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Great Expectations

"This place is dead," says Joe Hernandez, stating the obvious. It's the middle of a Saturday at Joe's Sandwich Shop at the corner of Main Street and Webster in Midtown. The middle-aged Hispanic businessman sits next to a wall of chips in the middle of a small sea of black-and-white linoleum. Behind a deli display case, his 18-year-old grandson putters around in a white plastic apron -- prepared for customers, any customers who might make it past the muddy lane-wide trench that stretches around two sides of the business.

When customers do trickle in, Joe jumps up from his seat and hustles. He smiles broadly -- partly because he is jovial by nature and partly because his wife has told him to do so. She learned that the sale is in the smile when she worked for Marshall Field's department store. "Come on in, come on in," he says. "We got the Philadelphia cheese steak. It's my No. 1. It's on special today." Every $3.75 counts. He encourages them to buy party trays for their offices, and gives them free homemade carrot cake and brownies for coming in despite the hassle of construction.

Joe says his business is down 30 to 40 percent since the construction for Metro's light rail began there last August. His landlord has cut his rent by 20 percent, but still Joe has had to put $20,000 of his own money into the sandwich shop to cover expenses in the last nine months. He's shy about admitting this to a reporter. He's afraid of scaring people off. He doesn't want to show too much weakness.

Joe's is a struggle that's being fought in all kinds of small businesses along torn-up Main Street -- the ones that still have their doors open, that is. The Amco Insurance agency next door is trying to sublease its space in the retail center. There's a vacant space next to that, and the alterations shop in the small complex is about to move out as well. Down the street, Fusion Café closed its doors in August, and Connie's Health Food Store will follow suit in December.

But Joe is not one to give up. "I told myself a long time ago: I gotta make myself strong. If I was a weak man, I'd already be out of here." He tells stories of entrepreneurial spirit, bolstering his own confidence by remembering trials already overcome.

As a young man, Joe learned the trade of a butcher. He raised five children, and sent three of them to college, on the meager profits of cutting meat. But butcher shops are chilly, and Joe could never seem to get over his colds, so he went to work making sandwiches and taking out the trash at his sister's restaurant, Supreme Sandwiches. When Joe decided to go out on his own at the age of 50, nobody thought he could do it. But he was inspired by "the Colonel," who had started Kentucky Fried Chicken when he was 65. Joe didn't exactly turn his sandwich shop into a global chain, but he's been serving the blue-collar workers and Greyhound riders in Midtown for ten years now.

Joe remembers one day, early on in his new business, when the meat truck came and he asked his son to write a $150 check to pay for the supplies. His son protested. Had Joe noticed his balance lately? Joe scolded him. He hadn't asked for his balance; he asked for a check. Then the chip truck came and another $150 check went out the door. Joe's son was insistent. They had 15 cents in the bank. His father had just ordered two hot checks. Joe ignored him. That day, the fledgling sandwich shop did remarkably good business. They brought in $350, enough to cover the checks.

"My boy said, 'Daddy, you got guts,' " Joe remembers. "And I said, 'Life is about chance. You got to take chances.' "

Now, Joe wants to take another chance. He knows that he has to fight the downturn in revenue not by scaling back but by expanding. He's talking to his banker about opening another shop a few blocks away at Louisiana and St. Joseph Parkway. He hopes the second shop will help float the one on Main Street for a while. He has three years left on his lease at Main, and anyway, he doesn't want to leave that location. After all, if he lasts through the construction until the light rail opens in 2004, Metro promises a boon to his business there.

"It's a short-term pain for a long-term gain," says Metro President and CEO Shirley DeLibero. "Once we build it, it is going to definitely enhance their business. So we want to really kind of hold hands with them as we go through this construction so that they remain there when the times are good too."

 


Holding hands, as defined by Metro, means putting up signs, printing flyers, holding community outreach meetings and hosting spaghetti dinners to update merchants on construction progress. It does not, however, mean financial assistance. Any street improvement causes temporary inconvenience for businesses, says DeLibero. "We're a public entity and we couldn't just give money to these businesses. No one does that in the country."

Despite DeLibero's assertion, the question of financial settlements is not such an outlandish one. In a state where property rights are as valued as civil liberties, some believe that public entities ought to be held responsible for the damages they inflict on private landowners and tenants. "If there is a taking for the public good," says Steve Clark, "the public owes."

