Stratus Flows Downhill
Stratus Properties Plays Its Development Cards at City Hall, and It's Déjà Vu All Over Again
Jim Bob Moffett didn't make any money on Barton Creek. Neither did Ben Barnes.
Tom Hicks will.
That's because Hicks has lots more patience -- and lots more money -- than Moffett or Barnes ever dreamed of. Moreover, the City Council appears ready to cut a deal with Hicks on the land he acquired from Moffett's company -- a move that should assure Hicks a tidy profit. (Not that he needs it: Last month, Forbes estimated Hicks' worth at $750 million.)
If Hicks does get a deal with the city, it will be a curious conclusion to an odyssey that began in 1974 when Barnes, a former lieutenant governor, bought the land that became The Estates at Barton Creek. A few years and one bankruptcy later, Barnes and his partner, former governor John Connally, lost it. Moffett's company, New Orleans-based Freeport-McMoRan, bought the land, and almost immediately began fighting with the city of Austin over how much development should be allowed on the property.
So Hicks may succeed where Moffett failed, but it won't be because his arguments or tactics are any better. Indeed, the current negotiations between the city and the Barton Creek landowners are déjô vu all over again.
A decade ago, Moffett went before the Austin City Council to push his company's plan for a massive development in the Barton Springs watershed. City Council members were ready to approve the deal. Environmental activists decried the project as a deadly threat to Barton Springs, and encouraged citizens to oppose the plan. Today, the main elements of Moffett's PUD -- now being pushed by the Hicks-controlled Stratus Properties -- are back, slated for discussion at Nov. 30 and Dec. 7 public hearings before the City Council. A few names and specifics are different, but the project -- and the implied threats behind it -- are remarkably similar to those made during and after the historic City Council meeting of June 7, 1990.
In 1990, Freeport proposed a 4,000-acre project with 2,500 homes, 1,900 apartments, 3.3 million square feet of commercial space, and three golf courses. Today, Stratus plans a 4,000-acre deal with 1,400 homes, 4,700 apartments, 6.5 million square feet of commercial space and a golf course.
In 1990, Moffett relied on local attorney David Armbrust to paddle his project through the city process. Armbrust's lieutenant, lawyer Richard Suttle, helped out. Today, Stratus is relying on Suttle, who still works with Armbrust, to shepherd the deal through the City Council. Moffett's handpicked man, Beau Armstrong, also remains on duty. Hired a decade or so ago by Moffett, Armstrong ran the Freeport spinoff, Stratus, until a Hicks affiliate acquired majority control of the company. (And in apparent continuing solidarity with Freeport's long-standing policy, neither Armstrong nor Suttle returned phone calls from this reporter).
Armstrong's new boss is Dallas-based Olympus Real Estate Corp., an affiliate of Hicks, Muse, Tate & Furst, the leveraged buyout and investment firm headed by Hicks. You may recall that it was Hicks who bought the Texas Rangers for $250 million from a group of investors that happened to include Gov. George W. Bush. According to the Center for Public Integrity, Hicks and his firm are Bush's fourth-largest career patrons, having given Bush $305,150 over his career.
In 1990, Freeport threatened that if the city didn't approve its project, it would go ahead and build it anyway, and that state law would supersede the city's. Today, Stratus is apparently saying the same thing. Ten years ago, Freeport could count on lobbyist Dick Brown to savage the city with a flurry of bills in the Legislature. During the 1999 session, Stratus employed 15 lobbyists, among them Brown, Austin lobbyist Cal Varner, and Randy DeLay, the brother of U.S. Representative and majority whip Tom DeLay, R-Sugar Land. During the coming session, the company will surely rely on Brown, the former mayor of Rollingwood -- whose witty and charming personality is eclipsed only by his undying enmity toward the city of Austin.
So what has changed in the past 10 years? In 1990, the council was divided between environmentalists and pro-growth forces. Today, it's dominated by the greens. In 1990, one of the leading critics of the Barton Creek project, Daryl Slusher, was writing about the development for The Austin Chronicle. Now, Slusher sits on the council, and will cast one of seven votes that decide the project's fate. (At that time, the Chronicle was publishing about 44 pages a week. These days, it's averaging about 168 pages). Since 1990, the city has grown dramatically, and high tech has moved from being an afterthought on the local employment scene to being one of the city's main economic drivers. Over the past 10 years, the city's environmentalists have fought numerous battles (both externally and internally). In 1990, environmental groups had little trouble getting 800 people to attend a council meeting that lasted all night. Today, the battle-scarred groups are still powerful and they can still rally the troops, but (despite the city's explosive growth) they show up in fewer numbers.
