The Thing That Ate Downtown
Like other public officials, Dallas City Council member Veletta Lill got the pitch in the Victory Marketing Center, a former machine shop made over to sell the prime, quite empty real estate around American Airlines Center. The show was impressive. Flickering down the granite-topped table were slides of new hotels and chic stores on Chicago's Michigan Avenue, a massive 53-story corporate headquarters and theater on New York's Central Park, fountains dancing in a bougainvillea-filled plaza in West Palm Beach, Florida, whole new city centers in the high-tech hubs of San Jose, California, and Reston, Virginia.
These are our projects, Lill was told by a team from The Palladium Co., the New York developer that has an option to develop 20 acres of Tom Hicks' and Ross Perot Jr.'s arena-side land. We can work our magic for Dallas, too, on this very ground.
We just need a little favor. A $44.5 million tax favor, and we've drawn up a plan. Say yes, and $600 million worth of stores, hip hotels, restaurants, apartments and offices will rise up around a big grassy square.
A detailed handout and achingly complex flowchart suggested how to do it. Boiled down, it proposed tossing central downtown, which has been on a slow comeback courtesy of tax incentives, together with the West End and the 70 acres of Hicks-Perot's land called Victory. "The idea was to form one giant TIF," says Ken Wong, a Palladium executive, using the acronym for a tax-increment-financing district, which is how Dallas distributes help to developers. Out of the pot would flow the money Palladium says it needs to build its streets, square and parking garage. Without this break on future taxes, spread over as many as 20 years, there is not enough return to attract investors, Wong says. "It doesn't pencil." Without the public kicking in, he says, it will not be done.
Since 1996, Dallas, like many American cities, has been generous with incentives for those willing to rebuild its depressed downtown, both in the Hicks-Perot Victory development and the city center. (Developers who work nationwide complain Dallas is, in fact, conservative compared with cities such as Chicago and Denver, which pour it on even more.)
Even former Councilwoman Donna Blumer and mayoral candidate Laura Miller--whose political reputations have been built on opposition to public money going to big developers--have voted for millions of dollars of tax incentives for improvements such as restoring building façades and removing asbestos from privately owned buildings downtown.
Since the downtown incentives began four years ago, most of a $43 million budget has been directed to developers to redo lofts and hotels or renovate buildings into stores and parking. In the city's core, loft renovations began bubbling after that money was added to other government help, such as low-interest federal housing loans and credits for restoring historic buildings. Some of downtown's most ambitious projects, keyed to a retail district along Main Street, have been approved but have not begun.
For its new request, which it floated in private meetings with city officials this fall, Palladium knew it had a tough sell given the city's history with Perot and Hicks. Even a few people on the Palladium team admit as much in private.
Four years ago, the two multimillionaires threatened to move their hockey and basketball teams to the suburbs if voters did not kick in $125 million raised by new hotel and car-rental taxes to help finance the arena, an arrangement former Mayor Ron Kirk sold as a painless touch on out-of-towners. Perot promised before the close, divisive vote that the arena would attract $550 million of development before he was done. Next, while they were building their $420 million American Airlines Center, Perot and Hicks convinced city and school officials to kick in $46 million more--in effect a credit against future property taxes--so they could build roads and bring utilities to the abandoned, polluted industrial site.
A third bite at the apple was not likely to charm.
To make a few friends, Hicks-Perot-Palladium proposed to join forces with the old central downtown, which next year will reach its own incentives limit and is likely to ask Dallas City Council for more. Hence, says Palladium attorney Mike Baggett, they designed their everybody-in-the-pool idea of a single tax-fueled development sector stretching from downtown, through the West End and north into the Victory land.
If ever there was a misfire in coalition building among Dallas' biggest players, this was it.
Rather than rallying round, representatives of city-center businesses and real estate went to work lobbying council members, leaking to the press and imploring civic leaders to resist the plan. It's a money-grab, says one, explaining on background that the structure, if tweaked a certain way, could shift public money toward Victory, especially if a couple of downtown's more ambitious projects should fizzle. "It's become personal," says Dallas County Judge Lee Jackson.
Rumors flew about the tough tactics used by Palladium and its corporate parent, high-rise developer The Related Cos., in the cold-blooded New York real estate world. One, involving Palladium's activities in West Palm Beach, turned out to be intriguingly on the mark.
A few city-core representatives went out of their way to say downtown and Victory were not competitors. But some were frank enough to say what the fight was really all about. Behind the details and polite posturing, this was a struggle over the future of Dallas' most expensive real estate, a fight among real estate barons over the future of downtown.
