Dubious Deal

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

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.

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.


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.

A court will now decide what was legally right. Ali sued Wulfe, Houston Gulfgate Partners and the Gulfgate Redevelopment Authority, the city-created nonprofit that oversees the TIRZ.

Ali isn't asking for much — just the $150,000 he invested in build-out costs and equipment.

"When I first came to this country, I was worked 100 hours a week, easy, the first seven to eight years," says Ali, who has a small jewelry shop in Northwest Mall. "I think I took three or four days off the whole time. But that's how it is: When you leave your own country for another, you just can't sit around."

Wulfe's attorneys have asked the court to dismiss Ali's lawsuit. A hearing has been set for September. In the meantime, Ali's attorney has attached an order against Gulfgate mall, meaning any judgment rendered against Wulfe and Houston Gulfgate Partners would be enforceable against the property.

That legal action could impact a $40 million construction loan Houston Gulfgate is seeking. It could also hold up a $5 million loan that the Gulfgate Redevelopment Authority needs to purchase the mall from Gulfgate Partners.

And Wulfe admits he's having trouble marketing the mall. Since purchasing the property almost 18 months ago, he has yet to secure a major anchor tenant. Until he does, what exactly he will do to the Gulfgate mall is up in the air.

"Everything is driven by anchor tenants," Wulfe says. "That determines what happens in terms of what we build, what we demolish or whatever."

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