The More Things Change --
The Barton Springs salamander also has a higher profile. In 1990, it was just another rare amphibian. Today, it's protected by the Endangered Species Act, and local environmentalists are still trying to coerce the federal government into taking actions to control growth and sanction water quality violations that occur in the watershed.
Perhaps the most important change, though, is the documented decline in the water quality of Barton Springs itself. Swimmers have complained loudly in recent years that the quality of the water in the pool has markedly declined. They complain that algae levels have increased and the clarity of the water has declined. Two new studies confirm their perceptions: In May, the city released a study on water quality in the pool that found increasing turbidity and other problems, and an August study by the U.S. Geological Survey (USGS) found traces of four pesticides in the pool. More on that in a moment.
Despite a decade's worth of apparent changes, Mary Arnold, the grande dame of Austin's environmentalists, says the Stratus proposal is "still a bad, bad deal. It's not even worth talking about .... They aren't offering anything different from what they offered 10 years ago."
-- the More They Stay the Same
Given that harsh assessment, why is the city considering the deal? Arnold and others say it is because the council fears that the Legislature will pass yet more bills aimed at the city. "Stratus is still threatening us at the Legislature," said Arnold. "The idea is to do a deal and avoid more Austin-bashing at the Legislature, and that has never worked. We have been giving in and giving in, and still getting bashed at the Legislature." For example, in both the 1999 and 1997 sessions, Freeport/Stratus pushed a flotilla of Austin-bashing bills, including House Bill 1704 (the "grandfathered" development bill) and a special water-quality zone bill.
The other obvious question: Why would the city consider doing a deal with Stratus after it has spent millions of dollars in legal fees defending the Save Our Springs Ordinance and its home rule power? That question is particularly intriguing given the city's record in court: Despite numerous challenges, when defending its home rule powers, the SOS Ordinance, and the city's right to address water quality issues in its extra-territorial jurisdiction, the city has a perfect record at the courthouse. Over the past eight years, the city has spent more than $2.5 million fighting half a dozen lawsuits at the state and federal level. It has won all of them. Two of the wins came courtesy of the conservative justices of the Texas Supreme Court who, in 1998, upheld the ordinance in an opinion that said that imposing impervious cover limits on development is "a nationally recognized method of preserving water quality. Further, it is indisputable that limiting pollutants in runoff water will aid in preserving water quality."
The pending deal with Stratus would cover three separate properties controlled by the company. On 2,300 acres that Stratus owns on Barton Creek, it would limit impervious cover to 22%, while allowing the company to build 750 homes, 1,200 apartments, and 1.7 million feet of commercial space. On Stratus' 1,200 acres at Circle C Ranch, impervious cover would be limited to no more than 25%. Stratus' Circle C land would have about 650 homes, 1,500 apartments, and 1.8 million square feet of commercial space. At its 452-acre Lantana site, Stratus would comply with the city's impervious cover regulations on about two-thirds of the land. The rest would be governed by earlier regulations, and be developed with 2,000 apartments and 2.9 million square feet of commercial space. To top off the deal, the city would pay Stratus $6.3 million to settle a lawsuit Stratus filed against the city and to reimburse the company for infrastructure costs it has incurred. The company will also agree that 20% of the apartments on the Lantana site would be built as affordable housing.
The deal could have some benefits to the city and its parkland users. A settlement term sheet posted on the city's Web site (www.ci.austin.tx.us/news/stratus.htm) says that Stratus will give the city an option to buy 46 acres in the watershed, and will provide public access to Barton Creek from two different locations (see "What's the Deal," p.38). Parks advocates have long desired more access to that segment of Barton Creek, which is currently accessible to recreational users only during times of high water flows in the creek.
Whatever reasons the city may have for reaching a deal with Stratus, it surely isn't the company's economic might. Indeed, if Stratus were a dot-com, it would have been shut down long ago.
Let's Make a Deal?
Stratus, formerly FM Properties, which itself was formerly Barton Creek Properties, which used to be part of Freeport-McMoRan, a New Orleans-based fertilizer and mining company that no longer exists. (In 1997, Freeport merged with fertilizer giant IMC Global Inc. The biggest survivor of the old Freeport company is Freeport-McMoRan Copper & Gold, which operates a controversial gold and copper mine in West Papua, Indonesia.)