Clark used to operate the Waterloo Icehouse and its sister restaurant, The Avenue, near the capitol building in Austin. There weren't a lot of businesses on the north end of Congress back in the late '70s and early '80s, but Clark's places did well, especially when the legislature was in session. But on a December day in 1981, as Clark's restaurants were serving Sunday brunch, jackhammers started puncturing the street and sidewalk outside The Avenue. Glasses rattled on the tables. People got up to leave. The City of Austin was replacing sewer and water lines and sprucing up the sidewalk with new old-style stone pavers. The construction in front of Clark's businesses lasted more than nine months.

Clark sued the city for $125,000 in lost profits. It was an inverse condemnation case, which is a little bit like a condemnation case. Cutting through the legal jargon, condemnation is when the state forces a landowner to sell his property to them for a highway or other necessary public project. Inverse condemnation is when a public entity takes over the use of private property for a period of time but does not actually purchase the land. Some of Clark's customers were Texas Supreme Court justices. One told him he had the case in the bag. And it seemed that the justice was right. A jury awarded Clark $83,660, and an appellate court agreed. But when the city appealed the case to the Supreme Court in 1986, the decision was reversed.

Clark believes the justices changed their tune not because of findings of law but because many amicus, or "friend of the court," briefs were filed by other municipalities closely watching the landmark case. The cities feared that if they were made liable for their impacts on small businesses, it would have a chilling effect on infrastructure improvements everywhere -- and the redevelopment that tends to follow these improvements. The court apparently agreed.

"The inconvenience and damage which a property owner suffers from these temporary obstructions are incident to city life and must be endured," the high court wrote in its opinion. Clark "recoups his damage in the benefit that he shares with the general public in the ultimate improvement which is being made."

But Clark never shared in the benefit with the general public. That same year, he had to close both businesses and retreat to a second Waterloo location. Today, he's out of the restaurant business entirely. He estimates that the entire sequence of events touched off by the construction cost him more than half a million dollars.

"The city fathers, the people who are trying to do all these things, love to lead people to believe it's going to be so great later so you better get in now," says Clark. "No, let me explain to you. It will be good for the people that can afford to come down here later. Be up front and honest. All these people who've been in business all these years down here, they have to go."

Entrepreneurship is like a fight, he says. If you take a shot from one side, you can't stand up to a later blow from the other side. The one-two punch is typically construction followed by redevelopment. "It's simply unworkable for the little guy," he says. "It's really about the little guys."


Redevelopment has been a long time coming to Midtown. The area was one of Houston's first residential neighborhoods. In fact, Howard Smith, who owns the property where Joe's Sandwich Shop now sits, has had that land in his family since the 19th century. His grandfather built a house there in 1893. His father grew up in it. As residential suburbs were pushed farther south and Main Street became a retail corridor, the family tore down the house and built a small shopping center in its place. But by the 1950s, traffic congestion prompted the city to build a system of freeways that surrounded Midtown and pulled cars off Main Street.

 

Midtown's decline may have begun with the freeways, but it was sealed in the 1970s, when Environmental Protection Agency requirements forced a sewer moratorium on the area. Major developments downtown, at Greenway Plaza and in the Galleria area were overloading the city's main sewer station at Buffalo Bayou, and sewage was escaping into the waters there. In order to keep up with development in these areas, the city had to essentially disallow development in other areas. Property owners in Midtown could continue to use their land as they were already using it, whether as commercial or residential, but there was no sewer capacity available for new land use. Eventually property owners realized that their sewer rights were worth more than the land itself. They sold their rights to developers building on the edges of town, and tore down their now useless buildings in order to save on their property taxes.

In the late '80s, it looked to some real estate speculators like the new skyscrapers being built downtown might just jump over the Pierce Elevated and sprout up in Midtown. Land-banking came to Midtown, but the skyscrapers and the hefty profits didn't. When the real estate market collapsed, the speculators once again lost interest in the area.

A small Vietnamese community had opened shops on blighted Milam because there was a street in Saigon by the same name, and a few businesses, like Joe's, had moved into the north and south ends of the area to take advantage of cheap rents and a few daytime customers venturing from downtown and Montrose. But Midtown was mostly a ghost town, overrun by the homeless. In fact, a 1990 study by the McKinsey Corporation found that there were more than 3,400 undocumented squatters living in the area.

"I had a church in the middle of it," says Stephen Bancroft.

