Council revives plan to use ‘blight’ law to subsidize luxury high rises

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Concept rendering of a proposed mixed use development at 305 South Congress (Endeavor Real Estate Group)

Subsidy plan previously put on ice gets another look, now valued at $330 million

The Austin City Council has revived discussions to grant special tax status to 118 acres of waterfront real estate in central Austin.

The plan would divert property tax dollars from the city’s general fund to a special infrastructure fund benefitting the area, which is known as the South Central Waterfront.

To do so, the council would rely on a funding mechanism in the Texas Constitution intended to encourage the development of “unproductive, underdeveloped, or blighted” properties.

This mechanism—known as a Tax Increment Reinvestment Zone (TIRZ)—would pay for a new street grid, water, wastewater, sidewalks, and amenities like a public plaza, trails, and public art. These amenities would lie in the shadow of new high rises that developers plan to build in the area.

Despite questions raised by a trio of lawyers as to the legality of the plan, the council voted in December 2021 to create the TIRZ. However, it held back on a key step needed to implement it—namely, setting a rate to determine what portion of tax collected in the area would go into the fund.

“When council established the TIRZ at the very tail end of 2021 it was with a zero percent increment contribution,” noted Deputy Chief Financial Officer Kimberly Olivares at a council work session July 26th.

Nonetheless, the year-end move ensured that the council would later be able to raise that rate and thereby transfer a portion of this year’s tax revenues into the TIRZ.

After a public outcry, however, support for the idea of a TIRZ appeared to dissipate. At a work session February 2, 2022, several council members publicly questioned whether a TIRZ was the right approach to infrastructure in the area, and members decided to shelve discussion of the matter.

Council Member Kathie Tovo noted that members had “gotten a lot of feedback from the public about this over the last few months” and emphasized that the council hadn’t made any final decisions about the subsidies.

Staff planning continues

Despite the council’s seemingly lukewarm support for the idea of a TIRZ at the February 2nd meeting, city staff and consultants have continued to work toward its implementation, according to a staff presentation at a council work session July 26th.

Economic Development Department Deputy Director Susana Carbajal called the TIRZ an “essential component” of the South Central Waterfront Vision Plan (a framework adopted by the council in 2016), even though it was only one of several financing options originally presented in that plan.

Kimberly Olivares

Deputy Chief Financial Officer Kimberly Olivares said, “The taxing and financing scenarios that we presented in fall 2021 are still what are in place for current consideration.” However, she added that the estimated cost of the subsidized infrastructure in the TIRZ had risen from $277 million to $330 million, owing to changed market conditions.

That amount would be higher than the bonding capacity of a proposed TIRZ, she noted, meaning that the city would have to come up with additional funding on top of the diverted property tax revenues. Additionally, staff and consultants would consider “reducing the project scope of the SCW Vision,” according to the staff presentation.

Assistant City Manager Rodney Gonzales laid out a timetable for next steps: “Between now and November staff is going to be working on a regulating plan (for the South Central Waterfront) and taking the drafts to various boards and commissions.”

Rodney Gonzales

“Then once the regulating plan is approved, between December of this year and January of next year, staff is going to update the Tax Increment Reinvestment Zone (TIRZ) revenue projection, and that will give us a good baseline for the revenues associated with the TIRZ,” he added.

“And once that is done that will give us a better sense of the funding gap that we currently have identified for the vision plan… What we want to do is look at that funding gap and look at some various ways to close that funding gap,” he added.

Olivares also revealed plans to contract a consultant, Charles Heimsath, president of Capital Market Research, to update economic models that the city intends to use as legal justification for the TIRZ. Known as a “but for analysis,” this modeling aims to show that economic development in the zone would not occur without public subsidies. Heimsath already completed such a study in 2021, but market conditions have changed and the analysis needs to be updated, according to Olivares.

Another consultant, Economic and Planning Systems (EPS), is conducting an economic analysis of 305 South Congress, headquarters for the Austin American-Statesman and the largest property in the TIRZ, including estimates of the purported economic value of “community benefits” of the developer’s plans.

