Houston's Big Experiment
The offices of Ironwood Homes are in an upstairs bedroom of a display house on Hidalgo Street, a half-mile southeast of the Galleria. It's a small space that, unlike most offices, doesn't say much about the business it houses; there aren't any testimonials to Ironwood's record of customer satisfaction, for instance, nor are there any photographs or renderings of the large brick homes Ironwood builds and sells for around $350,000.
There are, however, a couple of things that speak volumes about the company's owner, Robert Silvers. Like the three packages of stomach antacid lined up neatly beside a computer and the sheet of paper, pinned to a bulletin board, that reads, "Never underestimate the power of stupid people in large groups."
As those decorative touches suggest, Robert Silvers is a miserable cuss, a state of affairs he traces back to 1989, when he purchased 107 lots in Lamar Terrace. In hindsight, Silvers is certain he should have resold the land, which he picked up on the cheap from the Federal Savings & Loan Insurance Corporation, and taken a quick profit. Instead, he renamed it St. George Place, tore down dozens of poorly maintained rent houses and petitioned City Council for 20 years of future property tax revenues to rebuild the neighborhood.
On December 12, 1990, Silvers became something of a pioneer in Houston real estate circles: He was awarded the city's first tax-increment reinvestment zone.
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The city froze the property taxes collected from the dilapidated World War II-era subdivision at their 1990 level. In 1992 the city sold $3.1 million in bonds, and committed another $1 million of its own money, to repair the streets, construct new curbs and sidewalks, replace the sewer and water systems and install lighting and landscaping.
The idea was that those improvements would make it a snap for Silvers to sell his lots to builders, who would construct upscale single-family homes. The new construction would increase land values, and the additional property tax revenues generated as a result would be used to retire the bonds.
By February 2011 the city could begin collecting many thousands of dollars in additional revenue from St. George Place, and Silvers would have attained a level of personal satisfaction that had previously eluded him.
"I had a burning desire to do something good for my city," Silvers recalls. "I had a purpose in life."
If Robert Silvers has a purpose these days, it's to get the hell out of St. George Place and never look back. Unfortunately it will be a while before taxpayers have the same opportunity.
Earlier this month City Council quietly agreed to refinance the 1992 bond issue, thereby extending the debt for another 20 years and delaying until 2031 the additional property tax revenues the city will receive from St. George Place. Moreover, Council also approved $5 million in certificates of obligation on behalf of the TIRZ -- debt backed not by future property tax revenues but by the full faith and credit of the city's general fund. Council also committed another $1.1 million of its own money to the project.
The additional spending reflects the failed expectations of St. George Place, which has been marred by numerous delays, disputes over control of the land, the slow pace of lot sales and a lawsuit. From a financial standpoint, though, the problem is simple: The revenues generated by the TIRZ have not been sufficient to support the debt issued in 1992.
Indeed, half the zone -- from Yorktown west to Chimney Rock, an area annexed by the original TIRZ in 1992 -- has seen virtually no new development, despite the fact that landowners there have seen their property taxes rise. For the past eight years those landowners have, in essence, subsidized development in the original zone, which nonetheless has grown far more slowly than anticipated.
One reason was a two-year dispute over Hidalgo Street, which splits St. George Place. Silvers wanted all the streets in the neighborhood to be quiet residential lanes. But Hines Interests, owner of the Galleria, wanted to widen Hidalgo and Fairdale streets to relieve traffic congestion around the mall. Though Silvers eventually won out, the uncertainty over the size and direction of the streets thwarted efforts to market his lots to builders.
But the most contentious issue, and the one that has caused Silvers the most grief over the last ten years, is eminent domain. While TIRZs are granted considerable powers, including zoning and other land-use controls, city officials have yet to give them the right to take property.
Silvers says that's not how he understood it when he agreed to take part in the city's first TIRZ. In fact, he says he never would have agreed to develop St. George Place if he hadn't been assured that the city would allow the zone to condemn and demolish substandard property.
"If they weren't going to do eminent domain, they shouldn't have done the deal," Silvers argues.
In 1996 Silvers sued his team of consultants, which included former city planning director Patricia Knudson-Joiner, claiming they had misled him into believing that a TIRZ would give him ultimate control over all the land in the zone. The suit was settled earlier this year in Silvers's favor for $2 million.
Eventually Silvers became so frustrated by the lack of new-home construction in St. George Place that he formed Ironwood Homes and started building houses himself. While that helped get the project off the ground, and has brought other builders into the area, Silvers says it's not something he planned or even wanted to do.
"I'm not a developer, I'm an investor," he says.