"I don't know why we'd want to incentivize something on the edge, outside the loop, when we're trying to fix downtown," says Susan Mead, a Jenkens & Gilchrist real estate lawyer who has worked for more than 20 years on behalf of the city's biggest real estate players and now is working for a city-center group.
"I'm confident that over time Victory will be a great development and all areas will succeed," says Kirby White, with Crescent Real Estate Equities, one of downtown's biggest property owners with landmark skyscrapers such as Fountain Place, the Bank One building and Trammell Crow Center. "But there could be a timing issue--how quickly that it accelerates and how quickly our [the core's] revitalization takes place."
Says Lill, who told Palladium after its sales pitch that she would not support its plan, "In the short term, they would be competitive if both were to be created simultaneously. In my view, right now downtown is still struggling. Inside the loop is where I want to concentrate my efforts." In her talks around the city, she found little support from downtown owners for the Hicks-Perot-Palladium idea, "and these were folks who are reasonably large, Trammell Crow Company, others like that."
In short, if downtown doesn't beat Victory out of the gate with its own stores, restaurants and convenient parking and somehow turn the Main Street hub into something more than a place to buy a lunchtime sandwich or a dollar-store wig, the core's creeping revival might grind to a halt. No more talk of creating a "lively 24-7 environment" in the city center. No more upbeat proclamations about fixing the car-centric downtown, where only Neiman Marcus' flagship survives among the empty, burglar-barred storefronts and the façades of long-gone banks.
In a business in which timing is everything and public officials play a huge role because they control the all-important tax incentives, City Hall is once again the center of a real estate brawl.
To listen to Palladium's Wong describe how a Palladium project works is to get an idea how sophisticated developers have become in designing things that make people want to come in and spend--on a meal, an apartment, a silk dress.
"The Palladium approach, rather than a piecemeal approach, has a big impact. We don't put a building out there and hope it works, that people will want to have a place to live next to an office building, then place a shop next to that," says Wong, a calm, confident sort who splits his time between the Dallas project and remaking San Jose. "We create the whole district at once. We make sure there's a there there.
"In the middle of it is a public space, a gathering place that draws an audience beyond the local trade. They come because there's a destination, an emotional attachment, a reason to come into the city.
"We also have the ability to do an integrated, mixed-use project all at once, so the investor community is confident in a Palladium approach."
Tenants are lined up in advance and promised in their leases that they will have neighbors up and running just like them. At present, while still in the planning stage, the company has lined up a boutique W Hotel, a House of Blues nightclub and retailers such as J. Crew and Abercrombie & Fitch.
The result--much like at Mockingbird Station and the anchor Angelika Film Center--is a sort of spontaneous combustion on opening day of foot traffic and cars. It is an instant cityscape, except one private manager runs it all.
Palladium, in a sense, creates an open-air, street-side Galleria, plus apartments. In Dallas, which has no waterfront, no popular squares, some indistinct parks and malls that always seem busy, it is a good bet Palladium's Victory will become a popular place to go.
In West Palm Beach last year, Palladium opened the first phase of a 55-acre mixed-use development called CityPlace in the heart of a decaying downtown. The project, which looks like a quaint quarter in a bustling Mediterranean town, is as close a project as the company has to what is planned here.
"Everything in CityPlace is private except for the streets," says John Zakian, West Palm Beach's economic development director. "When it comes to designing a customer-friendly environment, the private sector does it best. It's an innovative use of mall management plopped down in the heart of downtown."
Palladium is in charge of everything, from the mix of stores and restaurants to the free concerts in the plaza to the location of the movie house. A Florida chain called Movico put in a 20-screen theater with a four-story atrium in the style of the Paris Opera House, complete with reserved seating and premium food.
Zakian is particularly impressed with Palladium's approach to parking. In CityPlace, people can pull their cars up to valet stands and pay a premium or park for free in a lot. On the streets, there are short-term meters, but revenue collection is only a small reason why they are there. "On the street parking they want turnover, a kind of energy and activity," Zakian says. "People getting in and out. It creates the impression that this is a very busy street."
In Dallas, city-core advocates say their plans for bringing new retailers and restaurants will not compete with Victory because their focus is more on serving downtown workers, tenants and out-of-towners who might walk from the Dallas Convention Center toward Main.
But from their consultant studies and city staff briefing papers used to support the use of tax incentives, it sounds as if downtown is trying to create in the core precisely what Palladium builds from scratch on raw dirt.
A group of retail experts brought in by the Central Dallas Association last year concluded that downtown needed a "critical mass" of on-street retail space, a better "retail mix" and a host of things that have to do with parking, from making it easier to park on the street to building public parking garages.