Statesman rezone

Endeavor Real Estate Group, the developer of that property, is seeking council approval to build up to six high rises on the site—which would not be allowed under current zoning. The 18.9-acre site hosts the city’s famed bat observatory next to the Congress Avenue Bridge.

Endeavor has offered to dedicate 6.5 acres of the property as parkland, plus 1.6 acres as a public plaza. But it wants the council to approve the TIRZ to fund roadwork and public amenities in and around the site.

The Planning Commission approved Endeavor’s plans for the site in February (with amendments), but it made no commitment to dedicate TIRZ funding for these purposes. Likewise, when the council took up the rezoning case April 7th, it sidestepped the issue of the TIRZ. Although council members touched on the issue in remarks from the dais, the council formally made no commitment.

Ahead of a first-reading vote on the rezoning, Council Member Alison Alter said, “We don’t have a TIRZ set up yet…I would like to see the developers stepping up (to pay for) more of those amenities.” And Council Member Kathie Tovo said the council hadn’t yet gotten adequate information about the financial modeling behind assessments of the TIRZ’s purported public benefits. She reiterated concerns about that Tuesday.

On first reading, the council approved Endeavor’s rezoning request, with some amendments, by a vote of 10-0. However, the council subsequently delayed second- and third-reading votes on the matter originally scheduled for June 14th. Council Member Kathie Tovo, who requested the postponement, cited a lack of time given to the public to review the proposed ordinance and backup materials.

The council set another vote for July 28th but is expected to delay it again until September 1st, at the request of the South River City Citizens Neighborhood Association.

Public-private benefit?

Backers of the proposed TIRZ have argued that public investments in infrastructure will allow the South Central Waterfront to develop in a coherent way, rather than a piecemeal fashion, ultimately creating more public value. Not only would the TIRZ create new public spaces, but ultimately it would generate more tax revenue too.

Mayor Steve Adler supported that perspective in remarks Tuesday. He said, “We have some people in the community that have written editorials in the Statesman or otherwise arguing that if we contribute money to capital improvements that we’re giving money away to developers. Nothing could be further from the truth. We’re investing in capital improvements because that enables us to get the kind of development that the public wants in an area. If we don’t make that contribution, we get a different kind of development…(the TIRZ) generates additional ad valorem tax value.”

Critics, on the other hand, argue that the developers should pay for such infrastructure themselves, either directly or perhaps through the creation of a Public Improvement District—a mechanism that would essentially impose an additional voluntary tax on the property owners in the area.

Bill Bunch, executive director of the environmental watchdog Save Our Springs Alliance, opposes both the rezoning of 305 South Congress and the TIRZ, calling them “developer welfare” and “crony capitalism.” In a letter to the council June 13th, Bunch slammed the proposed rezoning ordinance for giveaways in the form of fee waivers and credits, nonstandard variances to water quality protection rules, and special rights that the developer would have for use of the new “public” parkland.

Bill Bunch

Bunch contends that Endeavor’s proposed parkland dedication is not really all that generous given the extra demand for parkland that will be generated by building 1,300 units of “ultra-luxury high-rise condos” at the Statesman site, plus 1.5 million square feet of office, shops, and a hotel.

Most of the proposed parkland would be in a narrow strip between Lady Bird Lake and the proposed high rises. Amenities would include a pier, boardwalk, a play area, and an extension of the Butler Hike and Bike Trail. Six of the 6.5 acres of parkland that the developer is offering to the city are unbuildable, due to waterfront overlay zoning, according to a November 24, 2021 memo by Parks Department Director Kimberly McNeeley.

As to the TIRZ subsidies, Bunch said, “Parking and roads, along with water, sewer, sidewalks, park land dedication, are standard costs that every developer must pay for on their own, built/delivered as required by city ordinances. The idea that this ultra-luxury development needs the taxpayers to pay for these for them is beyond absurd. It’s disgusting.”

