Houston will give a developer $19 million in incentives to replace some old apartment complexes on Westheimer just across the loop from the Galleria with a mixed-use complex of apartments, stores and movie theaters:
The city's chief economic development officer, Andy Icken, said the proposed deal is the difference between a job-creating redevelopment project or the existing 1960s-era apartments for years to come.
Icken said developers planning to build on 15 acres at Westheimer and Westcreek have told him that they calculate the $275 million project will make a 3 percent profit, but their investors require 5 percent. Icken said the city rebate of as much as $19.4 million in sales tax receipts would close that gap.
Icken says the city's economic development deals (and there have been several) must pass the "but for" test -- i.e., "they would not get built but for the city incentive to the developer."
The article caught my attention because I lived in one of those 1960s-era apartments right out of law school. The apartments were well maintained and moderately priced, even in 1992, particularly considering their prime location.
But, still, there's so much wrong with this deal, and with the city's attitude, that I wonder who's minding the store in Houston.
First, the "but for" test used by the city could be rephrased as, "We only give money to development projects that are financially irrational." The fact is that there are, today, income-generating properties on the site. To make financial sense, any new development must generate enough income to (i) cover the cost of demolishing the existing buildings, (ii) pay for the construction of the new buildings and (iii) replace the existing income stream. The developer claims the proposed development won't do this. This means the property is worth more in its existing configuration.
One could view the city's tax rebate as a subsidy to the developer. But if you believe the developer's numbers, that's not a helpful way to think about it. The developer won't go to the trouble unless it gets the rate of return it wants and presumably has several different potential projects to choose from that would generate that rate of return. In other words, the developer isn't $19 million better off with the rebate (again, if you believe its numbers). It's better off only to the extent this project beats its second-best prospect. That's likely a much smaller number.
So who's "really" getting the money? No one. It's pure economic waste.
Or is unless there are spillover/agglomeration benefits that offset the loss. But I don't see any.
Sometimes proponents of property development deals like this will justify them as necessary to "jump start" development in an underdeveloped area. But that doesn't apply to the Galleria area. In fact, the apartment market in the swath of Houston from Montrose to the Galleria is one of the hottest in the country: there are 4,300 units under construction in this area now, and thousands more announced. There are no barriers, either market or regulatory, to new apartment construction in this part of town. The only likely real consequence of this development will be to crowd out a financially rational development that would pay its entire tax bill.
I'm particularly flummoxed by Icken's insinuation that the city is better off without "1960s era apartments for years to come." Old apartment buildings are the main source of moderately priced housing. That's how housing markets work. I don't know what the rents are there today, but I'm sure they're no more expensive today, relatively, than they were in 1992. I'd be the last person to defend rigging the zoning or development rules to protect old apartment buildings, but at the same time I'm stunned that the city believes it needs to actively incentivize their removal.
The city claims its getting some infrastructure improvements, but this appears to be mainly the restoration of a 200-foot stretch of Bettis Drive. The city could secure this right of way for a lot less than $19 million.
This seems to be standard operating practice for Houston now, though. It has recently approved subsidies for a Kroger, Walmart and downtown housing. This is really bad economic development policy. Houston will pay for it in the long run with lower tax revenue, fewer real estate development projects that make financial sense, and an increasingly long queue of developers clamoring for similar tax breaks.