Thursday, April 05, 2007

“They’re supposed to be in the business of moving people, and instead they want to be real estate developers.”

Metro buys Midtown tract, and developer buys time

April 5, 2007

By Rad Sallee
Houston Chronicle
Copyright 2007

Metro is buying two blocks along its light-rail line in Midtown from a developer the agency expects will buy the property back and build transit-friendly residential and business space.

In a transaction unprecedented in the agency's history, the Metropolitan Transit Authority board voted March 22 to spend $7.2 million for the blocks bounded by Main, Holman, Travis and Winbern, next to the Ensemble station of Metro's light rail Red line.

The idea is to sell the tract back to developer Robert H. Schultz of RHS Interests for at least the same price after Schultz's partnership is ready to build. Schultz approached Metro with the proposal, he and Metro said.

Agency spokeswoman Raequel Roberts said Metro knows of no other instances in which a transit agency has bought land to hold and sell to a private company for what is known as transit-oriented development.

The board did not discuss the purchase publicly when it voted for the transaction, but Schultz and Todd Mason, Metro's vice president of real estate services, since have outlined the plan for the Houston Chronicle.

Schultz said Metro may join in developing a parking garage on the site that could be used by rail riders but that the agency chose not to invest in other parts of the project.

"They didn't want to extend that kind of money. They wanted to be much more conservative until they could see this thing was going to happen," he said.

Mason agreed, saying, "Metro does not want to be a developer and take on a lot of risk, but we want to be an enabler of projects like this one."

He projected that the development could increase Metro ridership by 1,000 passengers a day at virtually no cost. "By comparison, a typical Park & Ride lot adds 1,500 riders but costs $20 million to $25 million," he said.

Not everyone's on board

But City Councilman Michael Berry, who chairs a council committee on transportation and is in the real estate business, disagrees with the whole approach.

"Metro has completely lost focus," Berry said. "They're supposed to be in the business of moving people, and instead they want to be real estate developers."

Schultz, who also owns the Continental Club in the 3700 block of Main, said he expects the project to cost in the "low hundreds of millions" of dollars. "It depends on how much garage and residential and office and retail we can get," he said.

Under discussion are up to 50,000 square feet of retail, 400 residential units (probably apartments) above the retail, and possibly hotel and office space, Mason and Schultz said.

By purchasing the land to hold until the time is ripe to build, Schultz said, "Metro is giving us a little bit of breathing room." He said that the project as planned would require some exceptions to building codes and that it will take several months to obtain the variances.

Both parties want to attract renters and customers seeking an urban environment in which they can get around on foot and by transit. For that, developers generally prefer parking garages rather than surface lots and buildings closer to the street than the 25-foot minimum now required.

"The code works well in the suburbs but not necessarily in a dense urban environment," Mason said.

Schultz said the planned garage would be above ground but surrounded by other buildings or otherwise "masked" architecturally. Because the project's eventual scope is not clear, authoritative maps or drawings are not available, Schultz said.

Desirable property

Although there is no buy-back guarantee, Schultz and Mason said that, if plans fall through, Metro likely will be able to sell the land for a profit. Mason described it as "a very nice two-block assemblage in the middle of Midtown that is very marketable."

Mason also said that, in recent years, parts of the neighborhood have been plagued by drug dealing and vagrancy. "Metro and the city and everybody want to see it cleaned up," he said.

Metro officials say that the agency does not use its eminent domain authority for development purposes and that no condemnations are included in this transaction.

Schultz said RHS Interests assembled properties in the two blocks from multiple owners. The Metro sale will be closed over the next four weeks, Schultz said, and then the clock will start running.

For the next 12 months, he said, RHS Interests will be able to buy back the property at the price Metro paid. For six months after that, RHS can maintain buy-back rights for the original cost plus interest. After 18 months, Metro may sell the property or use it as it wishes.

Lost tax revenue

Holding the land could cost taxpayers some lost interest on Metro money tied up in the deal. And since Metro doesn't pay property taxes, the city, county and other taxing entities will lose out on revenue while the land is off the tax rolls.

The property's most recent annual tax bill was less than $200,000, including city, county and school taxes, county tax office records show.

Metro says the development would generate far more than that in property taxes and that the increased transit use would benefit the public.

Roberts said the agreement was reviewed by Metro counsel "and is fully compliant with the law."

Mason said the cost could be prohibitive for a private company to just hold the property itself until ready to develop it.

If Metro did not step in, Mason said, the blocks could be developed in ways that do not provide the urban flavor and residential density the agency thinks will increase ridership.

© 2007 Houston Chronicle:

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