By Richard Webner | @RWebner | Heron contributor
It has now been more than five years since the City Council approved the deal with Zachry Hospitality to build apartments, offices and a hotel on the northwest corner of Hemisfair—and nothing has come of it.
When the deal was approved, in February 2017, leaders from the city and from Zachry predicted that construction would be completed by 2021, allowing Zachry to begin making annual rent payments of $1.925 million to the Hemisfair Park Area Redevelopment Corp., or HPARC, the city-created nonprofit that manages Hemisfair.
Those payments would be crucial to the construction of Civic Park, which Zachry’s development would enclose, forming an oasis of green space in the urban fabric that HPARC board member Rod Radle likened to Bryant Park in New York City.
The contract inked in 2017 required Zachry to begin paying rent as soon as the project’s structures are occupied, or no later than Aug. 1, 2021, whichever comes first.
More than six months after that date, Zachry has paid nothing, according to Thea Setterbo, spokeswoman for HPARC.
The late rent has helped to keep HPARC from achieving its pre-pandemic goal to become financially self-sufficient by 2021, according to more than 1,500 pages of emails obtained by the San Antonio Heron from the city through an open records request.
It also has held up the construction of Civic Park. In 2017, HPARC officials spoke of finishing the park by 2020, but they only held a groundbreaking ceremony in January.
HPARC had planned to use Zachry’s rent to pay off the debt from $18.1 million in certificates of obligation issued in 2016 for the construction of Civic Park. Because the rent has not come, the city is proposing to make the payments for HPARC until 2029, with the understanding that HPARC will pay it back with interest, according to the agenda of a B session meeting of City Council on Wednesday.
When asked why Zachry had not paid the rent, Setterbo declined to provide an explanation, saying it would be addressed at the Wednesday meeting. The city and Zachry spokeswoman Tara Snowden declined to comment.
City staff and leaders at HPARC have been talking with Zachry about changing the rent payments since at least 2019, according to the city emails. That year, the company seemed to be considering shrinking the scale of the project: Emails between employees in the city’s Center City Development Office in May 2019 indicate that the number of residential units had been reduced to 130, from the 385 originally planned.
The city is now proposing an amendment to the 2017 deal between Zachry and HPARC, which would decrease the rent payments from $1.925 to $1.15 million a year. On Wednesday, Assistant City Manager Lori Houston and John Jacks, the director of the city’s Center City Development and Operations department, will brief council on the amendment.
Zachry-Hemisfair lease comparison
|Components||2017 agreement||2022 proposal|
|Hotel||200-room Hilton-brand hotel||200-room Hilton-brand hotel|
|*Multi-family Housing||385 units (38 workforce housing units)||525 units (87 workforce housing units)|
|Retail/Restaurants||50,000 – 75,000 gsf||65,000 gsf|
|Office (leasable)||60,000 – 110,000 gsf||None|
|Parking||800 spaces||1,100 spaces|
|Total private investment||$200 million||$340 million|
|* Original bid solicitation required housing project reserve 10 percent of the total unit count for workforce housing.|
Zachry would change the composition of the project, increasing the number of apartments from 385 to 525 units while eliminating a planned seven-story class A office building. The 2017 agreement requires it to build at least 70,000 square feet of office space. The month before council approved it, the company announced it had decided to increase that amount to between 120,000 and 150,000 square feet.
The offices would be removed “due to the impact of COVID on the commercial real estate market,” the agenda says.
Under the new agreement, there would be 65,000 square feet of retail and restaurants; Zachry had planned to build between 50,000 and 75,000 square feet.
The amendment would bring the following changes:
» Parking: Zachry would construct the project’s parking facility, which the city had planned to build at an estimated cost of $59.5 million. The privately-owned garage is intended to provide parking both for Zachry’s development and the park as a whole.
» Utilities: The city would pay for the construction of $8 million in utilities through the Hemisfair Tax Increment Reinvestment Zone, or TIRZ, a cost which Zachry is responsible for in the current agreement.
» Hotel pavilion: Zachry would provide an “annual financial credit” of $150,000 to HPARC in the form of a privilege to use a pavilion attached to its new hotel. Essentially, Hemisfair will receive a $150,000 credit it can use to rent the pavilion for events. If it does not use the entire credit in any year, Zachry will compensate it for the remainder.
