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From Dream to Possible Demolition: The Highest and Best Use of Houston's Compaq Center.

What's next for Houston's Compaq Center: continued use as a municipal sports and entertainment arena, conversion to an international religious center or demolition for redevelopment? What should be a question of highest and best use has become a legal conundrum.

In the 1960s, the late Houston developer Kenneth Schnitzer of Century Development laid out plans for an activity center five miles west of the central business district. Today, Greenway Plaza continues to be one of the most successful mixed-use developments in the city with approximately 5.5 million square feet of office space, another million square feet being proposed, and supporting retail, hotel, residential and uses. A key element of Greenway Plaza is the Compaq Center.

Known as the Summit until 1997, the facility was completed by the City of Houston in 1975 to replace downtown's Sam Houston Coliseum and is the current home to the Houston Rockets, Houston Comets and other sports teams, and the site of numerous performances--concerts, circuses, civic events and the like. As one of the higher-quality venues of its generation and with a seating capacity of more than 16,000, the Compaq Center has approximately 220 event-dates per year and has enjoyed overwhelming public approval.

Compaq Center's future, however, is in serious question. The Harris County-Houston Sports Authority is currently constructing a new multi-use arena downtown, which is scheduled for completion in Fall 2003 to coincide with the expiration of the existing operating agreement governing the Compaq Center. Because of these circumstances and legal and physical limitations of the property, its days may be numbered.

From Mixed-Use to An Uncertain Future

In October 1973, Greenway Plaza, Ltd. (then controlled by Schnitzer and since 1996 controlled by Crescent Real Estate Equities out of Fort Worth) deeded to the City of Houston a seven-acre site on the Southwest Freeway at Edloe Street. As part of this conveyance, the parties set forth numerous restrictions and side agreements concerning the use of the property. These restrictions and agreements, reached almost 30 years ago, are the source of uncertainty surrounding the future of the Compaq Center. In short, there are three elements that may impact the use to which the property can be put once the new downtown arena is complete. Following is a summary of each:

Legal Restrictions

Pursuant to the referenced deed, "During the original 30-year term [ending October 30, 2003] no portion of the subject property shall be used for any purpose other than municipal sports arena purposes, which includes but is not limited to: sports events, productions, conventions, receptions, trade shows, exhibitions, performances, and similar and related uses, together with uses incidental thereto...." In other words the only use for which the property was intended and constructed, was as a municipal sports arena.

But after the initial 30-year term, the restriction is broadened: "... [After October 30, 2003] no portion of the Subject Property shall be used for any purpose or use other than one or more of the following: municipal sports arena purposes [as defined above]...; offices; library; post-office; retail stores; banks; and savings and loan association quarters."

Distinctly missing from this list of allowable uses, among others, are residential and religious facilities. This point, especially with regard to the latter use, has recently become the topic of considerable debate and ultimately a source of litigation between the fee owner--the City of Houston--and the successor to Greenway Plaza, Ltd.--Crescent Real Estate Equities. More discussion concerning this point is outlined later.

While continued use of the facility for municipal sports arena purposes remains legally permissible by deed, the Interlocal Arena Development Agreement ("IADA") between the City and the Harris County-Houston Sports Authority, entered into on September 13, 2000, prohibits such use. It provides flatly: "...the Compaq Center will not be permitted to be used for events that could be in coin petition with the [downtown] Arena." In effect, the IADA limits the use of the Compaq Center only to those nonmunicipal sports arena uses outlined in the 1973 deed.

No Parking

Part of the original agreement between Greenway Plaza, Ltd., and the Arena Operating Company (holder of the Compaq Center master lease through October 2003) provided for the shared use of parking between the arena and adjacent Greenway Plaza. As such, after the expiration of the lease, the over-16,000-seat Compaq Center will have less than 100 parking spaces.

No HVAC

Similar to the parking situation, Compaq Center uses Greenway Plaza's chilled and heated water system to air condition the arena. At the end of the lease, the facility will not only have insufficient parking, but also no means of independently cooling and heating the building without a substantial investment.

These three legal and physical limitations may eliminate the property's continued use as an arena. The following highest and best use analysis outlines the effect of these limitations.

Is Continued Use Highest" and Best Use?

Applying a variety of use scenarios serves to flesh out the details, but still complicates the matter somewhat.