Since Freeport made FM Properties into an independent company, the spinoff has excelled at two things: suing the city of Austin and losing money. The company sued over the SOS Ordinance, it sued in federal court claiming its constitutional rights had been violated, and it sued over reimbursement for infrastructure costs it claims the city should have paid for. Meanwhile, according to company documents filed with the Securities and Exchange Commission, Stratus/Freeport has incurred net losses of $136.7 million since 1993. It has made money in just two of those seven years. Yet the company survives because of infusions of capital from investors such as Moffett and Hicks. And it retains significant assets: namely, the acreage at Circle C and Barton Creek.
According to Slusher, the council is considering the deal because Stratus can already build much of the development it wants, and it can do so under earlier regulations that are weaker than the SOS Ordinance. "It makes sense to talk about it," said Slusher. "We can't endlessly ignore it." Slusher and Mayor Kirk Watson have pointed out that House Bill 1704 allows landowners to develop their property under the laws that existed when they filed their initial project paperwork with the city. By working out a deal, they say, the city and Stratus may be able to agree on a development plan that adheres more closely to SOS rules. If that happens, less development will occur -- and in theory, less damage will be done to Barton Springs Pool.
But there's another wild card in the negotiations. Slusher is supporting a proposal that would allow Stratus to swap some of its land on Barton Creek for part of the land at the old Mueller airport (see below), and a transfer of development rights between the city and the company. Using the airport as a carrot in the Stratus negotiations "has the possibility of getting development where you want it and lessening development where you don't want it," says Slusher. Slusher appears to have an ally in Council Member Will Wynn, who says that even if Stratus complied with SOS throughout their project, "I still think it's too much development." The solution, said Wynn, is "to buy down some of that density, whether with cash or development opportunities."
But it's not clear that Wynn and Slusher's colleagues on the council are willing to trade the valuable land at Mueller. Council Member Beverly Griffith said the developer who ends up controlling the Mueller project must have experience with both redevelopment and moderate-income housing. In a prepared statement, she said if the city "starts negotiations with Stratus prior to the open Request for Qualifications [for the Mueller development], we will corrupt the process and truly world-class developers will presume that we have already cut a deal, and they will not respond." In an interview with the Chronicle, Griffith also made it clear that she is not ready to support a settlement deal with Stratus on its Barton Creek lands. "If we don't do this thing, on what basis would we be criticized? There is still abundant opportunity for them to develop their land," she said.
Griffith's stance on the matter is similar to that of Council Member Danny Thomas; he has made it clear he's not ready to trade Mueller, either. Their opposition may put more pressure on the other council members who want to cut a deal with Stratus. If the council can't do a deal that involves the airport, they're back to the deal regarding Stratus' development densities. And because the SOS Ordinance requires the council to approve any exemptions to the ordinance by a margin of 6 to 1, any deals that allow Stratus to exceed SOS's mandates could be blocked by Griffith and Thomas.
Adding further intrigue is the potential political muscle of the city's Green Machine, which helped elect every one of the current council members. In 1990, former Council Member George Humphrey was on the dais when the Freeport deal was unanimously turned down. "I'd be real surprised if Daryl and Jackie [Goodman] and Beverly overrode that 1990 vote," said Humphrey. "I think that would be political suicide."
The one inexorable law of politics, land development, and plumbing is playing a big role in the city's talks with Stratus.
It's the Sewer, Stupid!
The law? Shit flows downhill.
During previous settlement talks -- in both 1993 and 1995 -- the company clearly stated that it wanted sewer service from the city. The reason is simple: Without sewer service, the company has to build its own sewage treatment plants and dispose of the effluent by spraying it onto flat grassy areas, such as golf courses or undeveloped grasslands. By law, each home or living-unit equivalent needs about 8,000 square feet of irrigation land, and that property must be away from the creek and have a slope of less than 15%. Of course, all the property that fits that description is also prime development land. Therefore, the more land Stratus sets aside for effluent irrigation, the less money it is able to make on its project. That bit of engineering background helps explain why Stratus is asking the city to provide wastewater service for a 600-acre tract of land known as Section N, on the south end of the Barton Creek site.
In 1993 and again in 1995, environmentalists opposed settlement deals with Stratus/Freeport that included the extension of sewer service. And they oppose it now. Extending sewers will "only increase their potential for development on their land," says Mary Arnold. "They are not offering any reduction in the amount of square footage of development in order to make it an environmental benefit for us to extend wastewater." Arnold adds that Austin's environmentalists have long agreed that judicious spending on infrastructure helps protect the environment. "This is a policy we've been touting for years: You don't grant city wastewater in environmentally sensitive areas," she said.
