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Downtown Waco leaders worry high tax values could imperil progress

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Preliminary appraisal increases in the TIF Zone

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Source: McLennan County Appraisal District, preliminary 2017 data

Once again, the great downtown tax debate is heating up just in time for summer.

When values in the downtown Tax Increment Finance Zone increase by 34 percent — and in many cases, more than double last year’s values — is it reflecting a bull market for downtown Waco real estate, as McLennan County Appraisal District officials say, or will soaring taxes kill the goose that laid the golden egg?

Downtown property owners and advocates argue the latter, saying that a too-sudden escalation of tax values could slow the momentum of downtown and even drive out some businesses.

“The thing that is driving values up is successful businesses,” said Megan Henderson, executive director of City Center Waco. “If appraisals rise so steeply as to shock the system and make it unsustainable to do business downtown, the potential to erase a lot of significant gains we’ve made is very real.”

Values for about 30 properties, including the Magnolia Market at the Silos, have not yet been released. Of the 879 preliminary appraisals that have been made public, 185 of them had increases of more than 100 percent.

The biggest increases are concentrated south of Franklin Avenue — especially around RiverSquare Center, the silos and the former residential district around Cleveland Avenue that Shane and Cody Turner are redeveloping commercially as “West Village.” Some businesses along Austin Avenue also saw major increases, though not across the board as they did last year, when the appraisal district raised land values in that area.

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“West Village” area around 11th and Cleveland.

Only about 40 downtown property owners so far have signed up to protest their values in hearings this summer, but most have until Wednesday to do so.

MCAD created an uproar in downtown a year ago when it released preliminary appraisals showing property in the TIF Zone had increased by 46 percent on average. The zone includes downtown from the river to 11th Street, with extensions along the Brazos River corridor and Elm Avenue.

Many property owners succeeded in lowering those values, and the 2016 tax rolls ended up at $413.4 million, about $90.5 million — or 28 percent — above the 2015 values.

Now some property owners who were successful in last year’s protest process are girding for battle again. For example, the value of the Insurors of Texas building at 225 S. Fifth St. increased by 110 percent this year, from $3.8 million to $8 million.

“We protested last year and lowered it down to pretty much what it had been previously,” said Insurors president George Chase, who plans to protest his value again. “That would seem to me to be an agreement that it was appropriate a year ago. It’s hard to see in one year how it could have gone up that much. . . . Values have gone up, and I can’t pretend otherwise, but doubling in 12 months is hard to imagine.”

A sample of other properties with major increases include:

  • Liberty Building, 601 Austin Ave., from $428,679 to $1.48 million (245 percent).
  • Courtyard by Marriott, 101 Washington Ave., from $11.2 million to $21.6 million (land and improvements, 93 percent).
  • Stratton Building, 800 Austin Ave., from $65,630 to $514,060 (683 percent).
  • Parking lot near Magnolia Market, 325 S. Sixth St., from $172,500 to $653,400 (279 percent). The property is being marketed online for $1.3 million.

Some of the largest increases were on undeveloped property in the West Village area, where two hotels and retail areas are planned, as well as in the Magnolia Market “Silo District” and in East Waco around Taylor Avenue and Bridge Street. New developments, such as the Altura Lofts and Mary Avenue Market, also showed huge increases.

New growth, new info

Don Whitney, MCAD’s director for commercial appraisals, said the large increases are partly a result of new growth since last year, and partly the result of new information that indicates some properties have been undervalued for years. He said the district purchases proprietary information on rental rates, which can be used to set the income-producing value of a commercial property.

“We have a lot of rental information we didn’t have last year,” he said. “We learned last year that office buildings were worth more than we thought.”

In addition, he said land values were adjusted for the areas along both sides of the river, especially East Waco.

“We had overlooked that area,” he said.

