An unintended consequence of the Stop Domain Subsidies' Charter amendment?

Stop Domain Subsidies' proposed Charter amendment to ban retail subsidies is fraught with unintended consequences.

Here's one:  The Charter amendment likely will shunt low-income residents away from mixed-use developments and into stand-alone residential developments.  Why?  Because the proposed amendment bars subsidies to developments that merely include a retail use, even if the retail use itself receives no subsidy.  The City thus will be unable to "buy down" the affordability of units in mixed-use developments that include a retail use.

A concrete example:

Back in 2006, the City gave Ardent Residential a zoning change to redevelop the Stoneridge Apartments on South Lamar into a 300-unit mixed-use development.  The developer agreed to make 10% of the units affordable at 80% MFI.  But the units being replaced rented for a lot less.  To quell the furor over the rezoning, Betty Dunkerly proposed using some of the City's affordable housing bond money to "buy down" 10% of the units to 50% MFI, a genuinely affordable level.  The developer and the City are squabbling over the "buy down's" price tag, but the City appears ready to honor its pledge.  (It has to spend its $50 million in affordable housing bond money somehow.)

I don't know whether Ardent has filed a site plan yet, but it has talked all along about including retail as part of the mixed use.  That was part of the development's attraction. 

Assuming Ardent still intends to include a retail use, then, the Charter amendment will keep the City from honoring its pledge to buy "deep" affordability for these units.  The Charter amendment will keep the City from buying deep affordability in any mixed-use development that includes retail.  The City will be forced to spend its affordable housing dollars on stand-alone residential developments, or perhaps "live-work" developments.

I don't see how this protects local merchants.  The mixed-use development will still be built, and it will still have retail; the developer simply will rent the units at the market rate (or 80% or 60% of MFI if it takes advantage of the VMU incentives).

One could argue, perhaps, that purchasing affordability in mixed-use developments is an expensive, inefficient way to provide affordable housing.  (I'm ambivalent about it myself.)  But it doesn't seem wise to me to silence that debate by Charter amendment.

Comments

[M1EK]

I don't have time to make another post today, but I just browsed the Livable Cities' PDF relied on heavily by the SDS guys and was particularly taken by this bit of bad argumentation:

http://www.liveablecity.org/IncentiveStudy.pdf

on page 63:

"To the
extent that new or expanding retail establishments grow faster than local purchasing power, there
will likely be crowding out of existing retail establishments. This is why it makes little sense to
offer public incentives to retail. In most cases, retail incentives simply shift economic activity
from one place to another, rather than generating new products or jobs"

Well, duh. The idea was to keep the tax revenue in Austin instead of going to Round Rock or Bee Cave. If most of the cost drivers still live in Austin (and they do, in both places), then you want the revenue here as well.

and the followup point:

"There is every indication that the site would have
been developed for intensive, possibly even upscale retail due to its characteristics and
location.31"

The 31 footnote actually uses the low-end crap retail just south of Braker as their example. Uh, really? REALLY? You honestly think the tax revenues from the stuff south of Braker is comparable to what we make, even with the rebates, from the stuff north? The area is NOT attractive for retail - the Arbor Walk development moved in because of the Domain, and probably wouldn't even be there otherwise - this is NOT an attractive retail destination without the Domain sitting there.

I continue to be amazed that anybody buys this tripe. No, a lot of those high-end retailers wouldn't have come to Another Crappy Strip-Mall. They might have been convinced to come downtown in a few more years, but other than that, it'd take a project just like the Domain to get them here.

[trza]

Thanks for this. This is going to be a hard call for me. I'm more inclined to vote "no" after reading this and your other posts. Ballot referendums like this typically don't work out too well.

Still, the Domain subsidies really piss me off. I'm not knee-jerk against all subsidies for economic development or housing or even for retail. However, such subsidies have to be justified with some sort of appropriate policy rationale such as revitalizing a blighted neighborhood or encouraging desirable businesses such as grocery stores in underserved areas (although even this strategy is fraught with problems). Near as I can tell, the Domain subsidies provided no real benefit to the public. Given that fact, it is unethical to require businesses to subsidize their competitors, especially when the development is so far away from the city center that it is going to exacerbate sprawl and traffic. Am I missing something? Just a stupid, stupid action on behalf of the council. Rather than pass a ballot amendment with probable unintended consequences, a better idea would be a recall election against the imbeciles who voted for the stupid thing.