In 1995, Slusher wrote in this paper that "the reason Freeport keeps returning to the city is that they want city sewer service for their development." In that same article (www.auschron.com/issues/vol15/issue11/pols.slusher.html ), Slusher condemned city officials who "have dispatched cadres of high-priced lieutenants to try to forge a development agreement and sewer deal" with the company.
Daryl Slusher the muckraking journalist of five years ago would likely have been horrified by the attitude of today's ready-to-deal council member; 10 years ago, the reporter would have been provoked to poison-pen outrage. Now the shoe is on the other foot. "Rather than just say no, we have to govern, and figure out what is the best decision for the city," Slusher told the Chronicle last week. Slusher wants public discussion about the Stratus deal because he believes the development will be too much for the watershed. "I agree it's too big, too much," he said. "But I'd like to hear discussion on alternatives." Mayor Kirk Watson appears to agree with Slusher. On Nov. 20, he wrote a memo to the council arguing that while the Stratus proposal needs improvement, those who oppose the deal on the table have an obligation to consider alternatives, including the Mueller swap, in order to "explore how that might occur and enhance environmental protection at the same time."
Save Our Springs Alliance Executive Director Bill Bunch says he is not opposed to alternative solutions, like giving Stratus a portion of the airport, but he believes the city is negotiating out of weakness. He argues that Stratus is making the same threats it did in 1990, 1993, and 1995, and that those threats depend on the Legislature. But the Legislature "can't pass a law that makes us give them [Stratus] sewer," said Bunch. "They can't pass a law that makes us give them the zoning they want."
Bunch believes Stratus should ask for individual approvals on all of its projects, as any other developer would. The city then can fight any projects that it finds objectionable on a permit-by-permit basis. Bunch points to the latest water quality studies as evidence that urbanization is hurting Barton Springs.
There is plenty of reason to worry about the pool. A city study released in May (www.ci.austin.tx.us/watershed/) found increasing levels of conductivity, sulfates, turbidity, and total organic carbon in the water coming from Barton Springs. Those constituents are indicators of urbanization, and are precursors of worsening pollution problems in the pool. Equally worrisome are indications that pesticides are now invading the pool. A USGS study released in August (tx.usgs.gov/reports/dist/dist-2000-01/) found five different pesticides in the main springs. And it notes that water samples from Barton Springs have indicated pesticides on just two other occasions: In 1978, scientists found trace amounts of diazinon in the water, and prometon was detected in 1989. The new study found that in the hours after a rainstorm in early May of this year, the USGS detected four compounds -- the herbicides atrazine and simazine, and the insecticides carbaryl and diazinon -- washing out of the main springs at Barton Springs Pool. Although the amounts detected so far are still minute, scientists are concerned.
"These data show the trends that we believed would occur. I'm not surprised that these pesticides and other pollutants are showing up in these studies," says Nancy McClintock, the division manager of environmental conservation in the city's watershed protection department. Urbanization has occurred in the Barton Springs watershed, "without the controls that we believe are necessary. The protection levels in the older developments are more lax than what we have now," she said, adding that the big problem facing the city over the next few years in the Barton Springs watershed is "the grandfathered stuff."
Stratus happens to have lots of grandfathered stuff, and like their Freeport predecessors, they are holding the city hostage. "Make us a deal," the thinly veiled threat goes, "or we'll develop all this stuff and you won't be able to stop us." Given that Stratus already appears to have effective approval for much of the development they want to build, the city has two choices: Make a deal -- either with or without the airport as bait -- or do nothing. Over the past 10 years, the city has chosen to do almost nothing. Stratus/Freeport has been able to develop significant parts of their property. And other large tracts in the watershed have been developed by other owners with nary a protest by environmentalists. The city hasn't made a deal with Stratus/Freeport, and it has spent a lot of time and money fighting them in court. Now, just like 10 years ago, the City Council has to decide if it wants to make a deal or meet the company once again at the courthouse.
For Mary Arnold, the choice is clear. This decision, she says, is "very, very important because Barton Springs is probably under greater threat today than it was in 1990, due to the explosive growth that we are having here in Austin. There's nothing that the Stratus deal will do but spur that growth even further." Although she doesn't have an alternate plan for what to do about the Stratus proposal, Arnold believes a reprise of the 1990 protests are in order. "The people in this community need to get upset," she said. "They need to re-establish their voice."
After 10 years, it's not clear how loud the city's environmentalists are willing to be. Nor is it clear whether the new green council will listen to that voice.
Either way, don't bet against Tom Hicks.