Incubating Problems

At first blush, the huge one-story building near the intersection of Griggs Road and Martin Luther King Boulevard looks like a good place to do business in the middle of a bad place to work.

The long facade has the only decent coat of paint for blocks. The giant parking lot is freshly paved, but save for a dozen vehicles and an armed security guard in a golf cart, it is empty. Inside is another rent-a-cop, 64 offices, two conference rooms, a computer center and an art-deco design that invites ambition -- even if the grit and disorder of the surrounding neighborhood doesn't.

Quiet and squeaky clean, there is nonetheless something ominous about Palm Center, a city-owned office complex in southeast Houston. It is a feeling that arises in the presence of failure, which is about all this former shopping mall has known since the city acquired it in the mid-1980s.

That was supposed to change four years ago. In the wake of a federal audit that identified nearly a decade of tax-subsidized waste, City Council replaced the private contractor that had managed Palm Center with the Houston Small Business Development Corporation, a publicly funded nonprofit. At the same time, the city began investing roughly $1.5 million a year in federal community development block grants to nurture small businesses at Palm Center. It's called "incubation," and by offering inexpensive office space, equity loans and other tools to local female and minority entrepreneurs, the city hoped that more jobs and more businesses, big and small, would come and lift the area out of its despair.

"I just knew within three or four years, it would become the top center of its kind in the country," says Ronald Russell, an accountant who opened his small tax consulting business at the Palm Center in 1990. "They had those kinds of resources and support behind it."

Unfortunately, it wasn't enough resources and support, or perhaps just the wrong kind. Whichever, the old Palm Center has little to show for its efforts other than unrealized potential. Only 13 of 54 offices are leased at the so-called Business & Technology Center, a 140,000-square-foot section of Palm Center that's been set aside for "incubator" businesses.

And the vacancy rate appears destined to grow. Russell, for one, will move to an office less than a mile away from the center when his lease expires on November 30. Others are thinking of doing the same. And in the kind of logic that only government can contribute to private enterprise, three incubator tenants who want to stay have been served eviction notices by Marlon Mitchell, executive director of the Houston Small Business Development Corporation.

One of the ousted three, Danny Perkins, a construction contractor, has sued Mitchell, the HSBDC and the city. Richard Wiltz, a small-business financier, joined Perkins' lawsuit after receiving notice that HSBDC had decided not to renew his lease as well.

Meanwhile, Wiltz and a third tenant, Dora Fannon, received notice on September 23 that they had three days to vacate their offices. Fannon hasn't decided whether to join Wiltz and Perkins in court. But like them, she doesn't want to leave Palm Center. Nor does she understand how an enterprise begging for paying tenants could justify tossing out those it has.

"I love what the center stands for," says Fannon, who has watched with dismay as the neighborhoods around Palm Center slowly disintegrated. "I feel it should be a business hub for this community. But there are a lot of inequities, and a lot of things that have to be changed if it's going to survive."

The question of survival has dogged Palm Center since 1980, when urban decay claimed the sprawling 1960s-era structure that at one time had been a suburban mall.

Conversion of the abandoned center began in 1987 with federally funded loans issued through the city's Target of Opportunity program, which aimed to spur private investment in blighted areas and create jobs for low- and moderate-income Houstonians. The city program, which was discontinued a few years ago after an independent audit criticized its lending guidelines, was also used to fund another public-private venture, El Mercado del Sol, a $3.1 million ethnic marketplace in east Houston that failed in 1987 and is now scheduled to be demolished.

A failure of embarrassing proportions -- the city actually acquired the former mattress factory twice in the hopes of spurring economic development on the east side -- El Mercado has been the subject of three lawsuits by former tenants who, so far, have been awarded damages totaling $27.5 million to compensate for their failed businesses.

Certainly more was expected of Palm Center when it reopened as a small-business incubator in 1989. But in 1992, the federal Department of Housing and Urban Development issued a report that ripped the city's handling of the redevelopment. HUD identified $1.8 million in unsupported costs, including more than $1 million in overpayments to the private development team that had renovated the center.

