Dubious Deal

Randolph isn't the only hired gun touting the widespread use of tax-increment reinvestment. Two of the most visible players are Patricia Knudson and David Hawes, former city employees who have each formed a business that shops tax-increment reinvestment to wealthy property owners who want to carry out large-scale construction projects. Knudson and Hawes specialize in identifying tracts of land that might be eligible for a TIRZ then preparing project plans that include a certain amount of public improvements.

The plans are then presented to the city planning department for evaluation before going to City Council. Since the city created its first TIRZ in 1990, Council has yet to reject any of the the planning department's recommendations. That's good for Knudson and Hawes: Invariably, once a redevelopment authority board is appointed, their familiarity with the project plan makes them logical candidates to manage the day-to-day operation of the TIRZ. Depending on the size of the zone and the scope of the redevelopment planned, they earn fees ranging from $5,000 to $10,000 a month for their services.

Knudson actually wrote the city's first TIRZ policy, back in 1989, when she was director of the planning department. She never saw it carried out, though, at least not as a city employee. In October 1990, Knudson resigned after admitting to then-mayor Kathy Whitmire that she had accepted money from a city contractor.

She immediately formed her own business managing special taxing districts, including tax-increment zones and public-improvement districts. One of her first clients was Robert Silvers, who had approached the planning department with a redevelopment proposal while Knudson was still director. The Lamar Terrace TIRZ was approved by City Council in December 1990, two months after Knudson resigned from the city.

In 1993, Silvers sued Knudson, Fulbright & Jaworski lawyer Charles Williams and urban planner Peter Brown for breach of contract. He claimed that delays caused by the consultants had damaged the project's viability and drained its budget. The case never made it to trial, and, according to sources familiar with the outcome, was settled recently for about $2 million.

Neither Silvers nor Knudson would comment on the suit, though Knudson did acknowledge that she paid a portion of the settlement.

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When Lee Brown became mayor in January 1998, he vowed that there wasn't anything he wouldn't do for Houston's neighborhoods. These days that promise is ringing hollow among the residents of subdivisions that border two tax-increment zones, City Park and Memorial City.

Their opposition to the proposed projects is understandable: The City Park site includes acres of open space that serve as a neighborhood park. As well, the planned apartment complex and grocery would eliminate the natural buffer between their homes and flood-prone White Oak Bayou. Residents who live near the Memorial City Mall fear that the $1 billion in private development anticipated by the mall's owner, Metro National, will create even more traffic in their congested neighborhoods.

Civic group presidents in both areas suggest privately that they may take legal action to halt the TIRZ projects from moving forward.

In fact, a lawsuit may already be having an negative impact on the Gulfgate Mall TIRZ.

In March 1999, Husein Ali, a 34-year-old native of Bombay, sued Houston Gulfgate, Inc. The joint venture was formed by developer Ed Wulfe and the Houston Housing Finance Corporation to redevelop Gulfgate Shopping City into a 550,000-square-foot "power center." In December 1997, City Council created a TIRZ to finance $6.5 million in public improvements to the area.

Earlier in 1997, Ali signed a five-year lease for 1,000 square feet in the Gulfgate mall and spent $150,000 transforming it from a clothing store to a cookie shop.

It was a risk. Gulfgate Shopping City was 43 years old and had long been in decline. Still, Ali says, the mall continued to draw customers, and besides, there was no cookie store. Even after such major tenants as Dillard's and Service Merchandise moved out, Ali was doing all right with his dough — making about $4,000 a month in sales, he says.

But that changed last January. Without warning, Wulfe terminated the leases of about 30 tenants, effectively shutting the mall down and decimating Ali's customer base. Wulfe says the tenants' spaces had to be vacated because of required asbestos-removal work.

Ali, who is married and has a three-year-old daughter, says he called Wulfe Management Co., the mall's leasing agent, and asked to negotiate a lease buyout. The offer was refused.

By March, traffic at the mall was so dismal that Ali was down to selling about $50 worth of cookies a day. He had to close his store.

Wulfe all but admits he knew Ali's business would fail and that, in fact, he was counting on it. He says the company would have paid him off had it needed to end his lease. That might appear to be the best thing for Ali. Not so, says the developer.

"Rather than having to face x-number of years left on his lease, which was his legal obligation, we're doing him a favor by letting him out of his obligation," Wulfe says.