Castles for Welfare Kings

Welfare-reform rhetoric pervades the stump speeches of both Democratic and Republican politicians these days, as the public gets down on lazy poor people who don't work for a living. But one category of welfare recipient that has so far escaped much public scrutiny -- and any political outcry in Houston -- is the developer.

Houston Housing Finance Corporation is the enabler for the new breed of welfare kings and queens, having channeled millions into various and sundry commercial development projects. Those bear little resemblance to the HHFC charter mission: "To provide a means to finance the cost of residential ownership and development that will provide decent, safe, and sanitary housing at affordable prices for residents of local governments."

As documented in Brian Wallstin's continuing Houston Press series on the finances of Houston Renaissance, HHFC has pumped millions into the pockets of Fourth Ward redevelopers with little evidence that low-income residents of the area will benefit in the future. HHFC is repeating the feat with the redevelopment of the Gulfgate Shopping Center by Mayor Lee Brown's favorite developer/adviser, Ed Wulfe.

Perhaps the most spectacular example of HHFC's wayward corporate evangelism goes on display later this fall. The renovated Rice Hotel stages its grand opening to show off opulent ballrooms and hundreds of urban lofts partially financed through federal Housing and Urban Development Section 108 loans. The HHFC's great nod to average folks, as mandated by City Council, requires 20 percent of the lofts at the Rice to be rented to single people or couples with incomes of less than $49,000, or families of three or more with incomes of $53,000 or less. The figures are based on federal estimates of the average median income for families in Houston.

Project planners were wary that taking federal money might require them to include -- gasp! -- low-income people in their tenant mix. The city of Houston's special counsel, Cassie Stinson, queried HHFC chair Michael Stevens concerning a proposal to characterize the Rice as a "housing rehab" project rather than an "economic development project." Stevens, former mayor Bob Lanier's dollar-a-year housing honcho, had a blunt reply. "My concern is that somehow that characterization imposes some rent or other restriction on the building requiring low- or moderate-income residents, rent limits, future relocation or other issues. If none, okay by me."

The project was justified to the federal government as "a housing rehab project that will eliminate slum and blight conditions and assist in the establishment of a significant number of residents in the area." HHFC attorney Barry Palmer admitted in an opinion letter to city Housing and Community Development Director Margie Bingham that HUD could provide a loan, although "the use of Section 108 funds for the Rice Hotel redevelopment project would be novel and may require extensive negotiations between the City and HUD."

Austin-based John Henneberger, director of the nonprofit Low Income Housing Information Service, characterizes the Rice project as the gaudiest example to date of misuse of federal housing dollars. "When you look back at the history of many of the HUD programs, the real beneficiaries are the guys who build or develop the things and then 'flip' [sell] them," says Henneberger. "This is not very much about providing housing or economic development. It's more about developers doing deals, and smart, politically well-connected guys getting into the public trough to get their deals funded."

The federal loan money -- $5.4 million in the initial drawdown -- is routed through a chain of guaranteed loans from HUD to the city to HHFC to reimburse money spent on the project. Rice Lofts Limited Partners, which is an alliance of Post Properties and Randall Davis, leases and operates the Rice. Since the original loan request was for more than $7 million, it's uncertain how much more the feds will approve beyond the initial drawdown.

The federal loan is to be repaid by increased tax revenues generated by the Market Square Tax Increment Reinvestment Zone. Taxes will be rebated by the city, the county and the Houston Independent School District. The hotel deed is controlled by the Houston Redevelopment Authority, a nonprofit subsidiary of the HHFC.

Davis launched the Rice redo, having sold Lanier on the idea in 1995, but he is putting little in the way of serious cash into the deal. That's provided by Atlanta-based Post Properties, which purchased Davis's original partner, Columbia Real Estate Investment Trust.

Davis has developed other loft projects, including Hogg Palace and Dakota Lofts, and is currently under fire from former president George Bush for planning a high-rise overlooking the Bush Tanglewood home. Although HHFC owns the Rice, Rice Lofts has a 41-year lease on the hotel with a grand rental fee of $1,000 yearly for those four decades. After the hotel is fully leased, Davis estimates it will generate $4 million in income and a profit of $2 million annually.