[M1EK]

trza, the rationale for me was that there's high-dollar retail calling, and it'd locate just outside city limits at La Frontera or Bee Cave otherwise, leaving us with a large part of the costs of such retail and none of the revenues. Yes, this doesn't help the region as a whole. No, I don't particularly care, given that "regionalism" is usually code words for "screw Austin at the expense of the suburbs".

Also, the idea that the land at IBM would have been redeveloped any minute now without these subsidies is laughable - it's a huge job, it's a (supposedly remediated) brownfield with lots of nasty chemicals in its history.

[Brian Rodgers]

The subsidies had nothing to do with any remediation. There was no reference in any of the presentations before the county, the city or in any of the open records or by any of the representatives of Endeavor Real Estate about the subsidies being needed for remediation. The subsidy request was specifically for the added cost of structured parking, wider sidewalks, open space, and higher tenant finish.

[M1EK]

We've discussed this before. The remediation was already done; but the idea that somebody would have built something lucrative on that property just because somebody built something cheap and easy on the property to the south that hadn't needed any remediation is ludicrous (even if the property to the south hadn't been developed precisely because of its proximity to The Domain, which it was). Brownfield remediation, even by others, is a black mark on the property, and makes it less desirable, period.

[Brian Rodgers]

From a developer's point of view, if the remediation meets government guidelines and lender approval, then there is no longer a black mark and the matter is forgotten.

The property to the south is the Pickle tract and wasn't developed "precisely because of its proximity to the Domain". That was prime freeway frontage sought for years by developers wanting the Arboretum-area location and demographics. UT put out an RFP and then picked through an assortment of developers hungry for property including Simon who announced their own life-style mall on the Pickle tract at NO subsidy. Simon then moved their mall onto the backs of the taxpayer by buying the Domain and built another sorry mess of chain stores and big boxes like Home Depot, Marshall's and DSW Shoe Warehouse.

[M1EK]

That's not at all how I remember the history - and I was working at IBM when this whole thing began (they were trying desperately to unload that property for years and years; and nobody wanted it - they ended up subleasing offices to some pretty lame tenants for a very long time).

Again, you're arguing a counterfactual here. Nobody bid for the property sans-subsidy; and the stuff that was built without subsidy to the south is far less lucrative for the city!

[Brian Rodgers]

"Nobody bid for the property sans-subsidy". I don't understand what you mean there. What bid are you referring to? Endeavor bought the Domain in 1999 with JER Partners and The Blackstone Group at which time IBM became a tenant. When was IBM's desperation?

As it turns out, at this point the Arbor Walk on the Pickle tract is more lucrative on a per building sf basis for the city because the city gets to keep 100% of their portion of the sales tax on purchase made there and 100% of the property tax. At the Domain Mall, the city only gets to keep 20% and the other 80% goes to Simon for 5 years and they split it 50-50 for the next 15 years. Simon keeps 25% of the property tax for 20 years.

There's a whole other story on how Endeavor hid their compensation by projecting mall sales lowed than a Home Depot. If you are interested, I will tell you about it. Quite cleverly dishonest.

[Wes Benedict]

Chris Bradford,

You sound like you support the subsidy. Using your economic theory, can you show what the subsidy amount should have been? Maybe 2.8 million or 650 million? What's your calculations show?

[AC]

Wes, go back to my first post on the topic. Opening sentences: "I don't like the Domain incentives, either. I don't like subsidies for retail."

I don't like the proposed charter amendment because it is too rigid, will have unintended consequences, and is overbroad.

[Brian Rodgers]

Please list the unintended consequences. That has been a catch phrase used by the opposition for the last 9 months yet no specifics have been listed. We asked the city attorney for a list 6 months ago...... nothing.

[Brian Rodgers]

.... and please address the "overbroad".

[AC]

unintended consequence -- I described one in my post. Perhaps SDS intends this consequence, but I think there are many amendment supporters who do not.

Another, which I'm still thinking through . . . Would the infrastructure limitations prevent the city from building parking garages downtown, near Second Street, since they will primarily benefit retail development (or, arguably, new retail development?) Debatable, perhaps. I know from 16 years experience as a lawyer though that an opponent needs only a good-faith interpretation of a statute to litigate.

Overbroad -- banning subsidies to developments that include a retail use, even if the retail use itself receives no subsidy.

(Ironically, on parking garages, I've advocated public improvement districts rather than city construction. See http://austinzoning.typepad.com/austincontrarian/2008/01/the-city-wants.html#comments.)

