COMMENTARY
The Domain: Seven Misrepresentations by the Developer
Reasons why the City of Austin should not honor this economic development agreement.

By Brian Rodgers
Stop Domain Subsidies

Austin Voters -- Did you know that the City of Austin is set to voluntarily give $65 million in sales and property tax rebates to Simon Properties, current owner/operator of The Domain luxury mall in northwest Austin?

Nearly 500 local businesses, together with 27,000 voters who signed petitions, have called for a vote this November to put the brakes on tax giveaways (like these Domain subsidies) that undermine local business and raise the cost of living in our beloved city.

On Tuesday, November 4th, with Proposition 2, Austin residents will be able to decide whether to approve an amendment to the city's charter that would prohibit the city from giving tax rebates or subsidies to developments that contain retail.

This proposed charter amendment has come about in response to the City Council's 2003 economic development agreement with Endeavor Real Estate Group, then-developer of the Domain luxury shopping center.

The city's funding agreement for The Domain is a Trojan Horse of enormous tax subsidies whose final price tag may easily reach $65 million. Through a series of false assumptions and steeply discounted future cash flows, the developer cloaked the true taxpayer cost in 2003 and convinced City of Austin officials to grant a stunning sum.

Misrepresentation #1: Developer never needed the incentives since the profit already totaled $28 million.

Claim – Kirk Rudy of Endeavor told the Travis County Commissioners Court (April 29, 2003), “In order to make this project work and be viable, it’s going to require a public investment.”

Reality

Developer’s own projections show value at $158 million and cost at $130 million. This leaves a $28 million profit before incentives.

Misrepresentation #2: Developer exaggerated wage levels of workers.

Claim -- Kirk Rudy of Endeavor told the City Council (May 8, 2003), “The average wage would be approximately $27,000 per year.” Bryce Miller of Endeavor told the Travis County Commissioners Court (August 5, 2003), “The average annual compensation is in the neighborhood of $35,000 per year.”

Reality

Texas Workforce Commission Wage Information Network figures for Retail Trade Austin-San Marcos MSA (metropolitan statistical area) show a median wage of $18,250 and a mean wage of $22,430. The $35,000 compensation should be proven by the developer.

Misrepresentation #3: Developer claimed that paying for the tenant improvements of local businesses was a special inducement to local business to locate at the Domain when, in fact, the developer paid the tenant finish cost in excess of $50 for ALL tenants, excluding the department stores.

Claim – Kirk Rudy stated that Endeavor would create a $1 million small business fund to assist small business in relocating to the Domain to be used as a special inducement to bring local businesses to the Domain. This special fund was to be used for the cost of designing and constructing the interior improvements of a tenant’s premises.

Reality

This “special inducement” was extended to ALL tenants excluding Macy’s and Neiman Marcus. The developer should not get credit for doing something they had already agreed to do. Sue Edwards’ (current director of the city's Economic Growth and Redevelopment Services Office) presentation to Council on May 8, 2003, listed the developer’s reasons that the project was expensive to build, “the tenant finish-out is on the average $50 per square foot rather than $20 per square foot that occurs in a standard strip mall.” The developer counted the payment of tenant finish as a special inducement to attract "local businesses," and yet at the same time, they paid tenant finish for all tenants.

Misrepresentation #4: Developer exaggerated the amount of public areas.

Claim -- Kirk Rudy of Endeavor told the Travis County Commissioners Court (May 27, 2003) that Domain Phase I would include “four acres of public areas for people to enjoy.” Sue Edwards told the City Council (May 15, 2003),“There will be wide open public spaces.”

Reality

Look at the plans or visit the project: there are no large public areas whose sum would approach four acres. Therefore, one must assume that the developer used the computer CAD software to count every sidewalk in the project including those servicing all parking areas. Sidewalks should not be counted as public areas “for people to enjoy.” According to city of Austin figures, the actual total of all public areas in the development adds up to only 1.4 acres.

Misrepresentation #5: Developer exaggerated early revenue benefits on financial calculations.

Claim – Financial projections submitted by Mr. Rudy begin in 2005 and show full 2005 revenue, an impossible projection since the project had yet to be designed or tenants located.

Reality

Mr. Rudy knew the financial projections were rigged because, at the same time he was submitting the 2005 projections, he told the Travis County Commissioners Court (April 29, 2003) that the Domain will be “open and operational probably the first quarter of ’06.” This one-year difference is important because the developer was selling immediate revenue benefits to officials. The Domain did not officially open until March 2007.

Misrepresentation #6: Developer exaggerated property tax benefits.

Claim – Sue Edwards told the Austin City Council (May 8, 2003), “The city will benefit from increased property taxes and sales taxes sooner rather than later.”

Reality

Property taxes at The Domain have been held ridiculously low at $5.38/sf for over four years while land values have soared all over Austin. Have your taxes been fixed for four years?

Misrepresentation #7: Developer purposely under-projected sales tax receipts to hide developer’s real expected compensation.

Claim – Developer compensation is limited to a Net Present Value (NPV) of $25 million tied to May 1, 2003, at a 7.5% discount rate or $37 million over the life of the deal.

Reality

There is no mathematical link between $25 million and the $37 million over time. The developer’s stated compensation of $37 million over the life of the deal has an NPV of only $16.4 million, not the $25 million limit. The developer left themselves room for more profit while deceiving the City with false assumptions and projections. Here’s how they did it.

The developer submitted sales tax projections that reflected the "sales per square foot" of less than a Wal-Mart or Home Depot -- $326/sf. They submitted these figures even while they knew that sales levels at the Arboretum (a nearby, high-end shopping center) were $590/sf at the time.

Using these higher sales levels, the net present value of property and sales tax rebates to the developer conveniently reaches the $25 million NPV requested, but now exceeds $65 million over time. The whole selling point of the project was that the Domain was an entirely different kind of shopping center, which would generate much higher tax revenues, but this higher sales level was set artificially low to cloak the developer’s true compensation.

On account of these misrepresentations by the developer, the City of Austin is not legally or ethically bound to honor this subsidies agreement.

A longtime commercial real estate investor in Austin, Brian Rodgers has led the charge against this subsidies agreement that hurts local business. He founded the organization Stop Domain Subsidies and says, “Retailers work too hard to have their own tax money used against them.” If you are a registered voter in Austin, he urges you to Vote For Proposition 2 on election day, November 4th. This proposed amendment to the City of Austin's charter would ban the city from providing tax breaks and subsidies for retail development.