In passing its Main Street retail initiative last spring, the City Council endorsed the idea of restoring the core 10 blocks to a "24-hour urban destination neighborhood."
One can imagine how difficult it will be with a fresh competitor, a 21st-century mall less than a mile away. There is evidence, in fact, that competition already has begun.
Cheryl Pickens, a senior project director for the recently renovated Republic Center, says she has talked to an upscale restaurant and several other prospective tenants who have told her Victory is marketing to them, as well. From the looks of it, the Republic Center could use all the new tenants it can get. The steel-skinned complex, owned by financial giant Credit Suisse First Boston, has undergone $75 million worth of renovation for offices, and the owners expect to spend $25 millionmore converting a now-empty tower to housing. At the street level, though, where retail is supposed to go, it remains see-through.
Since the Boeing Co. chose Chicago over Dallas last May for its relocation from Seattle, the Central Dallas Association has been pounding the table in op-ed pieces and interviews that the city needs to take a much-expanded role if it truly wants downtown fixed.
"Our downtown has been touted by a lot of people as being one of the country's worst downtowns, period. We're a poster child of a bad downtown," Mead says. "There were some bad decisions in the past, bad planning, some bad professional advice. The product of that was the tunnels and skyways that took people off the street." She says the consultants she has spoken to say a turnaround will take at least three to five years. "It's not going to be fixed with one magic bullet."
If Dallas wants results, she believes, it will take a whole bandolier of ammo, paid for in many cases from city coffers: use of sales taxes, a public parking authority, bond money, a development corporation with the power of eminent domain. The latter would buy property from owners, or from quarreling multiple owners who refuse to get with the program.
Mead has taken a leadership role in a newly formed nonprofit group, Downtown Partnership Inc., funded by downtown's property barons and charged with drawing up a coordinated plan for bringing stores and restaurants to the district between Elm and Commerce streets. The city kicked in $150,000 from its downtown TIF. This fall, the organization brought in Washington, D.C.-based Madison Retail Group, best known for its revitalization of that city's chic Georgetown neighborhood, to work as the central planner--sort of like Palladium, but with a more complex job.
One of the "catalyst" projects to get it all going involves the Spire Realty Group of Houston's plan to renovate the Mercantile complex, a full city block of office buildings between Main and Commerce streets. Topped by the Mercantile Building--a 60-year-old limestone hulk with a distinctive, austere clock tower, a feature the developer says will be made to work again--the block is the largest collection of empty space in Dallas, about 1 million square feet. Nineteen years vacant, it is the deadest block in the zone.
Spire's plans for the $100 million-plus project include a mix of apartments and stores, perhaps a much-needed grocery for downtown apartment-dwellers, a bookstore and a parking garage. When it gets down to the big dollars--for this project and Palladium's--the mundane matter of parking is almost always at issue. Garages are expensive to build, usually lose money and can be justified under state law as public improvements worthy of tax dollars if they let anyone come in and park.
To pay for the garage, asbestos removal and other work, the Dallas City Council approved $28 million in tax incentives last February. Nine months later, though, no signs of construction have appeared. "It's moving along, just not as fast as people would like," says Spire President Tom Trzanowski, describing a project that sounds as if it is still in the early stages of design. He says leasing and retail studies are in the works.
Another major addition was supposed to be the 20-story Davis Building on Main Street, an apartment/hotel renovation to be done by Colorado-based Hamilton Properties. In April 1999, the council voted to kick in $1.3 million in incentives for street-side improvements and restoration of the building's façade, but that will have to wait. In June, a bank foreclosed on the building, making it the most obvious part of the Main Street initiative to fall victim to this year's economic slump.
One of the other developments in the mix, the renovation of a north-south block between Main and Elm, is under way. "Mine was funded a year ago," says owner Thomas Taylor, who expects to draw restaurants and stores to the pedestrian-only stretch of historic, two-story buildings dubbed Stone Street Gardens. So far, Taylor says he has one new restaurant signed and a few more interested. "For the four or five weeks after September 11 there wasn't much activity," he says, but he hopes to see more interest once construction is further along. The city is providing $876,000 in incentives to attract Taylor's $2.6 million private investment--meaning a public investment of roughly 30 percent.
Although the relative scales are different, West Palm Beach holds a few lessons about the steep hill traditional downtowns face in competing with a single, well-capitalized developer.
Palladium's CityPlace, which was built with more than $80 million in city help, roughly doubled the size of West Palm Beach's downtown. In the remaining part, centered on a 100-year-old stretch of Clematis Street, smaller local developers had been working since the early 1990s, with about $2.5 million in tax help, on renovating what was there.
