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Unbalanced Growth

As the suburbs continue to sprawl, politics, personality clashes, and price controls slow development in the city.

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The developer is black. The subdivision is not only in Memphis, it is in an older part of southwest Memphis just north of the Mississippi line and the competing developments of Southaven. Local banks made the loans. Builders have finished and sold 127 homes for an average price of $170,000. The tax-paying occupants have moved in and are, seemingly, happy.

So what's not to like about developer David Walker and his Gemstone development?

Enough that the Memphis City Council voted 9-2 last month to deny further subsidies to Walker. The council was heeding the strenuous objections of Mayor Willie Herenton and his aides, who worked unusually hard to thwart Walker.

The standoff highlights the politics and policies that have guided and, at times, hindered development in the city to the benefit of suburban Shelby County. The city has an adversarial relationship with its main developer of middle-income housing, who is inexperienced and sometimes brash. The county has a collegial, even cozy, relationship with several developers closely connected to the county mayor, county commission, and key divisions like engineering and code enforcement. The result is a mismatch.

Once celebrated by the mayor as a model entrepreneur in a plan to offset suburban sprawl with residential growth in older parts of the city of Memphis, Walker has grown so wary that he had an assistant videotape a city council committee meeting because he has 56 investors and "it's gotten to the point where you've got to see it to believe it."

Those tactics, which committee chairman Brent Taylor called "an attempt to intimidate," may backfire. Herenton says Walker has gotten more than his share of help from the city and isn't passing enough of the savings on to homeowners.

"We are going to be in the incentive game," the mayor said in an interview. "But we are going to spread the incentives out around the city and closely monitor the profits of developers."

At issue is some $4.7 million in middle-income housing subsidies the city administration says Walker has received for the 582 lots in his Diamond Estates, Ruby Estates, and Southern Heights subdivisions on Holmes Road east of Weaver Road near Whitehaven. That is 79 percent of all the public assistance approved for the program that is the centerpiece of the balanced-growth agreement between the city of Memphis and Shelby County. The plan was hatched in 1996 when Memphis finally agreed to extend the city sewer to the Grey's Creek area east of Cordova. The area, which is in the Memphis reserve area but could remain unannexed for several years, is now booming with new subdivisions, churches, schools, and future shopping centers.

Subsidies aren't the only thing unusual about Walker's development. There is also the matter of the neighbors.

To the south, less than a mile from Walker's property line, is DeSoto County, where market-savvy Reeves-Williams Homebuilders is putting in hundreds of starter homes on both sides of Stateline Road (all of which is in Mississippi on this stretch). They're bordered by a private golf course and a public soccer complex. Such competition for Memphians and their tax dollars drove Herenton to make a fresh pitch for consolidation this year.

To the east of Walker is the mayor's own home and the Banneker Estates subdivision of luxury homes he developed, plus a second group of luxury homes being developed by NBA basketball player and Hamilton High School graduate Todd Day. Herenton went into the development business 10 years ago, saying he wanted to give well-to-do black Memphians a housing option other than East Memphis and the suburbs.

The mayor promised to take no special privileges. There is no evidence that he has.

"I didn't ask any government agency for any incentive," he says.

Herenton paid $13,000 to extend utility service to his own house and personally backed the loan from First Tennessee Bank for Banneker Estates. The city engineering department, he says, was so thorough in its examination of his plans that he learned how developers feel about government red tape. Horn Lake Road in front of Herenton's house and Banneker Estates is the same two-lane, no-gutters, no-sidewalks road it was a decade ago. So is most of well-traveled Holmes Road to the north, where a plausible case for widening and curbs and gutters could be made based on normal traffic and the not infrequent diversion of casino-bound traffic.

After the most prosperous decade in Memphis history, 26 new homes have been built in Banneker Estates, partly fulfilling the mayor's vision. The other six lots in Banneker Estates have been sold but not built on, the mayor said. The streets in the subdivision still don't have the final layer of blacktop which is the developer's responsibility. In Day's project only three homes are built or under construction. Walker plans to build luxury homes in the final phase of his development, but competition is not the main issue.

"The mayor's development is essentially finished anyway," says Walker, adding, "if it were not for Banneker, I would not have tried Gemstone. He got it started."

On the contrary, one of the odd twists in this story is that the mayor's political sensitivity and his painstakingly deliberate approach to road-widening and other incentives in his backyard may be hobbling his attempt to balance growth in the suburbs, especially the Grey's Creek area.

For perspective, experts in real estate trends say the goal of balanced growth was never realistic, based on housing trends in the last four decades. The suburbs and the unincorporated parts of the county had the lure of undeveloped land for new schools, subdivisions, and shopping centers. Don Berge, head of MarketGraphics of Memphis, a housing research firm, says only about 20 percent of housing starts in Shelby County occurred inside the city limits of Memphis in the last decade and most of those were in East Memphis, Harbor Town, or the old expressway corridor in Midtown.

