Document Archives & 7 Developer Misrepresentations
7 Misrepresentations – The Domain luxury shopping center is a Trojan Horse of enormous tax subsidies whose final price tag may easily reach $65 million.Â Through a series of false assumptions and steeply discounted future cash flows, the developer cloaked the true taxpayer cost 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 â€“ Kirk Rudy of Endeavor stated, â€œin order to make this project work and be viable, itâ€™s going to require a public investmentâ€ to the Travis County Commissioners Court April 29, 2003
Reality â€“ Developerâ€™s own projections show value at $158 million and cost at $130 million leaving a $28 million potential profit before incentives.
The project cost of $130 million was repeated continuously throughout both city and county hearings by all parties. No other cost estimates were found in public testimony or in documents provided by the city under the Public Information Act.
The valuation of $158 million was revealed in two ways:
1.Â Â Â The developer projected city property taxes paid in 2005 at $729,529.Â The city tax rate at the time was .04597%.Â Therefore: $729,529/.0004597 = $158,696,831
2.Â Â Â This valuation matches the Domain Backup #5 from the cityâ€™s website which was in response to a question by Council Member Daryl Slusher.Â Slusher requested a comparison of city tax revenue between the proposed Domain and a site with big box retail.Â Developer never needed the incentives since the profit already totaled $28 million.
Misrepresentation #2 – Developer failed failed to meet promised annual wage levels of workers by a large margin.
Claim #1 – Kirk Rudy of Endeavor stated â€œaverage wage approximately $27,000 per yearâ€ to City Council on May 8, 2003 and â€œthe project will generate between 100 and 150 jobs that will command salaries between $50,000 and $100,000 a year.â€
Claim #2 – Bryce Miller of Endeavor stated â€œaverage annual compensation is in the neighborhood of $35,000 per yearâ€ to Travis County Commissioners Court on August 5, 2003.
Reality â€“ Developer failed to meet promises. Currently, 86% of the jobs at the Domain earn between $17,563 and $21,349 according to open records information provided by the City of Austin regarding the Domain. When the Domain deal was approved in 2003, the Texas Workforce Commission Wage Information Network figures for Retail Trade Austin-San Marcos MSA show median wage of $18,250 and mean wage of $22,430. The $35,000 compensation promise was not delivered by the developer nor was the 100-150 jobs earning $50-100k. Â Developer failed to meet promised wage levels of workers.
Misrepresentation #3 – Developer claimed that paying for the tenant improvements of local businesses was aÂ special inducement to local business to locate at the Domain when, in fact, the developer paid â€œan average landlord contribution to finish out the interior spaces of in excess of $50 per square foot, excluding the department stores.â€ (Bolded text taken directly from a document obtained by open records and typed by Kirk Rudy, Endeavor).
Claim â€“ 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.Â This special fund was to be used â€œfor the cost of designing/constructing the interior improvements of a tenantâ€™s premises.â€
Reality â€“ This â€œspecial inducementâ€ was extended to ALL tenants excluding Macyâ€™s and Neiman Marcus. The developer should not get credit for doing something they had already agreed to do. Sue Edwardsâ€™ presentation to Council May 8, 2003 listed the developerâ€™s reasons that the project was expensive to build, â€œthe tenant finish-out is on the average $50 per square foot rather than $20 per square foot that occurs in a standard strip mall.â€Â Â In addition, the sky-high rental rates of $42/sf NNN and higher charged at the Domain would amply fund any additional tenant costs and should not be paid for by Austinâ€™s taxpayer.
Misrepresentation #4 – Developer failed to provide promised 4 acres open space.
Claim- Kirk Rudy of Endeavor stated â€œfour acres of public areas for people to enjoyâ€ to the Travis County Commissioners Court May 27, 2003.Â Â Sue Edwards
Stated, â€œThere will be wide open public spacesâ€ to Austin City Council on May 15, 2003.Â Other promises include â€œpreserves and respects the natural environment in the form of maintaining space,â€ â€œfour acres of public spaces, unique place for people to gatherâ€ â€œwide-open public spacesâ€
Reality – Developer failed to provide open space. Kirk Rudy has stated that the open space was traded for more density and that the open space was not provided.Â Developerâ€™s own calculations reach only 1.4 acres but that includes mostly concrete impervious cover.
Council Member Randi Shade stated in a meeting on 9/12/08 that â€œthe public benefit that was discussed was that there would be four acres, and thereâ€™s not.â€Â Developer exaggerated the amount of public areas.
Misrepresentation #5 – Developer exaggerated early revenue benefits on financial calculations.
