Domain’s city tax incentives questioned

Domain’s city tax incentives questioned

Written by Rachel Youens Friday, 07 September 2007

When shoppers go to the Domain, they can expect to pay some high prices; after all, the shopping center is home to Tiffany’s, Neiman Marcus and Louis Vuitton. But the City of Austin is also paying some high prices at the Domain, and whether or not the city should be funding retail projects with multi-million dollar incentives is under contention in a lawsuit against the City.

“The city council is unleveling the playing field with these incentives,” said Johnny Barnett, owner of local promotion company Austin Unique. “We’re not afraid of competition from other businesses. We just want it to be fair.”

Barnett is one of more than 200 local business owners who have signed a petition with the organization called Stop Domain Subsidies. These businesses feel that by funding one retail project, the City is hurting all the others.

Led by Brian Rodgers, who settled a Domain-inspired lawsuit with the city in 2004, SDS wants to keep the city from awarding the Domain the millions it was promised in a development agreement in 2003, and furthermore to keep the city from rewarding any retail development with incentives in the future.

The law

These incentive packages are part of Texas Local Government Code chapter 380. This law allows cities to give economic development grants or loans, under the condition that the projects involve public use.

The city of Austin offers two types of incentive packages: firm-based and project-based. Firm-based incentives are the most common; the city currently has contracts for five deals of this variety. Firm-based incentives aim to retain and attract major employers to Austin by helping to cover their utility and permit costs in exchange for their economic stimulation. Examples of these projects include the filming of television show “Friday Night Lights” and development of the Samsung manufacturing plant.

The other type of incentive is far less common. In fact, the city has only granted one agreement for this type of incentive. These are project-based, and the Domain is the only of its kind. These projects “have the potential to shape many aspects of Austin’s economic environment and inject quality features in the Austin landscape and economy,” according to Austin’s 2005 Economic Development Policy, with special emphasis on New Urbanist, mixed-use and destination retail development.

The deal

The Austin City Council saw these qualities in the Domain when they signed a deal with developer Endeavor Real Estate in 2003 that would give up to $25 million, adjusted to the present day value at time paid, in subsidies. This $25 million would include 25 percent of the Domain’s property tax and 80 percent of the sales tax for the first five years, and 50 percent of the sales tax for the following 10 years. Conditions of this deal include creating 1,100 new jobs, helping local businesses in the development and offering open-space features.

Endeavor Principal Kirk Rudy says that without the incentives, the New Urbanist features of the Domain would not be feasible. At the time, there was no zoning appropriate for a development like the Domain. Endeavor had to navigate the process with a Planned Unit Development.

“First of all, it’s not a retail project. When it is complete, phase one will be approximately 40 percent non-retail,” Rudy said. “Endeavor has done a lot of projects in Austin, but this is the only time we’ve approached the city for a public-private partnership. The reason we did it is because mixed-use projects are more expensive for a number of reasons.”

The use of structured parking rather than surface, the combining of multiple types of uses into one building and putting utility infrastructure into the area all drove up costs for the Domain.

No payouts have been made yet to the Domain. The first one is scheduled for October 2008, but the Domain must first meet the criteria set out in its contract with the city. The Domain’s first report is due in 2008, but Rodgers and SDS are questioning the validity of some of the criteria.

The controversy

In the agreement, Simon Property Group, originally Endeavor’s partner and now full owner of the development, agreed to spend $1 million of its own money to assist local businesses in locating at the Domain. Local businesses such as Bettysport, St.Thomas and The Steeping Room are in the Domain today through this agreement.

However, Rodgers wanted to know exactly how much Simon had spent helping them. When he submitted a Freedom of Information request to the city in September 2006 seeking this information, what he received was a chart showing how much the local tenants were given in allowances and rent reduction with the numbers blacked out.

The Austin city attorney said that Simon had designated these numbers as proprietary information that must remain confidential. Rodgers has since filed a second lawsuit against the city over its denial of his information request.

At the city’s audit and finance committee meeting, former Austin City Council member Bill Spelman offered his own suggestions to the council on changes that could be made to the 380 grants that would make the process more transparent to the public and less controversial.

“The city needs to develop a policy up front for proprietary confidentiality,” Spelman said, “otherwise, anything can be called proprietary, and some of this is information that needs to be public.”

Spelman, who is also a member of the Austin group Liveable City, which aims to gather community consensus on policies affecting the social, environmental and economic needs of Austinites, pointed out that the public needs to be informed in a timely manner.

“The city council should only make decisions on awarding incentives after the information about the deal has been public for two or three weeks,” Spelman said. “When a deal happens so quickly and without public review, it makes the public suspicious that it’s not a good deal.”