» Property owners association: Zachry would help create, and contribute at least $125,000, to a nonprofit property owners association.
» Schutlze House: HPARC will be allowed to use the historic Schultze House, which Zachry now leases at Hemisfair, with the expectation that it will put a restaurant in the building, creating lease revenue.
» City property taxes paid: Each year, the developer of the residential portion of the project, working in partnership with Zachry, would pay HPARC an amount equal to what it would have owed in city property taxes if the development had not received an exemption because it is being built with the Hemisfair Park Public Facilities Corp., or PFC.
[ Editor’s note: Under Texas law, local governments can create nonprofits called PFCs, which have the power to grant full property tax exemptions to developments that offer half the units to people making below the area median income (AMI), typically at 80 percent AMI. HPARC has such a PFC, which helped create The ’68 apartments in 2019. ]
With Zachry building the parking facility, there would be 1,100 spaces, versus 800 as planned. Zachry still plans to build a 200-room Hilton-branded hotel, like before.
The project is now expected to be complete in 2025, the agenda says. The budget would increase to $340 million (from $200 million). The city expects the new investment to raise more money for the Hemisfair TIRZ, revenue of which would be used inside Hemisfair—$1.175 million a year, versus $687,000 before.
[ Scroll down for a chart explaining how TIRZs work. ]
In February 2016, HPARC selected Zachry Hospitality among eleven companies that had submitted bids to develop the site at the northwest corner of Hemisfair, often referred to as the northwest zone, or NWZ.
The 5.5-acre property was viewed as a crucial piece of the puzzle in the city’s campaign to transform downtown from a tourist and business district into a balanced urban neighborhood. It sits at one of downtown’s busiest intersections—the crossing of South Alamo and Market streets—near several entrances to the River Walk. The Alamo is hardly a five-minute walk away.
The site had become available when the city demolished the old west wing of the Convention Center and built a state-of-the-art expansion facing Interstate 37, at a cost of $325 million.
In short, for the Zachry family, this was a once-in-a-generation opportunity to build big, right in the middle of old San Antonio.
For as long as there has been a Hemisfair, the Zachry name has loomed large over it. H.B. Zachry, the grandfather of Zachry Hospitality Chairman and CEO David Zachry, built the Hilton Palacio del Rio at record speed to host guests of the HemisFair ’68 World’s Fair. The hotel remains part of the company’s portfolio.
David Zachry maintained the family’s involvement in Hemisfair, serving on the board of HPARC from its creation in 2009 until 2011.
One of the reasons Zachry’s bid prevailed was because it would deliver the highest lease payment, HPARC’s then-director of real estate, Omar Gonzalez, told City Council in 2017 before it approved the deal. A bid from Dallas real estate firm Cambridge Holdings would have delivered a $1.57 million payment; another, from local firm Lynd Hospitality, $315,000.
Zachry “really rose to the top. You can see that on the financial side, it’s significantly more, what they were willing to deliver in terms of an annual lease payment,” Gonzalez told the council.
For the first two years of the contract, Zachry would pay rent of $1.925 million a year. From year three, it would pay $1.45 million, plus a portion of lease revenue from retail tenants.
The goal was for Hemisfair to become financially self-sufficient—in other words, not requiring help from the city—by 2021, Gonzalez said.
Council voted unanimously to approve the deal. In making his vote, Mayor Ron Nirenberg—at the time, the councilman for District 8—said he hoped that the council would be briefed as the project proceeded to make sure Zachry lived up to the terms.
“We know that this is in the domain of HPARC and the PFC,” Nirenberg said then, “but because we don’t have a direct policy-making link on the board of HPARC… there needs to be check-ins with council about our partners living up to the expectations that we set forth in the lease agreement, and also have vocalized in this chamber. I would expect that we can do that even though it’s not a written part of the document.”
Negotiations with Zachry
The 2017 agreement establishes a deadline for Zachry to begin construction of July 31, 2018, though it can be extended in the case of an “excusable delay” such as a natural disaster.
Over the last two years, HPARC officials and Zachry spokeswoman Tara Snowden have told media outlets that construction of the northwest zone had been delayed in large part due to the pandemic and its impact on real estate markets.
