise, LeBlanc insists it was made "very clear" to the Midtown board that its legal counsel, Robert Randolph, the V&E municipal-finance attorney, owned an interest in land inside the TIRZ, including a parcel that was sold to an apartment developer in 1997.

None of these potential conflicts were reported to councilmembers. That's not surprising: Once a TIRZ is formed and a redevelopment board chosen, the only responsibility left to councilmembers is to approve TIRZ budgets every year. While most councilmembers say they don't have a problem with the arrangement, maybe they're just used to it. Some elected officials aren't convinced it is good public policy, though.

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