San Antonio City Council approves new agreement with Zachry for long-delayed Hemisfair project
April 7, 2022 By Richard Webner 52 Comments
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Construction continues at Hemisfair's future Civic Park on the southeast corner of South Alamo and East Market streets on Thursday. Photo by Ben Olivo | Heron
By Richard Webner | @RWebner | Heron contributor
On Thursday, City Council approved a new agreement with Zachry Hospitality to redevelop the northwest corner of Hemisfair after the company failed to pay rent or meet its construction deadlines in a 2017 deal.
The unanimous vote was a show of confidence that Zachry will follow through with a new timeline to put the finishing touches on the $340 million project, around Hemisfair's recently-begun Civic Park, in time for the 2025 NCAA Final Four Tournament which begins precisely three years from this week.
The timeline sets milestones for designs to be submitted by March of next year, for financing to be lined up and plans to be submitted for permits that May, and for construction to begin that August with an opening set for March of 2025, according to a term sheet attached to the council agenda.
Leaders from Zachry, the city and the Hemisfair Park Area Redevelopment Corp., or HPARC, have been talking about renegotiating the 2017 agreement since at least 2019—the year after construction was supposed to begin—when Zachry executives asked about modifying the rent payments, according to emails obtained by the Heron through an open records request.
[ Related: Zachry's failure to make Hemisfair rent payments prompts new lease agreement | March 14, 2022 ]
Under the 2017 agreement, Zachry was supposed to begin making annual payments of $1.925 million to HPARC by Aug. 1 of last year at the latest, yet it has never made a payment.
The newest proposal from Zachry would include a 200-room hotel, two apartment buildings with 525 units, 50,000 square feet of retail and an 800-space parking garage.
Mayor Ron Nirenberg and several council members said on Thursday that they consider the agreement to be an improvement over the original. It decreases Zachry's rent to $1.15 million a year, but the city and HPARC will collect revenue in other ways, including by collecting property taxes on an apartment building which otherwise would have received an exemption.
The city argues that the new revenue sources will create more value for HPARC, the city-created nonprofit that manages Hemisfair, allowing it to achieve its longstanding goal of supporting itself financially.
Among the changes: Zachry will now build the project's parking garages, which the city had planned to build at an estimated cost of $59.5 million.
The mayor, council members and leaders at HPARC have offered no criticism of Zachry for failing to meet the terms of the 2017 agreement, which established a deadline for construction to begin by July 2018. In 2016, Zachry's bid to develop the site prevailed over 10 others in part because the company promised to pay higher rent.
[ Related: Mayor Nirenberg, City Council signal support for revised Zachry-Hemisfair lease | March 16, 2022 ]
District 9 Councilman John Courage said on Thursday that the city might not be getting the best deal because it did not put out another request for proposals for the project.
"We may have a better deal today, as it's been explained to us, but we may not have the best deal," he said. "You know, we reworked a five-year-old-plus deal that was never fully initiated. We did not initiate a new request for proposals. So we don't know how much better or what the best deal could have come from an updated competitive proposal."
City Attorney Andy Segovia responded by saying, "We already had an agreement with Zachry… There would have been issues in terms of we wanted to terminate that and rebid it. The preferable option was to revamp the deal."
Courage asked city staff what penalties Zachry and its development partners will face if it doesn't complete the project in time for the Final Four.
Assistant City Manager Lori Houston, who helped negotiate the new agreement, said there will be separate contracts—for each component of the project, such as the apartment buildings. Each contract will include milestones, and if the partners do not reach those milestones they could be declared in default or the contract could be terminated. HPARC will have a contract with Zachry and separate contracts with Zachry's partners for the multifamily portion of the project: local developer David Adelman and Austin firm Johnson Trube & Associates, HPARC spokeswoman Thea Setterbo said.
The Thursday vote gives city attorneys the go-ahead to negotiate the language of an amended contract and to execute the contract.
Zachry-Hemisfair lease comparison
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
Completion Date 2021 2025
* Original bid solicitation required housing project reserve 10 percent of the total unit count for workforce housing.
[ Download: 2017 Zachry Corp.-Hemisfair lease agreement with the city ]
Nirenberg said he expects the project to become "the marquee destination of downtowns in the southern United States," correcting the "original sin" of a neighborhood being destroyed to make way for the Hemisfair '68 World's Fair.
"We are in the business of creating equitable and accessible public spaces for our residents," he said, citing the Yanaguana Garden children's play area in Hemisfair's southwest corner that opened in October 2015. "This partnership will further that mission because it will support the continued maintenance and operations of Hemisfair park."