One of the most vigorous was Andrew Aiken. "We began back in 1993 trying to bring this place back to life," he says. Buying small, two-story and three-story buildings along a five-block stretch, Aiken and a partner put in clubs and a few stores, and thanks to a Thursday-night pub-crawl, they drew people in the door. "We made live/work lofts and tried to make it a cool, happening neighborhood," he says. "We got the first Starbucks in Florida and then some other big retailers. We got a Gap, a Tommy Bahama, a Banana Republic.
"Then our mayor decides she wants to redevelop this huge 70-acre site, and they bring in CityPlace. They passed municipal bonds. All along they're telling us, 'Don't worry. Our market is gonna expand yours, too.'
"Don't get me wrong. Palladium does a great job. They worked very positively with the city, and they achieved something pretty close to Disney World. They poured a ton of dough into it. But lo and behold, the market didn't grow 100 to 200 percent. It grew by 1 or 2 percent, and we're all competing wildly for customers. A lot of cool businesses on Clematis, they're shuttered."
Because CityPlace brought in its own Gap and Banana Republic, Aiken says the outlets on his street are likely to close when their leases are up. "We're over-retailed. The way it works here is all their tax increment goes to them, and jobs are being lost downtown."
One of the biggest problems on Clematis Street, Aiken says, is that it never developed its own big draw to compete with Palladium's movie house and theater, a made-over Spanish-style church at the center of the restaurants and stores.
Some people suspect Palladium, through its meddling in a key building on their side of town, helped it turn out that way.
While CityPlace was still in the planning stage in 1997, Aiken says he learned a former Burdines department store had gone up for sale. The vacant and deteriorating three-story building takes up a whole block of Clematis.
Aiken says he and other local developers were interested in the building. "We had a lot of interest for a movie theater to go in there."
When he went to make a bid, though, the owners' agent told him a New York high-rise developer had come into town and within a week or two put a sales contract on the building.
The developer, David Edelstein, told the Fort Lauderdale Sun-Sentinel in a July 12, 1997, story that he planned to tear down the entire block to make room for a movie theater, a 250-room hotel, 100,000 square feet of office space, a multilevel parking garage and "other entertainment venues." It sounded so grand, a city planner wondered aloud how that much building could be stuffed onto a single block. The story's headline: "Downtown Restoration At Hand."
It turned out that the company Edelstein contracted to do the development was none other than The Related Cos., Palladium's parent. A spokesman for the company confirmed that Related had signed such a deal, and stories in New York newspapers show that Edelstein and Related had real estate dealings in the past.
The timing was more than useful to Palladium, which was lining up tenants for CityPlace--including a multiscreen movie theater--and months behind a city-set schedule.
"It's hard to prove intent, but when you're on both sides of a competitive situation, you control the game," says Woodrow Melvin, a Miami attorney who is representing one of the building's former owners in a lawsuit against Related. He says there were plans drawn up for the Clematis building, wining and dining, and nothing but delays.
"It all seemed a little funny at the time. It was just hardball real estate," agrees Jeff Koons, a former West Palm Beach city commissioner, who nevertheless says Palladium did "an excellent job" on CityPlace.
In April 1998, Related's chairman, Stephen Ross, made known his interest in the Burdines building and talked up some plans to the local press. Two weeks earlier, though, Edelstein had put the shell company he set up to buy the property into bankruptcy, setting up more delays. His filing in the U.S. Bankruptcy Court in Manhattan claimed he had a dispute with one of the building's owners, who tried to cut himself in on the deal. The filing was later thrown out.
In December 1998, with its potential nearby competitor hopelessly stalled, CityPlace broke ground.
Six months later, the owners of Burdines finally sold it for $10 million to a Miami company, Melvin says. The new owner thought the next big thing in real estate would be "telecom hotels" for Internet service providers and dot-com start-ups.
Of course, you can guess where the story moves from there. They finished their renovations last summer, just in time for the dot-com bust. Today, the ill-fated building is back on the sales block.
In Dallas, the political planets are far less favorable for Palladium at the moment than they were in Florida. There, the mayor considered herself a full partner with Palladium and reportedly toured Italy with Ross to scope out designs.
Here, in the midst of a special election for mayor, the two front-runners both say Dallas has done enough for Victory, and it's up to Hicks and Perot to make the project go.
"They should keep their end of the bargain. I want to see some dirt fly," says insurance executive Tom Dunning, referring to the Perot promise of $550 million in private development. It was a tough statement coming from a man who had Tom Hicks on the podium when he announced for mayor.