Legally Permissible Use: Restrictions encumbering the site are those previously outlined and specified in the 1973 deed and the 2000 IADA. These restrictions and agreement likely limit the use of the property to offices, library, post-office, retail stores, banks, and savings and loan association quarters.

Physically Possible Use: Two primary issues impact the property from a physical standpoint: its lack of parking and lack of an independent HVAC system.

When the existing agreement expires in 2003, the possibility of a new agreement between Crescent, thc owner of the systems, and the City or its tenant is highly unlikely, mainly because Crescent has an interest in the land, as will be explained later. Further, because parking and HVAC arc personal property, not real property, they are not subject to condemnation. As such, the continued use of the Compaq Center would require the on-site construction of a parking garage and HVAC system. The costs associated with such construction are likely to be in the tens of millions of dollars.

Financially Feasible Use: At this point in the analysis of highest and best use, the Compaq Center is a building that cannot legally be put to the use for which it was constructed, is legally restricted against other possible uses, and does not readily have access to required infrastructure for any use without considerable capital outlay. It is highly unlikely any profit-driven entity would buy or lease such a property under such conditions.

Remaining possible users, therefore, are non-profit entities, for example, houses of worship (assuming such a use does not violate the 1973 deed restriction), universities, schools, etc. There are very few such parties with the financial capacity to successfully redevelop the Compaq Center, a fact that further limits demand and serves to diminish marketability.

Maximally Productive Use: Because of the numerous legal, physical and financial constraints on continuing to use the Compaq Center one must conclude that the improvements to the land, namely, the Compaq, Center, contribute no value to the property. Based upon this conclusion the most likely end result is that the improvements be razed to make way for a new development on the site.

To the less-informed, demolition of the Compaq Center remains unimaginable: it's in good shape and it has been only a few years since a major makeover resulted in an expanded food-court, new seats and other cosmetic improvements. The arena is seemingly suited for years of continued, quality use. However, given its legal and physical limitations, the Compaq Center may very well come down when the Rockets take the floor at their new home downtown.

What's Next?

The search for an answer to the fate of the Compaq Center was put on the fast track in early 2001. The City of Houston submitted a Request for Proposals to lease the property upon the expiration of the existing master lease in November 2003. In light of the legal and physical limitations previously outlined, it came as little surprise that only two proposals were submitted.

One proposal came from Crescent itself. Being Houston's largest real property owner in terms of total assessed value, its proposal was based primarily on a land swap. In general, the City would gain ownership of Crescents "Super Block" in downtown in front of the George R. Brown Convention Center and adjacent to the proposed multi-use arena and under-construction convention center hotel. Crescent, in turn, would control its missing piece of Greenway Plaza, the Compaq Center site. The building itself holds little interest, since Crescent, like the rest of the market, does not have any economic use for it due to the legal and physical limitations. Rather, they want it to control development within Greenway Plaza and for future development. Indeed, as part of their presentation to the City, Crescent stated that the proposed construction of a 1 million square-foot office tower adjacent to the Compaq Center was in jeopardy if Lakewood Church, the only other party to bid on the property, successfully leased the fac ility.

Lakewood Church, a local church whose services are televised across the United States and worldwide, proposed an initial lease payment of approximately $9.5 million for the right to occupy the facility for an initial term of 30 years with a 30-year renewal option. The church's plans called for conversion of the arena to an International Conference Center by expending approximately $70 million for construction of a parking garage, an independent HVAC system and considerable interior alterations.

In July, Houston's city council convened and approved City representatives to commence lease negotiations with Lakewood Church. Crescent, it appeared, had lost its opportunity to control the last out-parcel at Greenway Plaza. Within days of the city council's vote, however, Crescent filed suit seeking a federal judge to stop the city from leasing the arena to Lakewood. On what grounds? Violation of the 1973 deed restrictions, which, according to Crescent, do not allow the use to which Lakewood Church intends to put the properly. It appear as though the future of the Compaq Center may lie in the hands of the court.

Matt Deal is an associate memory the Appraisal Institute and managing appraiser for Lewis Realty Advise Houston, Tex.
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Author:Deal, Matthew C.
Publication:Valuation Insights & Perspectives
Geographic Code:1USA
Date:Jun 22, 2001
Words:1688
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