Alter skeptical

At Tuesday’s work session, Council Member Alter asked how much the developer would profit from the development at 305 South Congress. Knowing this would help citizens to assess whether the proposed subsidies for the zone would just “line the pockets of developers,” she suggested.

“I think that’s relevant for us as we’re trying to assess this tradeoff. If we don’t understand the rate of return that’s assumed under the cost structure, I think that’s a problem,” Alter said.

Alison Alter
Alison Alter

“I think that’s really the question that’s before us and what the community is asking us is this question as to whether these investments are really going to line the pockets of developers, or whether this is an investment in our community and the future of our city and an important part of downtown. But it’s really hard to assess that if we don’t have a sense of what that rate of return is.”

Luke Foelsch, an associate with Economic & Planning Systems, responded that their studyof the Statesman PUD had not delved into that question. But Assistant City Manager Rodney Gonzales said city staff and consultants could look into the matter: “Council member, if it’s the will of the council we could certainly go down that path as well. We could ask the developer what their rate of return is and they could give us that information. Then the next question would be whether council wants us to verify that information as well.”

“For the verification we would use EPS (the consultant) to go through the pro forma that the developer has, it would be an open book pro forma where we assess all their revenues and cost estimates and put our eye towards it and affirm whether that rate of return is verifiable.”

Alter replied, “In a perfect world I would (want that). I don’t know what time and resource intensity that involves. But I do think absent that knowledge it’s going to be hard to address some of the concerns that are being raised about whether this is good public policy.”

Trust indicatorsBulldog reporter Daniel Van Oudenaren is a journalist with 13 years experience in local, state, and international reporting.

Related documents:

Staff presentation at work session, July 26, 2022

Draft ordinance, Statesman PUD, July 15, 2022

Staff report: Statesman PUD, July 15, 2022

Statesman PUD Economic Analysis, July 8, 2022

Staff presentation on TIRZ, February 1, 2022

Approved TIRZ ordinance, December 20, 2021

TIRZ Preliminary Project and Financing Plan, December 20, 2021

Letter from attorney critics, December 17, 2021

Capital Market Research – TIRZ analysis, September 24, 2021

South Central Waterfront Vision Framework Plan, June 15, 2016

Related Bulldog coverage:

Luxury subsidy deal stalls at council, February 3, 2022

Luxury real estate to get special tax status under ‘blight’ statute, December 21, 2022

3 COMMENTS

  1. Adler is obviously positioning himself for some sort of consultant role after mayor. It’s obvious he’s not even trying to look out for the public interest, just looking for more tax revenue to fund more projects that more developers can take advantage of. What a disaster he is. While I’m no Alter fan, at least she’s asking common sense questions. The fact the Luke Foelsch hasn’t “delved into” a basic question on ROI of the city’s proposed $330M “investment” indicates that he and the planning team are worse than useless. He probably should be fired before he does any (more) damage. This may be a great investment and I have no problem with smart development but how would anyone ever know? C’mon Mayor, council people, planning department… do your damn jobs!

  2. I fully support Bill Bunch’s and CM Alter’s position that the public should not be paying for these improvements and developments. This is a project that should stand on it’s own without public funding. Austin has become known as a developer’s paradise and it is time we change our policy. This is not “free” money. Someone has to pay and it shouldn’t be the general public.

  3. hummm. since we are facing the increasing shortage of lower wage service workers having a place to live anywhere close to all the venues that need them to make the Austin destination allure work, it would seem that any public incentives to build massive LUEs in the central business district would at a minimum include a sizable percentage of legitimate affordable housing options. If tax dollars are going to be spent on this type of development, those tax dollars should benefit truly lower wage workers along with the projects these workers will be called on to serve. Commitments for 80% MFI doesn’t get us anywhere. We need to think differently, together, of how to deal with this growing crisis.

    once again, good reporting, Bulldog. Continue to make us all become more thoughtful about how to address our problems.

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