Whitney said hotel values also have increased because of soaring occupancy rates and income in the past couple of years, as documented in state lodging tax reports. But he said retail data are not as easily attainable, making it difficult to appraise one-of-a-kind projects such as Magnolia Market, which drew more than a million visitors last year. At any rate, he said, Magnolia is only one factor in the downtown real estate boom and corresponding value increases.

“You keep seeing market activity and redevelopment and construction activity all the way down to 11th Street,” he said. “It’s not Magnolia Silos driving this.”

Randy Reid of Reid-Peevey Commercial Real Estate said the downtown real estate boom is real, and Magnolia is a part of it. He said “Fixer Upper” fever will eventually subside, but downtown Waco will likely continue to draw tourists as well as businesses and urban dwellers as it develops.

But he said rising rents, along with the prospect of big tax increases, are likely to drive out some businesses with smaller profit margins.

“You’ve just essentially had an atomic bomb, and it takes a few years for the fallout to come,” he said. “What’s going to happen is that people are going to go out of business. . . . You’ve going to have winners and losers. There’s going to be lots of winners, and also people disappointed with their sales and overhead, and that’s going to put them out of business.”

Reid said the problem with the tax appraisal process is that it assumes “highest and best use” for every property, but not every owner can find a buyer willing to pay top dollar.

“Current use ought to trump highest and best use if an owner doesn’t want to sell their property,” he said.

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Visitors walk down Austin Avenue after spending a morning in Waco.

Brian Ginsburg, a retailer who also owns three buildings in the 800 block of Austin Avenue, said increased taxes could tip the scale in the survival of some small businesses. He leases one building to the Hey Sugar! candy store, has one under renovation for a home décor boutique and has one for lease.

Together, the appraised value of the buildings went up this year from $272,990 to $408,080, a 49 percent increase. He said he’ll have to eat the tax increase for Hey Sugar!, but pass along the tax costs to the other future tenants through what is known as a “triple net” contract.

Ginsburg has been downtown for decades, and he said a lot of property was undervalued for a long time. But he said this seems like too much, too soon.

‘It hurts everybody’

“I can’t protest it on the grounds that it’s not worth it,” he said. “It’s just the sharp increase that hurts. . . . In the long run, it hurts everybody.”

Henderson, the downtown official, said her central concern is that properties are appraised accurately. But she said the values should reflect the “long-term, intrinsic value” of a given property, not just match the highest rent in the market.

For example, she said the new Mary Avenue Market at South Sixth Street and Mary Avenue is set to charge high rents to high-end businesses, such as a pie bakery.

“I like pie as much as the next person, but we’ve got 111 blocks of downtown,” she said. “They’re not all going to be Mary Avenue Market. They’re not all going to get a lot more in rent than they’re getting right now.”

Henderson said she is urging property owners to challenge their values and to request “comps” from the appraisal district to use as evidence.

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Insurors of Texas at 225 S. Fifth St. saw its appraisal double this year.

Chase, the Insurors of Texas president, said his company isn’t going anywhere, even if taxes double. But he said it cuts into the company’s bottom line and creates a less certain business environment.

Still, he said he’s glad to see downtown real estate becoming more valuable.

Chase’s father, Tom Chase, bought the five-story Southwest Drug factory-warehouse in 2003 for a few hundred thousand dollars and announced plans to spend about $3 million renovating it for the insurance firm, according to news stories from the time.

“I thought (my dad) had lost his mind,” George Chase recalls. “I said, ‘You’re going to do what?’ It was an old, run-down building that had been vacant more than 20 years. But it did strike me that downtown was ripe for development.”

George Chase said moving downtown was a good bet, and he thinks downtown’s redevelopment won’t slow down anytime soon.

“I think it will continue for at least the next few years,” he said. “We’ve got great momentum. We love being downtown. Having more people down here makes it more exciting. . . . When you get more people, you get more places to go. When you get more places to go, you get more people.”

J.B. Smith is the the Tribune-Herald managing editor. A native of Sulphur Springs, he attended Southwestern University and joined the Tribune-Herald in 1997. He and his wife, Bethany, live in Waco and have two children.

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