[M1EK]

"Endeavor bought the Domain in 1999 with JER Partners and The Blackstone Group at which time IBM became a tenant. When was IBM's desperation?"

From about 1996 to about 1999. And then Endeavor didn't have any ability to get anything done there for years after that. (The Domain was just a name for a very long time).

[Prentiss Riddle]

I'm a confused voter looking for a clear explanation of what Prop 2 would do and not finding it.

I do agree that the Domain deal was a bad one. But every time someone asks what Prop 2 would do to Mueller or to future city attempts to encourage mixed use or the survival of beloved local businesses, the SDS crowd switches the discussion back to the Domain or to bashing the Council. Even their FAQ fails to answer the question clearly: see points 5 and 6 at http://www.stopdomainsubsidies.com/?page_id=121

I signed the ballot initiative even though I had reservations. Now SDS behaves as though they've secured my vote. At this point I've decided to vote no unless I find a compelling explanation of what Prop 2 will mean going forward.

[AC]

Prentiss, you will never get a clear explanation because the law governing municipal finance and economic development agreements is so convoluted that it is hard to give any definitive answers. Things get even more convoluted when applied to existing agreements that run 100 pages or more and have complicated funding mechanisms. I frequently attend land use CLE programs, and the presentations on economic development agreements are always the most technical. (I should note that this is definitely outside of my area of expertise; the lawyers who deal with this stuff build their entire practice around municipal finance and economic development agreements.) SDS cannot give you ironclad assurances that their charter amendment won't affect Mueller because they do not know.

Let me hit two different issues. The first is that the amendment applies to pending agreements which make financial incentives contingent on future appropriations by the city. (This clause was required by a provision of the Texas constitution that was amended in 2005 to eliminate the need for such clauses.) Both the Mueller agreement and the Domain agreement contain these clauses. Perhaps SDS means the city can amend the Mueller agreement to delete the "future appropriations" clause (which it can now do thanks to the 2005 amendment to the Texas constitution). It's not clear to me that merely deleting the clause would change anything, and in any event, the city could do the same thing with the Domain agreement.

The charter amendment also contains an exception for tax increment financing districts and tax increment reinvestment zones (TIRZ). It is my understanding (and this is just secondhand) that Mueller is being funded in part by TIRZ bonds financed with property taxes. But the City is also making payments using sales taxes. At the time of the agreement, the law did not allow tax increment financing using sales taxes. Can the TIF be expanded to include these sales tax payments? I don't know. I don't think SDS knows, either.

Regardless, it seems to me that if Mueller could be fixed, so could the Domain. SDS has calculated that Council wouldn't fix the Domain.

I wish I could give you more definitive answers. I wish an expert on municipal finance would write a detailed explanation that addresses the stuff I'm fuzzy about..

[langhugh]

If this adds to the discussion, this is the legal brief from city staff on Mueller's impact from Prop 2.

http://www.keepaustinsword.com/City%20Attorney%20Memo.pdf
and
http://www.keepaustinsword.com/docs.asp

[Prentiss Riddle]

For what it's worth, I decided the burden of proof was on the proponents of Prop 2. Since they've been unable to explain clearly what the consequences of the proposition would be for future development, I've voted against it.

[Ben Brumfield]

I just got off the phone with Brian Rodgers. He seems to believe that Proposition 2 will not significantly affect the density bonuses that are part of the North Burnet/Gateway redevelopment project ( http://www.ci.austin.tx.us/zoning/downloads/ch5_nbg_implementation.pdf ), as the city can still use fee waivers and TIFs.

[Ben Brumfield]

Interestingly, AC's original post seems to have influenced the Chronicle's endorsement: http://www.austinchronicle.com/gyrobase/Issue/story?oid=oid%3A694021

[AC]

I'm an influential guy. ;)

Large-scale redevelopments can be funded through TIFs. TIFs allow the city to hand out all kinds of incentives to developers. Supporters who claim otherwise are confused. (Other than killing the Domain deal itself).

The charter amendment would bite small-scale developments that practically cannot be rolled into a TIF. Affordable housing for stand-alone mixed-use projects, for example. Or small-scale infrastructure improvements. (These are often a very important incentive and would not be allowed by the amendment exception if they benefit the developer's retail development).

SDS is pushing a charter amendment that will allow Domain-like deals in the future but that will kill, or at least limit, the small-scale stuff that Austinites broadly support.