by Jenna Colley

Tax incentives come late in development game

A revamped city ordinance granting loftier tax abatements to historic property owners has sparked debate at City Hall that is echoing throughout Houston's downtown development community.

The ordinance, passed earlier this spring, grants certified historic property owners 100 percent tax abatements over 15 years on the increase in value of their property. The owners still pay taxes on their original investment in the property.

In the past few weeks, four historic property owners tested the council's boundaries on the ordinance and were met with mixed results. Under the new ordinance, property owners have to win city council approval to be eligible for the tax relief.

Two of the ordinance's first abatement requests called for tax abatements in private residences, while two others involved property owners that intend to redevelop the downtown historic sites for commercial use.

Frank Garvey, owner of the Franklin Lofts at 201 Main Street, was one of the would-be commercial developers to approach city council about the new abatement incentive last month. On May 30, Garvey received a 15 year, 100 percent abatement on a 62-unit downtown loft project currently under construction.

City councilmember Bruce Tatro, who voted against the abatement, takes issue with the city aggressively giving away a portion of its income stream to spur economic growth in an area of the city that is already experiencing record growth. Most of the city's historic properties are located in the Central Business District, which is in the midst of a development renaissance.

"It's one thing for people to take advantage of this, but it's another for the city to aggressively sell it," Tatro says. "A 15-year abatement with 100 percent abated - that's aggressive."

Still, Garvey says the added economic incentive proved crucial in his decision to move forward with his project.

"It means a great deal," he says. "It enhances the value of the place and makes it more attractive to people living downtown. The abatement offsets the high cost of renovation."

Garvey, who purchased the former Lomas & Nettleton Building through a Harris County auction for $4.1 million in 1999, says he plans to invest $11.5 in the residential project.

The lofts will go on sale in January 2002. Ranging in size from 900 square feet to 2,600 square feet, sales prices for the lofts will start at $220,000. Whoever decides to purchase the lofts will receive the tax abatement when they take over the property.

That gives Garvey a competitive advantage over earlier downtown residential developers that weren't able to offer such savings to their buyers.

The city will receive an estimated $647,596 in taxes on the land for the same properties. In the 15 years after the exemption expires, these properties are expected to generate approximately $9.9 million in city taxes, according to city calculations.

At-large councilmember Annise Parker chairs the Neighborhood Protection and Quality of Life Committee that introduced the ordinance to council.

"There was support for encouraging historical preservation for individual property owners, but less support for historical preservation for commercial property," Parker says. "Anytime you pass an ordinance, there are permuta-tions that couldn't be anticipated."

Parker says the city must adhere to the ordinance it passed just months ago despite the new arguments against commercial abatements.

"These people followed the rules, and we can't go back and stop the process in midstream," she says. "We can go back and tweak the ordinance. The debate is healthy, we need to know the possible outcomes so we don't have to stop the process."

Meanwhile, downtown developer Bill Franks is a little more amenable to the new tax abatement rule, despite its late arrival.

As general manager for Spire Realty which owns about a dozen downtown historic properties, Franks knows firsthand the challenges of redeveloping such properties, particularly through his involvement in the redevelopment of the former Southern Pacific Building into the Bayou Lofts.

"There is a 'why give away things' attitude that so many Houstonians take," Franks says. "But if you put an economic analysis to it – that is property that is sitting idle with very little taxes on it."

Franks, who serves as chairman of the non-profit Downtown Historic District, says the abatements could spur additional development that might not otherwise happen.

"A lot of people perceive the city as throwing tax dollars away," Franks says. "But if we don't redevelop buildings they'll just continue to be vacant." •