Bancroft had come to Houston to lead the 100-year-old Trinity Episcopal Church at Main and Holman in 1986, as the church teetered on the verge of closing. There was no neighborhood from which to draw congregants, and the commuter membership was growing older. The priest developed a well-known ministry to the homeless, which gave the church an image and attracted new members who wanted to help the downtrodden. But Bancroft knew that sort of ministry wouldn't survive long. People need to see results, he says, or they get burned out. For every few homeless the church helped, there were dozens to replace them.

By 1991, Bancroft had decided to save his neighborhood and his church in a very different way. He became a redevelopment advocate. Midtown had infrastructure, empty land, a prime location between downtown and the Medical Center, and prices cheaper than Houston's most far-flung outskirts. Furthermore, after 17 long years, the city had finally built enough new sewage and water treatment plants to lift the sewer moratorium. "What more could you want?" he asked.

Bancroft visited other cities to observe their redevelopment efforts and found that all the successful projects had one thing in common: a tax increment reinvestment zone, or TIRZ. As property values go up in a TIRZ, the additional tax revenue is used to pay for improvements to the infrastructure and public spaces within the zone, thus spurring development and further increases in property values. Bancroft and his Midtown Redevelopment Association spent years mapping Midtown and convincing property owners, the school district and the city of the merits of a TIRZ. By January 1995 the TIRZ had been established, and within two to three years it had proved to be one of the most successful uses of tax incremental financing in the city. Bancroft says that property values skyrocketed from $1.50 to $2 a square foot all the way up to $18 or $19.

The Midtown Redevelopment Association had a dramatic vision for Midtown: a pedestrian-friendly neighborhood, with mid-rise apartments and ground-level retail, sidewalk cafes and tree-shaded plazas. A few apartment complexes and mixed-use developments have already been attracted by the TIRZ. And while Bancroft did not support Metro's first plan for light rail, which would have bypassed most of Midtown on an elevated track, he thinks the current line will help further his vision for the neighborhood. Charles LeBlanc, the man who has since taken the reins of the redevelopment authority, says that new and potential Midtown residents invariably ask two questions: Where is the grocery store? And when will light rail be ready to ride? (Incidentally, a Randalls grocery store has just broken ground a few blocks from Joe's shop.)

Metro's DeLibero expects to see more than $500 million in development along the light rail line -- much of it in Midtown. "You're not even going to recognize this town in the next ten years," she says. "These stores and blocks of nothing right now, almost boarded-up old businesses that have been like that for years -- it's going to take on a whole new dimension."

 

But there are businesses on Main Street that aren't boarded up, that have been serving Midtown's working class for a decade or more. Will they have a place in the new Midtown? Bancroft had hoped that they would.

"We had a plan…in which we were going to take some of our original money and buy some land that was going to be used to maintain a certain character of the lower-income quality of the neighborhood so that you'd have a mixed-income neighborhood," he says. "Also, there would have been some helping out of the already existing businesses -- maybe to help them buy their own land or deal with the thing you're noticing now."

But others in the authority and outside experts thought Bancroft was too optimistic about Midtown's turnaround. They thought it would take ten years rather than two for the property values to come up. They thought there was time to wait. "The fact is," says Bancroft, "we didn't step up and buy the land when it was cheap enough to buy. The property values went up so fast that they were not able to capture enough land in places where you could actually do low-income housing."

As for the aid to small businesses, Bancroft says he might have been able to push that through, but he left at the wrong time. The priest moved to Detroit in 1995 to take over a cathedral there and start new redevelopment projects. The authority he left behind has no current plans to help the businesses.

"It's a difficult question, and people's lives are being hurt by it, and that's a shame," says LeBlanc. "In 2004, when the next layer of development comes in, those people will get a benefit, but the people that were there before got all the pain. That's not right, and I'll admit that. But I don't have an answer how to solve it."


Even though there are still plenty of rundown, vacant buildings along construction-ravaged Main Street, it looks as if a new, upscale, redeveloped world is closing in around Joe. The residential developments on the west and east sides of Midtown are filling up, with shops and restaurants serving residents on the ground floors. Richard Ziegler, director of research at the real estate consulting firm of O'Connor & Associates, says that apartments in Midtown are renting for the highest rates in the city, 10 percent higher than even the tony Galleria area. Robert Duncan, a property owner in Midtown, says the time to develop is now, so that construction ends just as the light rail is completed. LeBlanc talks about projects that are too "pie in the sky" and "confidential" to divulge.