Zachry and its CEO, David Zachry, have declined to comment when asked on several occasions to explain why the company did not meet the terms of the 2017 agreement. Officials with the city and HPARC have cited several causes for the project's delay, including the city's tricentennial celebrations in 2018, unforeseen difficulties in building an underground parking garage, and above all, the disruptions wrought by the Covid-19 pandemic on the commercial real estate market.
Zachry's 2017 proposal included an office tower with up to 110,000 square feet of space, but that has been eliminated in favor of a second apartment building.
On Thursday, Zachry spokeswoman Tara Snowden said in an email that the company was "grateful for today's unanimous vote of confidence."
In a statement, Hemisfair CEO Andres Andujar said the new agreement offers a way to achieve the original vision of building a "world-class, mixed-income development" in a "post-pandemic reality."
Vincent Michael, executive director of The Conservation Society of San Antonio, declared his support for the project at the council meeting, saying it would add life to the La Villita historic retail center across South Alamo Street and lead to the renovation of the Schultze House on Hemisfair's grounds. As part of the agreement, HPARC will take over the house from Zachry, which has a lease expiring in 2025, to fill it with a restaurant.
The new agreement also has the support of Visit San Antonio, the public-private group promoting the local tourism industry, with the group's spokesman Richard Oliver predicting it would have a "seismic effect" on the area.
The delayed rent payments from Zachry are largely responsible for pushing back the construction of Civic Park, which was slated for completion in 2020 but only broke ground in January. HPARC had planned to use the rent to pay off $18.1 million in debt the city issued to build the park.
The city will now make the payments for HPARC until 2029, when HPARC will begin paying it back, along with interest it wouldn't have had to pay if the rent had been on time.
Zachry's new proposal includes 525 apartment units, versus 385 units before. The Austin developer Johnson Trube & Associates will build a complex on East Market Street with 350 units—all of them market-rate—as well as 50,000 square feet of retail and an 800-space parking garage, Houston told the council last month.
Local developer David Adelman, who built The '68 apartment building next to Yanaguana Garden, will build a 175-unit complex with 15,000 square feet of retail and a 300-space garage. The complex will include 87 units of "workforce housing," with 55 units reserved for tenants making up to 60 percent of the area median income (AMI), and the remainder for those making up to 80 percent AMI, Houston said.
[ Scroll down for a chart showing AMI levels. ]
Here are some other changes in the new agreement:
» Rebate of state sales tax and hotel occupancy tax: The city has pledged the rebate of all state sales taxes and hotel occupancy taxes generated by the development to HPARC, which will pledge them to Zachry to offset the cost of the parking garage and other improvements.
» Utilities: Instead of parking for the parking garage, the city will 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 former agreement. The city will do the work as part of an existing plan to fix up South Alamo Street.
» Hotel pavilion: Zachry will 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 will help create, and contribute at least $125,000, to a nonprofit property owners association, which tenants of the development will participate in. The purpose of the funding is to help activate the park.
» Schultze House: HPARC will be allowed to use the historic Schultze House, which Zachry now leases. It will likely partner with a private company to turn the space into a restaurant or music venue, raising an estimated $150,000 in revenue a year.
» City property taxes paid: Each year, David Adelman, as developer of the apartment complex with workforce housing, would pay HPARC an amount equal to what the complex would have owed in city property taxes if it had not received an exemption because it is being built with the Hemisfair Park Public Facilities Corp., or PFC.
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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2021 Area Median Income
Here are the latest area median income (AMI) levels for the San Antonio-New Braunfels region (Bandera, Bexar, Comal, Guadalupe and Wilson counties). Want to know more about how AMI works? Click here.
120% $62,250 $71,150 $80,050 $88,900 $96,050 $103,150
AMI $51,900 $59,300 $66,700 $74,100 $80,100 $86,000
80% $41,550 $47,510 $53,400 $59,300 $64,050 $68,800
Source: U.S. Department of Housing and Urban Development
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Filed Under: City of San Antonio, Development, Hemisfair, Parks & Plazas Tagged With: '68 World's Fair, Andy Segovia, City Council, David Adelman, David Zachry, Hemisfair, Hemisfair Park Area Redevelopment Corp., Hemisfair TIRZ, HPARC, John Courage, Johnson Trube & Associates, Lori Houston, NCAA Final Four, Richard Oliver, Ron Nirenberg, Schultze House, Tara Snowden, The Conservation Society of San Antonio, Vincent Michael, Visit San Antonio, Yanaguana Garden, Zachry, Zachry Hospitality