The 4-1 advantage in statistics is obvious to anyone who drives around east of Germantown Road or on Nonconnah Parkway. New churches, homes, office parks, and shopping centers are as common as the new six-lane or eight-lane roads that serve them, all built by city and county taxpayers. How powerful is suburban sprawl? One example: Wal-Mart plans to abandon a location on Germantown Road that it has occupied for six years for another one also on Germantown Road about a mile away.

The closest new retail development to Gemstone Estates and Banneker Estates is a service station on Stateline Road in Mississippi.

In the growth game, the county also has more experienced players and a different playbook. One of the most successful suburban developers is Waymon "Jackie" Welch. The son of the former head of the Shelby County Office of Construction Code Enforcement and a close friend of Shelby County mayor Jim Rout, Welch has 40 years' experience in commercial real estate. He is also a big political donor and fund-raiser, currently supporting county mayoral candidate A C Wharton and various commissioners.

Welch cut his teeth on commercial real estate in Whitehaven in the '60s. He and his partner, engineer Jim Dickinson, moved to Winchester Road in the '70s and '80s, and to Nonconnah Parkway and Germantown Road in the '90s.

"I bought by the acre and sold by the square foot," Welch says.

His subdivisions are close to new public schools built on one of the nine sites Welch assembled and sold to the Shelby County Board of Education. Rooftops followed schools. Commercial corners, some selling for $500,000 or more, followed rooftops. Welch and a lot of other people got rich. And the county grew like a teenage football player on Creotine while much of the city aged like an elderly parent on Geritol.

For this formula to work in the huge Grey's Creek basin, though, the city of Memphis had to extend the sewer. Welch and Rout "unclogged the pipeline," in Welch's phrase, by working out an agreement with the city of Memphis to build Cordova High School to serve both city and county students. The extension of the sewer and the balanced-growth plan grew out of that agreement in 1996.

That is approximately when David Walker entered the picture. When the city and county announced a new jointly funded program of middle-income housing assistance in older parts of the city, all of the big suburban developers passed on it. Walker, who helped author the plan, was at the head of a very short line. A native of Hernando, he graduated from Jackson State University in 1978 and had a career with IBM before venturing into real estate development. Walker, who now lives in Gaithersburg, Maryland, recalls his first meeting with Herenton in 1995 "like it was yesterday."

The mayor, then three years into his own development, took the younger man into his office and said he wanted to make sure Walker had really thought things out. Could he find buyers? Could he get bankers to make construction loans? And could he find builders willing to work on a subdivision in South Memphis?

Walker said there were potentially 12,000 move-up households in the area; if he could get 10 percent of them, that would be 1,200 prospects. The bank question was tougher, but eventually First Tennessee (also the mayor's lender) and Bank of Mississippi loaned him $4.8 million. Walker recruited five builders by agreeing to use the city subsidies to keep his lot prices lower and carrying the ownership costs until the houses had been built and sold.

"I believed I could make a lot of money for me and my investors," he says, which includes relatives, fraternity brothers, IBM coworkers, and friends, most of whom, he says, invested $10,000 or less. He says the projected return was "comparable to the stock market," but he won't be more specific.

Walker took aim at the middle -- both the middle of his 259-acre tract of land and the middle of the price market for homes with about 2,200 square feet of space. In 1997 the city, county, and MLGW agreed to subsidize Diamond Estates and another middle-income subdivision in Raleigh-Frayser, consistent with the public improvements in the Grey's Creek basin. The subsidy could only be used for public roads and utilities, not for clearing lots or building houses.

Walker agreed to play by rules that don't apply to development in suburban Shelby County or DeSoto County. Instead of making the infrastructure improvements and letting the market determine the housing mix, the city and county, through the Middle Income Housing Task Force, defined a price range for middle-income housing of $80,000 to $130,000. No more than 15 percent of Walker's homes could sell above the upper limit to stay eligible for the program.

Progress was slow at first. The tiny-towns storm blew up at the end of 1997, and it was 1998 before the first funds were released. Walker found he could meet a market and get a bigger and quicker return for himself and his investors by building houses that cost more than $130,000. Over the objections of the mayor and administration, the city council raised the upper limit for Walker to $170,000. Herenton was not pleased.

"David did an end-run on me when Joe Ford was on the city council," he said last week.

Joe Ford ran against Herenton in the mayor's race in 1999. Gemstone Estates is in his former council district.