Bill Sharp, who manages the retail center that houses Joe's, says that the owner likely will challenge the property's next appraisal in light of the fact that the construction has cost them tenants. That will help keep rents low for the time being. But even he admits that "in the long run, the small mom-and-pop tenants that have basically been up and down Main Street there will get pushed out." As property values continue to go up, owners will have to charge higher rents to keep up with the associated increase in taxes -- and to make up for rent profits lost because of construction. Owners also may be tempted to sell the property by offers they just can't refuse. Metro may bring new customers to Joe's neighborhood via light rail, but it also may usher in a pricey environment where a simple sandwich shop can't compete.

Or maybe not. Ironically, the hype surrounding Midtown and light rail inadvertently may serve to protect Joe -- at least for a little while. The land along Main Street may be undesirable for tenants now thanks to construction, but developers say that the anticipation of rail has led many landowners to ratchet up their asking prices. "Everybody thinks that land is worth gold now," says CB Richard Ellis broker Michael Palmer. The land is also divided up into small parcels, with many owners, he says. It's too difficult for developers to put together large enough pieces at low enough prices for the area to be profitable -- with or without rail.

Landowners of prime real estate in Midtown are asking anywhere from $20 to $40 a square foot. With dirt that expensive, developers will have to struggle to turn a profit. They'll need to create high-density, high-rent projects in order to get that much value out of the land. Mixed-use projects -- like the Post properties on West Gray in Midtown -- are the most likely to achieve that kind of value, but Ziegler says it's not easy to convince a lender to fund a large-scale mixed-use development. "You've got a lot of moving parts," he says. "You have to prove your retail rents and your office rents and your apartment rents. You have to show they're going to hit the targets you need them to hit for the property to have a value to support the loan."

 

Even if land along Main Street weren't astronomically priced, developers are likely to wait until the light rail is completed before they begin trying to develop along the line. "People want to see it, touch it, feel it, see the impact it's going to have," says LeBlanc. His predecessor, Bancroft, is more cynical: "You know what developers are? Sheep." They're waiting for a pioneer to show that a project on the line can be successful. Despite the success of light rail in other cities, including Dallas, there is still some concern over whether the mass transit plan will work here. Continued efforts by antirail groups to bring the under-construction light rail to a vote doubtless don't inspire unflinching confidence in developers. There is also, of course, the worry about the effects of an impending nationwide recession. And some wonder whether the rail line will really be able to change people's habits in this car city.

After light rail, there will be little to no parking on Main Street, meaning that business and development there will depend almost entirely on pedestrian and rail traffic. "Any retail developer would much rather have a clear, unobstructed, multi-lane street in front of them and two driveways into your parking lot," says Sharp. "You know, the standard deal that's worked all across the world."

Despite the questions, few believe that Midtown's Main Street corridor will remain undeveloped forever. "But it may have to wait until some of the land prices come down," says Ziegler. "Or, alternatively, once the rail gets in there and the streets are no longer a mess and people can actually make it to the businesses, you can make the numbers work easier. People will pay higher rents if they're going to actually get a high volume of business."

But it will take time for the market to pull prices back down to a more reasonable level. And it will take time for Metro's light rail to prove itself with ridership numbers and pioneer developments. In the meantime, businesses like Joe's have a chance at keeping their heads above water -- that is, if they can keep their heads above the construction.


Business is better at Joe's Sandwich Shop today, a Friday. The Boy Scouts of America office has put in an order for 30 sandwiches, and for a moment all five little tables in the shop are full. But Joe seems more distracted than usual, rubbing his chin and looking out the barred window. "Sometimes I get depressed," he says. "Don't put that -- people will think I'm crazy. Say that Joe's a happy-go-lucky guy."

Earlier this week, Metro had closed down Webster Street completely. Right in front of his shop. At lunchtime. Without even telling Joe. Today, Metro's community outreach department has called him to apologize, to invite him to a meeting of business owners, and to offer him free space in an advertising coupon booklet. Joe is grateful, but he wishes Metro had taken some of these steps months ago when the construction began -- and maybe waited until after lunch to close down his street.

Besides, there's more bad news. Joe can't open the second shop on Louisiana. It's too expensive, double his current rent. He just can't make the numbers work.

Joe already has had to lay off one of his three employees, and another one will have to go soon. He and his wife sit up nights talking about it. If worse comes to worst, the two of them will run the restaurant alone. At least they'll still have the business.

"They say it's going to get better," Joe says. "I'm already established here. I just have to hustle." He comes upon an idea. "You go see Joe, you get a bag of free chips with any sandwich. Put that in your article."


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