HUD also criticized management for inaccurately reporting expenditures and overstating the number of jobs created for low- and moderate-income people. In the fall of 1993, the city closed that chapter of the Palm Center's history by agreeing to pay $572,000 in penalties.

By then, a new chapter had begun with new management, the nonprofit HSBDC. HUD approved the use of community development funds for a 12,000-square-foot renovation, as well as a sizable build-out for a light-manufacturing facility.

But the city seemed particularly committed to small businesses that would trigger new economic prosperity for the surrounding area. The bulk of Palm Center was renovated and renamed the Business & Technology Center. By July 1994 it had 35 offices for incubator tenants, ten of them filled with small start-up businesses paying below-market rents and enjoying a host of services -- telephone and answering services, word processing, fax and photocopying -- designed to give them a leg up on success. But two years later, the Business & Technology Center has only three more tenants than when it opened. The center's largest employer is the HSBDC itself, which has a full-time staff of 17 plus three part-time employees.

Meanwhile, the small-business owners who do lease space at Palm Center say HSBDC has done little to support their growth. In fact, they suspect the center's management has all but abandoned the incubator concept.

They point to HSBDC's slow response to such things as the tenants association's request for additional security measures, including around-the-clock armed guards. Some offices were so small that they had no closets or storage space. But when tenants offered to lease vacant offices at reduced rates, it took a surprising amount of written discussion before they were accommodated. Others tenants complained that they had no access to their offices on weekends and at night, and that the answering service, fax machine and photocopier were often unavailable.

As a result, says Ronald Russell, who has already moved his tax-consulting business to another office though two months still remain on his Palm Center lease, HSBDC has "run off so many people from there, it's pitiful. They got away real quickly from dealing with the small businesses, and my understanding was that that was their purpose."

Indeed, HSBDC's most recent accomplishments seem to have come at the expense of the incubator. For example, Palm Center's newest tenants -- a Kelsey-Seybold clinic and the U.S. General Store, a one-stop outlet for information and guidance on government contracts -- are paying little or no rent at all, according to Richard Wiltz, president of the Palm Center Tenants Association. Wiltz says that such "sweetheart deals" mean the incubator tenants are subsidizing successful, well-established enterprises, rather than the other way around.

Marlon Mitchell, executive director of HSBDC, refused a request for information about individual rents at the center, citing the pending litigation. He also declined to provide an estimate of how much revenue HSBDC collects each month from rents and services. He did, however, provide a copy of a comparison study done by HSBDC that professes to prove that, at $1.05 and $1.10 per square foot, rates at the Business & Technology Center are competitive with similar office properties.

But Mitchell's numbers are misleading: none of the six office complexes he cited in his comparison were located anywhere near the Palm Center. One was in Clear Lake, another just south of Intercontinental Airport and yet another in the Memorial area. Their average lease rate was roughly $2.50 per square foot.

The tenants challenged HSBDC's analysis with one of their own, confining it to office space in the area of Hobby Airport, just southeast of Palm Center. Rental rates there ranged between 65 cents and $1 per square foot.

Mitchell defends Palm Center's rates by pointing out that incubator tenants get much more than space for their money. "We're providing them access to services that you wouldn't normally get in an executive suite," he says. "Access to financial assistance, access to management and technical assistance, counseling, workshops and training sessions. When you look at our services and our pricing and our rent, we're still lower than an executive suite where they don't get that kind of assistance."

Apparently, however, few tenants find Palm Center's services much of a bargain. One tenant, Triple T Service & Supply Co., moved out last September after repeated complaints from customers about the center's receptionist and answering service. In a letter to Mitchell, Melissa Thibodeaux, Triple T's president, acknowledged that she had fallen behind in her rent, but pointed out that HSBDC's management "made it increasingly hard" to run a business. She complained that messages were not passed on to her by the center's receptionist and that Mitchell's staff was "too busy running the place" to provide much technical assistance.