In 1999, the first families moved into Diamond Estates. To date, Walker has sold 127 houses in Diamond Estates, most of them in the range of $125,000 to $200,000, comparable to what similar houses cost in the county. Ordinarily, a market that wants bigger, more expensive housing is anything but a problem for a developer. But it is for Walker. He could lose his subsidy if he builds and markets too many homes for more than $170,000, even if he sells them and they go on the city tax rolls.

"That's a heck of an incentive," he complains. "The pricing issue is restricting our ability to address the market. Why in the world would you want to restrict the market and reduce the amount of tax value being added to the city?"

The issue came to a head last month.

Walker's request to have a second round of funding released to him for road-widening was approved by the Shelby County Commission in August. But it was held up by the city administration, determined to enforce its rules and sensitive to the wishes of council members who would like to see new middle-income housing in their districts.

On January 11th, Walker -- at the invitation of city councilman Myron Lowery -- showed up at the annual retreat for the council, mayor, and top administration. Herenton and city council chairman Rickey Peete were miffed to see an "uninvited guest" breach protocol at what is traditionally and by definition an informal gathering for elected officials, division heads, and media. Herenton said he was a developer himself, understood the problems, and "nobody helped me at all." He told the council that the middle-income program needed to be moved from the Memphis and Shelby County Office of Planning and Development to the City of Memphis Division of Housing and Community Development and director Robert Lipscomb.

Herenton said the incentives will be "closely monitored" to ensure that they pass through to homebuyers and don't "create a culture of unreasonable incentives."

On January 22nd, Walker's request to the council for additional subsidies was opposed by city engineer John Conroy and chief administrative officer Rick Masson. They handed out a paper showing Walker has been approved for $4,705,715 in funding, or 79 percent of the total funds in the program. Another page of calculations showed the exact subsidy per lot in each development in the program. There was an discussion of the net impact of Walker's development on the tax base, where his customers came from, and whether their old houses should be part of the figures. From the chilly tone of the meeting, a visitor might have concluded Walker was putting in a waste dump, not a subdivision. In the end, Conroy told the council Walker had already received with adequate funding.

"The question is how those subsidies are to be delivered," Conroy told the Flyer. "The program provides funds to developers to pay for infrastructure. Walker has not chosen to use the funds available to him to build these particular roads. His request was to be totally relieved of this requirement, which would have resulted in the city building the roads out of its capital-improvements budget rather than the middle-income housing budget."

City officials said they must temper assistance to Walker or else they will open the floodgates for other developers to follow his example.

Which prompts Walker to ask this question: Where are they? Only one of the four other companies and individuals in the program, Southland Capital, has built a subdivision.

"I am doing 259 acres and 650 single-family homes," says Walker. "There are no other developers doing that inside the city. You are not opening up the floodgates. There is no other water to come through."

He said that if it is a losing proposition to develop the lots because of the price restrictions, then he isn't going to do the road-widening, which at one time was in the capital-improvements budget for 2002 anyway. He said he has received only a little over $1 million in subsidies, not the $4.7 million which is due to be paid by 2004.

If his standoff with the city is resolved, Walker wants to finish Diamond Estates and the less expensive Ruby subdivision. He also wants to start an unsubsidized community of luxury homes and, eventually, a shopping center at Holmes and Weaver. But that could be a while. Conroy said it will probably be next year before the roads are widened. Many residents now do their shopping in DeSoto County.

In contrast to Walker, Welch got his Grey's Creek subdivisions through the developer-friendly Shelby County Commission with no trouble. He raves about the efficiency of the county engineering department, where he does almost all of his business. The sort of scrutiny Walker faced is foreign to him, with the exception of a run-in with the city administration over the toy-towns issue a few years ago. In approximately seven years, he has put in almost 4,000 lots and sold scores of commercial sites in unannexed Cordova and the Grey's Creek area. In the last six months alone, Welch sold three large tracts. Each one will be developed with more homes than Walker has completed in five years. He credits demand and low interest rates.

"I have never paid rates as low as I am paying today in 35 years," he says. "Last year I probably made more money than when business was really good."

Last week, Welch and Walker met for the first time. Welch, who grew up in Whitehaven, was impressed with Diamond Estates. He and Walker discovered that they use many of the same builders. Walker, Welch conceded, has a harder job than he does because he is going against the grain.

"I didn't break any molds," he said.

In county time, the balanced growth plan of 1996 is already ancient history. The not-so-distant future nexus of growth has spread east from Cordova High School to the intersection of Houston Levee and Macon Road.

Maybe that is where David Walker should have focused his video camera.

The schools, roads, and rooftops are already there (along with a $1.3 billion mountain of county debt), and now the services are coming. Where bulldozers have cleared the land, the signs announcing new Krogers and banks and churches sprout as predictably as daffodils.

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