Hicks has been promising he will build a new office tower, originally announced to be completed this year. That project has been scaled back, delayed and moved around the site. Industry sources say it is not likely someone would put up a high-rise office tower downtown in the midst of the current economic slump.
Laura Miller, the mayoral candidate and former Dallas Observer columnist, did not return a phone call for this story. It is likely, given her years of mocking and reviling the Victory developers, she opposes giving them one more dime.
Against that backdrop, and the opposition blowing in from the city center, Victory withdrew its "giant TIF" idea earlier this month. But it has not gone into full retreat. Wong says his group is designing another proposal to gather the $44.3 million in incentives, only this time in a way that affects only Victory rather than all of downtown. The details aren't likely to be out until early next year.
Overall, the pitch will remain the same: Things have changed since Perot's promise, and if you look at the total economic and tax benefit, it is a fair deal: 10,000 construction jobs; 5,000 permanent jobs; $25 million a year in new sales taxes; $6 million a year in hotel taxes; $11 million in real estate taxes. They promise the city's cut will be $10.5 million a year.
"That's where you get your pothole money," says Mike Baggett, the Winstead Sechrest & Minick lawyer who is working for the company. "It generates all sorts of taxes that go into general revenues that you have to pay your firemen and police."
And while others may have proposals, the pitch suggests, we have $200 million in equity lined up and are confident we can borrow the rest. "The developer takes all the risk," Wong says.
While Victory's proposal is stalled, at least for the moment at City Hall, Dallas County Judge Lee Jackson says he is willing to listen to the plan. "If this were a fancy retail center that said, 'We're looking at three cities, and Dallas is one,' I think we would be very interested in seeing what we could do. But there's a history at the city of some kind of commitment. I'm not sure what that is, or whether it can change."
The county kicked in $3 million for roadwork at Victory and would be asked to contribute more under the Palladium request.
Lisa LeMaster, a public relations consultant working for Palladium, says County Commissioner John Wiley Price is of the same mind as Jackson. Price declined to return calls from the Observer.
"I think we have some support in the minority community," says LeMaster. "We ended up with 35 percent minority-and-women participation on the arena. We're ready to go with more jobs."
Palladium has hired political consultant Carol Reed, bond lawyer Ray Hutchison (husband of U.S. Senator Kay Bailey Hutchison) and consultant Kathy Nealy to push its plan. Nealy--who has a private box at the American Airlines Center, on the premium level just a few down from Hicks'--helped deliver the crucial black vote for the arena four years ago.
There is also support for Victory from some major property owners in the West End, which would be linked more closely with the arena development than would Main Street and the core of downtown.
"It's a short-sighted, bunker mentality to be afraid of it," says Bill Nabors, president of ECOM Real Estate, which owns eight buildings in the historic district. He says Victory cannot compete with him on the price of office space, and if they lure away a restaurant or two, newcomers will take their place.
As for others, "We've got to soften them up to listen," LeMaster says.
Former Councilwoman Donna Blumer, a long-standing arena critic, says she knows what that means. "Whenever Hicks and Perot go to City Hall, they get heard. It can come to a standstill until they get their piece."
Despite the mayoral race's accent on fixing neighborhood streets, parks and pools, Dallas is likely to be faced for years to come with major decisions on "public-private partnerships" and "innovative financing arrangements" on projects downtown. Typically, they are designed not to tap the public treasury directly, but they tend to diminish future receipts. (In a TIF district, new taxes collected as a result of rising property values are directed toward developers rather than going into the general fund. Defenders of the system say it's self-funding, because without the new projects, property values don't rise.)
"I'm not against business incentives, but we have to be very careful how they're used," says Councilman Alan Walne, chairman of the business and commerce committee. He is skeptical of both Victory's ideas and what has been done in the core. Walne says the city-center TIF was pitched five years ago as a way to finance parking garages. "So far, we haven't built a space."
Instead, there have been projects like the one the city approved in 1998 to buy the 95-year-old Wilson Building from apartment developer Post Properties, lease it back and exempt the handsome warren of stores and apartments from nearly all property taxes for 13 years. Eighteen months later, Post informed investors in a release that its $15 million investment in the building would yield a solid but not staggering 11 percent annual return. And that assumed it stays leased.
Is that a bad deal for the city? Is it better the building sits empty and derelict? Dallas City Councilman Ed Oakley says those are always the multimillion-dollar questions posed by the high cost of building downtown. "It's popular right now to say you're against incentives and breaks for developers," he says. "The reality is, if you don't give them, nothing gets done."
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