Ronald Russell says Mitchell not only hurt his business, but insulted it. The tax consultant claimed that during his busy season, when he might service as many as 2,500 mostly blue-collar clients, Mitchell asked him to pay additional security and janitorial costs because of the increased building traffic. Russell says he was also asked to pay extra for a waiting room.

"Marlon did not like my clients coming in and out of the building, so he made it difficult for them and me," Russell says. "He tried to make me pay $10 an hour for a conference room during the tax season so that my clients would have a place to wait that would be out of sight."

In an effort to foster a working relationship with Mitchell, in mid-1995 a group of tenants led by Wiltz, Russell and contractor Danny Perkins formed the Palm Center Tenants Association. Wiltz says the group also hoped to promote the incubator concept to small businesses that might be prospective tenants for the center.

But according to Russell, the association was "a divisive thing" from the outset. "Instead of trying to work together," he recalls, "what [HSBDC] would do is try to divide the tenants by talking to them individually. 'Those people are a bunch of renegades,' they'd say. 'Why do you want to associate with them.' "

Despite conflicts, by August 1995 regular meetings were beginning to take place between the tenants group and HSBDC. Solutions to problems were proposed; some, such as added security and allowing tenants 24-hour access to the building, were carried out. But one issue has proven to be non-negotiable.

"All of the other concerns they have had, we solved most of those that we could," reports Howard Jefferson, chairman of the HSBDC board of directors. "But that was not the real deal. They asked us to cut the rent by 60 percent and make it retroactive one year. Well, that was not done."

Wiltz says the more the tenants pushed the issues of high rent and poor services, the more frustrated Mitchell became. Relations between the two sides sunk to their lowest on August 17, 1995, when at a meeting with several tenants, the executive director lost his cool.

"He told us to our faces that if we didn't like it, we could leave," recalls Wiltz, whose version of events is corroborated by a letter Russell received from Mitchell shortly after the meeting.

"[P]lease accept my sincere apologies if my remarks appeared insensitive relative to tenants exercising their option to move," Mitchell wrote. "Each tenant is a valued client of the HSBDC, and it is not our intent to encourage moving from the [Business & Technology Center]."

In a recent interview, Mitchell politely steered clear of any discussion of his dispute with the tenants. He did, however, suggest that he believes too much of his time has been spent dealing with Palm Center's incubators. "What we have here is a mixed-use complex," he pointed out, "and it's not geared just toward small business. The complex as a whole has to be run like a business."

That means that HSBDC has to decide when a tenant's "constant nudging" becomes a "disruption of the peace and enjoyment of the facility," says Mike Easley, an HSBDC board member and a small-business owner himself.

"It's been something of an unusual situation dealing with Richard Wiltz," Easley says, with equal parts bemusement and frustration. "After trying to accommodate him for so long, and to still be getting barraged with threatening letters and arm-twisting tactics ...."

Perhaps not coincidentally, the three tenants that HSBDC is trying to evict -- Wiltz, Perkins and Dora Fannon -- were among the most vocal members of the tenants association. So far, Wiltz, Perkins and HSBDC have been to court three times over the eviction issue. At the second hearing, District Court Judge Katie Kennedy ordered HSBDC and Perkins and Wiltz into mediation. That failed when it became clear that Mitchell wasn't about to back down and give the tenants a new lease. "He told us he'd give us until November 30 to get out," Wiltz says.

Fannon had a private meeting with Mitchell, her attorney and former City Councilman Al Calloway, who is now an assistant to Mayor Bob Lanier. Fannon says she received no satisfaction, and is waiting to see if the HSBDC will take her to court in order to get her out of the Palm Center.

As for the remaining incubator tenants, they point out that whatever the HSBDC has done, it hasn't contributed much to the success of their small businesses. That worries them -- and, they say, Houston's taxpayers should be worried as well.

"This," says Richard Wiltz, "is going to be like El Mercado II before it's over.

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