Re: Koehler St. Development

To my knowledge the City has not yet entered into a 380 agreement. I believe they are a somewhat new tool, or at least one not previously employed by the City of Houston. However, my knowledge of 380 agreements is quite limited.

I found a summary of 380 agreements here (PDF), which you may like to read.

The gist of it is, it allows the city to enter a standard business negotiation (ie whatever they will both agree to goes [so long as it's otherwise legal]) with a developer for the purpose of enabling a project that has a significant public good but could not otherwise be completed due to a financial or regulatory constraint.

It’s pretty open-ended.

If you do some digging and find anything interesting I’d love to share your findings on this site. Please let me know!

Michael: Good question.

The issue with the local “big name” mixed-use developments that you’re talking about is two-fold:

First, they were all designed heavily around high-end retail, and that market is just gone. Second the ones that are not yet built but still on life support are struggling with repositioning AND the new financial market which is, frankly, frozen.

The issue is *not* residential demand, however. Residential demand for a mixed-use product is very high among millennials and retiring boomers across the US, and Houston is one of the most under developed markets in this category.

There are two major problems that have prevented more of this from happening in Houston.

The first is that there is a much greater level of skill required on the part of the developer to make a mixed-use deal work than to make a single-use deal work. It’s harder to make money when you start with expensive land, and land is only cheap where the market demand is much lower and mixed-use would be overkill anyway.

So in Houston (and everywhere) the bulk of the investment / development community just does what’s easy – they buy land on the fringes at prices so low that you almost can’t help make a profit in development.

So you need high skill developers, and there are only so many high-skill local developers in any particular market. Houston is not unique in that way, but where Houston is unique is that we have no adjacency predictability. If someone comes in from outside and looks at our market they see several things:

1. They have almost exactly the same obstacles to doing real mixed-use as any other city (setbacks, excessive parking regs, over-engineered street reqs, etc).
2. If they are from outside it would very likely take them *longer* to entitle a project in Houston than elsewhere because our planning process is quite different and much less predictable than other cities.
3. The lot next-door can be bought and built as a gas station in like 20 days.

The developers who want to do quality development know that their investment return is only going to outperform the low-cost product over the long haul, so it’s really important to them to have an idea about what direction the properties around them are going to head. If the people next-door develop similarly high-quality stuff, they’ll win. If the people around them don’t, it will depress the value creation that the high-quality investment would ordinarily yield.

Because the city doesn’t do anything to promote urban districts where some minimum design standards are present, the developers have to find other barriers to entry in order to feel confident in their investment. This means they go to the Woodlands or Sugarland instead of Houston – OR – they build in areas where the land price is SO high that a low quality product simply won’t make paper (ie return any money).

In Houston there are very few places with land values that high, but Uptown fits the bill. Uptown also has an active and influential management district. So in Uptown you can feel pretty safe about your project not having crappy neighbors built that drain value away from it.

The problem is the very thing that attracts them, though. The extraordinary property values in Uptown mean your project has to be an absolutely flawless home-run or you’re screwed. Thus, you’ve gotta have stellar retail, and a *lot* of it, and you need to charge high-premium rent for whatever’s above that.

There is *not* enough market for *that* kind of product in Houston, ESPECIALLY not in this economic environment. Thus we’re having the problems we’re having.

“Ordinary” mixed-use projects, on the other hand, can work just fine if they just have a place to go. If you’ve got 22 acres (ie WalMart Site) you have a large enough area that your neighbors aren’t going to affect you as much, and the land prices there are much more moderate (though still high) than the prices in the Uptown or Downtown areas. So, with that site you could put in pretty regular retail and mom/pop stores primarily as an amenity for the office and residential that you rent at a slight premium over the market. The retail breaks even, but you make a great return on the residential and office.

Now, an important caveat is that if you took this to a bank today none of that would be enough to get you financed. But these things take a lot longer than a day or a week to design, so you’ve got some lead time built-in no matter what. The financial market will thaw, and when it does projects that make sense will be able to finance again.

But if you add public-sector backing to a project, if the City (for instance) buys the land and puts the land into the deal as equity (ie they get paid back by the developer a large percentage of his profits forever instead of getting paid for the land up front), then you have a situation where the carrying cost of the project is very low, so you can actually make the project happen by brining in partner entities to do the vertical construction of individual buildings, and THAT can be financed even in today’s market.

So, can we propose another mixed-use project? Absolutely. Can we propose another Boulevard Place? No way. The difference is in the price-point, and the reason people in Houston think that mixed-use only happens at the top 1% of the market is that in Houston the only barrier to garbage quality development next-door is top 1% land prices.

I hope that helps answer your question, thanks for asking!