Claim â€“ Financial projections submitted by Mr. Rudy begin in 2005 and show full 2005 revenue, an impossible projection since the project was raw land.Â That means in 18 months, the developer would have to convince 70 new tenants to come to the Domain, negotiate their leases, engineer and design the mall and each of the 70 tenants spaces separately, submit them to the City of Austin for multipleÂ approvals, construct the mall and 390 apartments, construct the tenant improvements, and have them fully operational.Â It took an additional two years.
Reality â€“ Mr. Rudy knew the financial projections were rigged because simultaneous to submitting the 2005 projections, he stated the Domain will be â€œopen and operational probably the first quarter of â€™06â€ to the Travis County Commissioners Court on April 29, 2003. The difference is important because the developer was selling immediate revenue benefits to officials.
Endeavorâ€™s own press release announcement on 2/20/2004 regarding the signing of Neiman Marcus stated, â€œThe opening would be in late 2006 to spring 2007â€.Â The article appeared in the Austin American Statesman 2/20/2004.Â Developer exaggerated early revenue benefits on financial calculations.
Misrepresentation #6 – Developer exaggerated property tax benefits.
Claim â€“ â€œThe city will benefit from increased property taxes and sales taxes sooner rather than laterâ€ stated Sue Edwards to Austin City Council May 8, 2003.
Reality â€“ Property taxes were held ridiculously low at $5.38/sf for over 4 years while land values have soared all over Austin.Â Â Have your taxes been fixed for four years?
The developer may argue that these statements came from Sue Edwards and not Endeavor and therefore should not be attributed to them. However, Ms. Edwardsâ€™ presentation of the Domain deal before the council was a repetition of projections submitted by Endeavor, and the statement of one is the statement of the other.
The developer has also argued that they have no control over the taxing authorities and should therefore not be held for those actions. However, Ms. Edwards and the developer canâ€™t have it both ways – trying to take credit for early increased future property tax revenues but disavowing when it doesnâ€™t pan out. Developer exaggerated property tax benefits.
Misrepresentation #7 – Developer purposefully under-projected sales tax receipts to hide developerâ€™s real expected compensation.
Claim â€“ The city expected to pay the developer a $37 million subsidy over the life of the agreement based on projections submitted by the developer.
Reality â€“ The $37 million calculation was based on annual mall revenue projections of $326/sf which is less than a Home Depot. If the developer had used actual sales levels of the Arboretum of $590/sf, then the city council and public would have realized that the actual subsidy package would reach a stunning $64 million.Â Most likely, the city and public would have turned down the subsidy package request.
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 developerâ€™s true compensation.Â The developer claims they got this $326/sf number from a book of national averages rather than a local market study to build their $200 million center.
Comparison of Endeavorâ€™s Sales Projections
Annual Sales Per Square Foot
AppleÂ Â Â Â Â Â Â Â Â 4,032
TiffanyÂ Â Â Â Â Â Â Â Â 2,666
Best BuyÂ Â Â Â Â Â Â Â 930
CostcoÂ Â Â Â Â Â Â Â Â Â Â 819
Neiman MarcusÂ Â Â 611
Arboretum 2003Â Â Â 590Â Â Â $64,000,000Â Â Â Endeavor compensation if Domain
Samâ€™sÂ Â Â Â Â Â Â Â Â 505Â Â Â Â Â Â Â Â Â meets sales/sf of Arboretum
Wal-MartÂ Â Â Â Â Â 415
Home DepotÂ Â Â Â Â Â 371
Domain Mall Â Â Â Â Â Â 326Â Â Â $37,000,000Â Â Â Endeavor Compensation is Domain
TargetÂ Â Â Â Â Â Â Â Â 282Â Â Â Â Â Â Â Â Â sales less than a Home Depot
Sue Edwards â€“ May 15, 2003: â€˜There are a lot of statistics that show this kind of destination shopping center generates a lot more sales tax than a regular mall does.â€ If she understood what she was doing, then Ms. Edwards allowed the developer to use sales tax projections a lot LESS than generated buy a neighboring shopping center, the Arboretum.Â Would the city have approved this deal knowing the developerâ€™s take would really be $64 million?Â You can bet that the developer didnâ€™t sell the Domain concept to Neiman Marcus using store revenue projections of $326/sf.
The developer claims they obtained the $326/sf annual sales projection from a book of national averages.Â Kirk Rudy stated that he didnâ€™t call over to the Arboretum to check sales levels.Â Are we to believe that this investment was made without a market study?
Developer under-projected sales tax receipts to hide developerâ€™s real expected income.
The City of Austin is not legally or ethically bound to these subsidies.
ORIGINAL AGREEMENT (Chapter 380 Agreement). This is the original governing document for the incentives.