BG Note | Policy - The Domain Incentive Challenge is Important, and not just Because of Amazon
With the buzz of Amazon's HQ2 announcement lingering, Austin’s City Council met Monday for final discussions on the city’s FY 2017/18 budget (a vote is expected later this week).
Incentives was the word of the day, and the dais debate over whether Council could renege on an incentives deal with The Domain resembled a first year Contract law class.
For those not familiar, The Domain is a high-density office, retail, and residential center located in northwest Austin. The decade old property in recent years has evolved into a vibrant uptown as new development phases came online. It was also the first project approved by Council (on 5/15/2003) under the city’s Chapter 380 Economic Development Program, authorizing municipalities to offer incentives designed to promote economic development such as commercial and retail projects.
The focus on The Domain (though current and past Councils have been generally tepid on incentives) was prompted last week by Council Member Leslie Pool (District 7), whose district the property resides.
Council Member Pool’s contention was that pulling out of the deal would provide the city with extra funding and budget flexibility to address Council priorities outside the General Operations Fund. Council currently has about $5 million to add new programs outside of the its $1 billion (approx.) budget.
Mayor Steve Adler, an attorney in private practice before being elected, stated he would be a “No” vote on such action.
“I think it’s a really bad precedent for us to set,” he said.
Interim City Manager Elaine Hart explained to Council that as a rule, every city contract is subject to annual appropriation. The idea being future Councils could, if needed, exit contracts in cases of economic downturns, and generally would not be locked into past Council actions.
However, Ms. Hart stated she did not believe that when the past Council entered into The Domain contract it expected to use that provision. She further stated that in the event of a downturn “where we had to cut back on a lot of different programs,” it would be an option.
Reliance, as in whether one party relied in good faith on the terms of a contract in entering into it, is an essential component of contract law. Mayor Adler underscored this point in asserting there had been reliance on the incentives by the developer (then Austin’s Endeavor Real Estate Group, and now Simon Property Group).
Adding to that, Christine Maguire with the City’s Economic Development Office explained the incentive agreement was predicated on future revenue stream obligations from the city, rather than annual appropriations. Additionally, she added that The Domain had performed to its contractual obligations to date.
Council Member Jimmy Flannigan (District 6) also opposed reneging.
“We are in a difficult budget year, which is not an emergency budget year,” he stated.
Further, he cautioned about the impact such action would have on future incentive deals.
“Everytime as a city we talk about going back on a previously agreed agreement the next agreement becomes more expensive. This is how business works … There is a price to pay for cancelling agreements that we’ve already made.”
Council Members Delia Garza (District 2) and Ann Kitchen (District 5) seemed to find the annual appropriation provision controlling rather than the parties reliance. The latter Council Member stating it was not a breach for Council to renege on the incentives deal.
A decision to renege on The Domain incentives where the project has to-date kept its bargained obligations (and no dire recessionary economic circumstances exist) will likely have larger ripples for Austin as it competes with cities within the state and nationally.
The most prominent example now being Amazon HQ2, with the Greater Austin Chamber of Commerce already committing to pursue it. But also for example as the city seeks to develop an Innovation Zone around the Dell Medical School, where pharma giant Merck received incentives last spring to anchor the zone.
No vote was taken on The Domain contract Monday. And Council will convene later this morning at 9:30AM and again on Wednesday for further discussions.
For questions on Ch. 380 agreements and other inquires: CONTACT US HERE.
/// The Bingham Group
Austin mulls backing out of multimillion-dollar tax deal with The Domain developers (Community Impact, 9/3/17)
Council revives talk of reneging on Domain deal as budget vote nears (Austin American-Statesman, 9/11/17)