Future plans

At the Audit and Finance Committee meeting Aug. 28, members said they did not intend to retract their promise to pay the subsidies promised for the Domain. Council member Betty Dunkerly offered up one disasterous example of what happens when the city is hesitant on paying or offering incentives: the loss of Dell Inc. to Round Rock.

“It’s my personal opinion, and it may seem self-serving, but it probably wouldn’t be a good thing for the city to not pay the incentives from a credibility standpoint,” Rudy said. “People need to be able to rely on the agreement.”

SDS plans to make a push during the Christmas season, putting its petition into the local stores to encourage customers to sign on. It is SDS’s goal to gather signatures through January, and to enact a law keeping the city from giving chapter 380 grant money to retail developments.

“We want people to know that we’re not against the Domain or against any of the local or non-local stores in it,” said Katy Culmo, co-owner of local boutique By George. “We’re not against Intermix or Bettysport. We’re against the city giving this money and making the situation unfair.”

The city gives grants through its Economic Development Program. There are currently six active chapter 380 grants. The Domain is the only “project-based” incentive, while the others are “firm-based.”

The Domain

• Incentives:
  • 25% of property tax for 20 years
  • 80% of sales tax for five years
  • 50% of sales tax for the following ten years
• Conditions:
  • Create 1,100 jobs
  • Development includes open space
  • Efforts are used to hire minorities and women
  • Allocate $1 million to helping local business in the Domain
  • All units follow S.M.A.R.T housing guidelines and 10% are considered lower income affordable

Samsung fabrication plant

• Incentives:
  • 100% of property tax for the first ten years
  • 75% of property tax for the following ten years
• Conditions:
  • Utilize a diverse workforce
  • Create 500 full time jobs and 200 contract jobs
  • Invest a minimum of $2.5 billion in real property, equipment and machinery

Friday Night Lights

• Incentives:
  • $40,000 for first and second year
  • All other years 50% of sum of all sales tax paid, city fees paid and $95 per employee
• Conditions:
  • At least 75% of staff, cast and crew must be Austin residents. Efforts must be made to purchase goods and services in Austin.
  • Credits for each episode must include “Filmed on location in Austin, Texas.”

Grading the Domain

Before the Domain can receive incentive money from the city, Simon and Endeavor must first meet the standards set out in the Economic Development Agreement. The first report on these standards will be due in January and the Domain will undergo an onsite inspection and review of its W2 forms, sales and property tax returns. Here’s how the Domain is doing thus far.

• Small and local business support
  • Requirement: Simon must use $1 million, known as the Domain Fund, to assist small local businesses into the project. This money can be used for advertising the business, designing interiors or moving.
  • Performance: Local businesses in the Domain include The Steeping Room, Betty Sport and St.Thomas. According to the city’s audit and finance committee report, Simon has spent $1.4 million to date helping these businesses and is approaching $2 million. It is difficult to say an exact amount as the city and Simon will not release exact numbers on how much the stores received in rent discounts and allowance, claiming it is proprietary information.
• S.M.A.R.T Housing
  • Requirement: There must be 300 units within the first six years of construction. All of the living units in the Domain must meet city S.M.A.R.T housing guidelines of being safe, mixed income, accessible, reasonably priced and transit-oriented. Ten percent of the units must meet affordability standards: 65 percent of the median wage.
  • Performance: Thus far, 390 units have been constructed. As of January, to be eligible for affordable housing, one must make between $27,000 and $32,000 yearly. One bedroom, 675 sq. ft. affordable apartments start at $899 a month. The Domain is currently working with Neighborhood Housing and Community Development to verify incomes.
• Construction
  • Requirement: Construction on the commercial portion must begin by June 13, 2007. Construction on the residential portion must begin by June 13, 2009.
  • Performance: Construction on both portions was initiated in 2005 and both are completed. Construction on phase II of the Domain, not part of this incentives package, is currently in development.
• Open Space
  • Requirement: The project must include wide sidewalks, significant open public space and pedestrian features such as fountains. The project must also use a combination of surface and structured parking.
  • Performance: The audit and finance committee has reviewed and verified phase I of the open space amenities. These include public art, a fire pit, fountains, an outdoor stage and a small playscape. There are also parking garage spaces for tenants and shoppers.
• Minorities and Women
  • Requirement: Simon must make a good faith effort to support minority- and women-owned businesses with their tenants and the contractors used by tenants. Simon must also maintain a consultant specializing in outreach to these groups.
  • Performance: This review is in progress with the Department of Small and Minority Business Resources.
• Job Creation
  • Requirement: At least 1,100 permanent jobs must be created by the project.
  • Performance: This criteria is still being reviewed and the first report is due in January 2008.

Source: City Audit and Finance Committee

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