There have been other problems, HPARC CEO Andres Andujar told the Heron last year. As they did preliminary work, HPARC, Zachry and the city discovered that the plan for an underground parking garage would be difficult to build and finance. NRP Group, one of the most active developers of multifamily in San Antonio, abandoned its plans to build an apartment tower.
Emails from city staff, obtained through the open records request, suggest that Zachry’s rent payments were under discussion as early as April 2019—well before the start of the pandemic. An agenda for a meeting between city and HPARC officials dated April 15, 2019, includes an item labeled “NW P3”—or, public-private partnership for the northwest zone—with a description: “review ZH rent memo.”
The following month, the agenda for HPARC’s finance committee includes an item titled “NWZP3 updates.” Zachry “is seeking restructure rent,” according to an attached document. “HPARC is prepared to negotiate if it leads to self-sustainability sooner.”
The agenda includes a table laying out an offer from Zachry made on April 30, 2019. For the Market Street portion of the project—or, the northern section—the rent would be $625,000 a year. For the Alamo Street portion of the project, the rent would be split into three “tranches,” with payments beginning in October 2022.
The document includes a bullet-point list of “constraints,” noting that the city issued $18.1 million in debt for the construction of Civic Park based on the lease payments Zachry agreed to in the 2017 deal. It also notes that HPARC had been expected to be self-sufficient by 2021.
A September 2019 email sent from Andujar to members of HPARC’s executive committee, including Assistant City Manager Lori Houston, mentions that the “Zachry lease recast” affected “the greatest number of milestones” for the nonprofit.
An attached spreadsheet indicates that May 2019 had been set as a milestone for the groundbreaking of Zachry’s development. But “Zachry’s intent to restructure agreement” had caused a delay, it says.
For more than four years after City Council approved the agreement with Zachry, the northwest corner of Hemisfair sat vacant, even as visitors packed into the new Convention Center next door.
By early 2021, HPARC executives had decided to split the construction of Civic Park into two phases and proceed with work on phase one—the southern portion, connecting to the popular Yanaguana Garden children’s playground—as a way of building momentum for Hemisfair as a whole. A second phase, a “source plaza” on South Alamo and East Market, inviting passersby through the Zachry buildings and into open green space, would be completed at a later date.
Last month, City Council approved placing the $1.2 billion 2022-2027 bond package, including a crucial $18 million for the second phase of Civic Park, before voters on May 7. If voters approve the bond package, Civic Park will be nearly fully-funded, after receiving—for Phase 1—the $18.1 million in certificates of obligation in 2016, $21 million from the 2017-2022 bond package, and philanthropic contributions, said Setterbo, HPARC’s spokeswoman.
[ Archive: Hemisfair’s Civic Park construction imminent as planners race to meet 2025 Final Four deadline | Dec. 23, 2021 ]
Park construction begins
It has been 13 years since the redevelopment of Hemisfair kicked off with the creation of HPARC, but much work remains to be done, even outside Civic Park.
At Hemisfair’s eastern end, around the Tower of the Americas, HPARC plans to build Tower Park. The plans are hazy, but it is expected to include the rehabilitation of historic casitas into retail businesses, like what has been done around Yanaguana Garden, and several plots for public-private development, like what Zachry is doing with Civic Park.
HPARC now expects for Hemisfair to become self-sufficient, making enough money to pay for its own programming and maintenance, upon completion of Tower Park, a time of which is undetermined, Setterbo said.
On a brisk morning on Jan. 26, Mayor Nirenberg, Assistant City Manager Lori Houston and District 1 Councilman Mario Bravo, and other local dignitaries and Hemisfair donors gathered for the groundbreaking of Civic Park.
For several weeks after the groundbreaking, the site of Civic Park looked just like it had always looked since the old Convention Center was torn down: a vast lot of patchy, yellowed grass behind a chain-link fence, not interesting enough to qualify as an eyesore.
In recent weeks, work finally began. On Monday, a team of construction workers were using a crane to move sections of metal piping and rebar, as work continued at the site.
What’s a TIRZ?
Richard Webner is a freelance journalist covering Austin and San Antonio, and a former San Antonio Express-News business reporter. Follow him at @RWebner on Twitter
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