And come December 31, 2022, Rice Lofts Limited will have a hell of a deal to ring in the New Year. According to the terms of its lease with HHFC, Rice Lofts has the right to purchase the deed to the hotel for $1,000 in cash. Perhaps the HHFC board thought they were playing monopoly when they cut this deal.

Indisputably, downtown is much better off having a reborn, glistening Rice Hotel with occupied lofts rather than the festering, vacant shell it became after closing in 1977. Using scarce public-housing funds for financing makes it clear: Plenty of folks who criticize welfare as an affront to the free-enterprise system aren't at all averse to using the federal government to help launch their own for-profit ventures.

Among the bills covered by HHFC so far for the Rice are some interesting ones, including a $3,500 payment to political consultant Marc Campos. Although the expenditure is tagged "public relations and consulting," Campos says he actually lobbied Houston Independent School District trustees to approve an HISD tax rebate for the hotel.

Campos's girlfriend, Paula Arnold, was president of the board at the time. His aunt, Esther Campos, was a trustee. Another board member, Olga Gallegos, is the mother of his political client, state Senator Mario Gallegos. So it would seem the assignment to lobby the board was a natural for Campos.

HHFC also picked up Davis's predevelopment and construction expenses to the tune of $100,345, including a $1,000 tab at the Hogg Palace Cafe, $27 at Chianti and $76 at the Post Oak Grill. Since welfare case-workers have been known to nitpick their low-income clientele, The Insider can't resist mentioning a $20 allocation to reimburse Davis for a municipal court parking citation.

Davis was also reimbursed for unexplained credit card bills totaling $678.49. Asked whether there were specific expenses provided on that bill, HHFC counsel Mickey Norman replied, "Probably not. In a deal over $30 million, we don't argue over hundred-dollar bills." Now if that guy were administering Aid For Dependent Children, he probably wouldn't be so blase about program expenditures.

Reading the product of the Rice's main cheerleader, its across-the-street neighbor Houston Chronicle, you'd never guess that Davis had put no serious money behind the venture or that $650,000 of the federal money was initially earmarked for the construction of a tunnel connecting the Rice to the downtown underground system through the Chronicle. HHFC paid the costs for $21,000 in preliminary engineering before deciding that the tunnel tab would be more than $1 million. HHFC counsel Norman says he doesn't know whether the federal government will cover those costs in its soon-to-be-released loan disbursement.

So anxious was the newspaper to beat the drum for Davis's project that it jumped the gun in reporting a sales agreement, leading Davis to recount his conversation with real estate writer Ralph Bivens in a memo to an associate dated February 1, 1996. "He also said that even though you asked him not to print a Rice story, he is under extreme pressure from Mr. Johnson, the editor, to continue to report news regarding the Rice Hotel." Randall may know lofts, but he's obviously a little hazy about the local journalism pecking order. The Mr. Johnson referred to is Chronicle publisher Dick Johnson, a considerably bigger gorilla than editor Jack Loftis.

You certainly have to hand it to Davis for ingenuity. In one of his meticulously documented memos on the project in February 1996, Davis outlined one of his plans to HHFC chairman Stevens.

"I had offered to donate space for a Jesse Jones museum at the Rice Hotel," explained Davis, "which seems the appropriate place for this entity. I had done this in hopes of extracting a donation out of Houston Endowment." Davis quickly added a cover-your-motive clause, "and because it's the right thing to do." The Endowment is the former Chronicle owner and the continuing philanthropic legacy of Jones, the late, great "Mr. Houston" credited with pulling the area out of the swamp and onto the national map.

Davis was working on his old tennis buddy, Houston Endowment board chairman Jack Blanton, but ruefully reported he had only gotten a series of qualified no's. "He told me there is not much sentiment among the board of directors toward the Rice Hotel, but I find that hard to believe given Jesse Jones's role in the history of Houston and the Rice Hotel in particular." Davis did not mention that his proposed historical museum might be an excellent complement to the Jones living museum, the Houston Chronicle, located just across Travis Street.

Apparently the endowment decided not to mix its charity money with a for-profit venture like the Rice. Too bad HHFC and federal HUD officials didn't follow the same good sense with money originally intended to promote low- and moderate-income housing rather than downtown luxury lofts and fancy restaurants.

Don't wait until 2023 to check in to The Insider with your news tips. Call him at (713) 280-2483, fax him at (713) 280-2496 or e-mail him at


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