On a recent morning Silvers gave a tour of Tax-Increment Reinvestment Zone No. 1 that, by all appearances, should have been an opportunity to show off all that he has accomplished with St. George Place. Big, beautiful new houses line more than a half-dozen rebuilt streets, from Richmond north to Fayette, from Sage west to Yorktown. More new homes are under construction on almost every block. New sidewalks have been built, new trees planted. The neighborhood exudes a stately elegance.
But as Silvers guided his white Mercedes sedan up and down the streets, he seemed to grow angrier. It's the same anger that has been gnawing at him for years now.
"Just look at that," he growled, pulling up in front of a 1940s-era ranch house on Navarro Street. "Who is going to want to move in next door to a house like that?"
From an aesthetic perspective, Silvers has a point. The juxtaposition of low-slung ranch houses interspersed with towering multistory brick manses gives St. George Place the look of a bad haircut. That said, things could be a lot worse: Lamar Terrace was a frightfully neglected neighborhood. The nastiest structures have been torn down or renovated (Silvers actually complains about the fact that some investors have fixed up their properties), and none of the front-yard mechanics that used to populate the neighborhood are in business anymore.
None of this seems to make Silvers feel better, though. St. George Place is an impressive scene, but all Silvers can see is what hasn't been done. All he sees is the two dozen 50-year-old houses he doesn't own, most of which, he says, have been purchased by speculators. That the structures haven't been torn down yet is something of an insult to Silvers, who says they continue to exist "just to spite me."
One gets the sense that, after nine years of involvement with tax-increment reinvestment, almost nothing would please Silvers. But he has borne some very real costs. Time is money in real estate, and Silvers has had to carry the expense of land he bought more than a decade ago. Not only was he forced to start his own home-building company, but early on Silvers sold his lots well below market value in order to entice other builders to take a chance in the neighborhood.
Silvers also was required to put up almost $800,000 of his own money to jump-start the street improvements in 1992. He was promised reimbursement, though he has yet to receive it. Nonetheless, Silvers still has a way to go before he can put St. George Place behind him. He still owns 37 lots, which is why the sight of the older homes in the neighborhood still riles him.
"I wish I had never done this deal," he says. "I'll never make as much money as I should have. I'm very proud of the homes, very proud of what's happened over here, but I'm also feeling a little disillusioned."
David Hawes, a consultant who manages the day-to-day operations of the St. George Place TIRZ (he wasn't a party to Silvers's lawsuit), has been involved with the project almost as long as Silvers. A former city official with the Finance & Administration Department, he helped structure the 1992 bond deal for the TIRZ.
Hawes acknowledges that St. George Place has developed much more slowly than anticipated, primarily because other landowners in the zone either refused to sell their land or asked too much for it. As for eminent domain, Hawes says, city officials would have to approve its use. So far, they've been reluctant to take property to benefit Silvers.
Hawes says that property values have gotten to the point where owners are more willing to sell. Home builders are lining up to start constructing homes on the west side of the zone, but the utilities and streets need to be upgraded first. Hawes says that because there are almost as many landowners as lots, there is no single developer willing to fund the infrastructure improvements needed. That's why the city has had to issue the additional bonds.
As for why the development that has taken place so far hasn't generated enough revenue to continue the project, Hawes can only shrug and offer the simplest of explanations.
"This was the city's first TIRZ," Hawes says. "It was new to everybody. "
Tax-increment reinvestment is no longer new to the city of Houston. Since approving the St. George TIRZ more than nine years ago, the city has created 19 more zones, encompassing more than 7 percent of the city's taxable land. Originally envisioned by state legislators as a tool for urban renewal, the city has strung TIRZs from southwest Houston to Kingwood, from east downtown to the far west suburbs.
The long-neglected Fourth Ward, which hasn't seen so much as a new manhole cover in 50 years, has a TIRZ. So does Uptown Houston, 1,000 acres of conspicuous consumption that, to the relief of overheated shoppers, no doubt, was awarded a TIRZ to construct an air-conditioned pedestrian walkway, among other amenities.
As a public policy, it's difficult to imagine anything as far-reaching and significant as tax-increment reinvestment. Each zone is, in essence, governed not by elected officials, but by appointed boards with the power to spend millions of dollars in property tax revenues unavailable to other areas of the city, whose residents will, as a result, be forced to dip further into the general fund to maintain basic services.
By the year 2030, when most of the existing zones created by the city have run their course, more than $2 billion in public money will have been diverted away from the city, county and local school districts to repay the bonds. That is, if the proposed plans for those zones go off without a hitch. But, as Robert Silvers's experience in St. George Place tells us, that's a pretty big if.
E-mail Brian Wallstin at firstname.lastname@example.org.
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