Politicians blew up our downtown Austin office lease: Horizon Bank

The leaders of the Texas Senate and House of Representatives are bitterly divided over their dueling property tax plans, but they have something new in common: both are being sued by Horizon Bank over a real estate deal gone awry.

As Class A buildings downtown face leasing woes, Horizon is accusing House Speaker Dade Phelan, Lt. Gov. Dan Patrick and Comptroller Glenn Hegar of blowing up a lease it signed with a state agency at its new downtown building, 600 West 5th Street. 

The Texas Permanent School Fund Corporation signed a lease with Horizon in June 2022. As the administrator of Texas’ $51.3 billion endowment fund for its public schools, the corporation has had trouble retaining top investment professionals, who expect more luxurious office amenities than the average government employee. 

Under the lease agreement, the corporation would address that issue by moving to a brand-new, high end office closer to downtown Austin. Horizon agreed to construct the office building and lease 45,000 square feet across three floors to the Permanent School Fund Corporation for just over 10 years. The lease would cost the corporation $2.2 million per year, or $49 per square foot, plus another $1.2 million to outfit the space.

But the June 2022 lease, signed before this year’s budget set the corporation’s spending limits, left open the possibility that state legislators could supply it with less money than it needed to meet rent payments. As it shopped around for new space, the corporation told potential landlords that the odds of a budget shortfall forcing a lease default were “extremely low,” Horizon alleges. 

A default of that sort would “damage the future ability of any State of Texas entity from continuing to enter into long-term contracts,” the corporation wrote, according to the lawsuit. 

After signing the lease with the Permanent School Fund Corporation, Horizon and D2000, a development and management firm connected to the property’s ownership LLC, spent the next year constructing the building. It was delivered in March, and the corporation began making its improvements to the space.

But when Gov. Greg Abbott signed the new budget into law this June, it contained a rider blocking the corporation from using any of its funds to pay for private facilities, except for its current lease in the Moody Bank Building at 400 West 15th Street. The Moody lease expires this year and isn’t eligible for renewal, according to the lawsuit. 

It is unclear who, exactly, added the wording to the budget that eliminated the corporation’s ability to sign a private lease. But the rider traces back to a February meeting of the House Appropriations Committee’s higher education subcommittee, when Permanent School Fund Corporation executives Holland Timmons and Tom Maynard laid out their budget requests. 

Timmons told the subcommittee that the corporation had signed a new lease that was a “fiscally moderate choice” that would “greatly advance our ability” to retain and recruit. Some committee members asked if the corporation had considered taking space instead at the George H.W. Bush State Office Building at 1801 Congress Avenue, a state-owned facility. The corporation said it had been in conversations, but never received definitive word on the space that would be available. 

“Do we have to be in downtown?” asked Rep. Carl Tepper, a Lubbock legislator and commercial real estate investor. “I’m just astounded, I mean it’s $49 a foot.”

Representatives for Rep. Gary VanDeaver, the committee’s chair, could not find which legislator specifically added the language barring the corporation from using state money for a private lease. But when the committee reported its rider recommendations, it included the provision. 

“It is a bedrock principle in this country that a state cannot simply pass legislation to avoid performance of its contractual obligations to its citizens,” the bank wrote in its complaint. 

Since the lease has already been signed, any failure to pay would be considered a default with “grave consequences,” demonstrating that the state’s word is “entirely subject to the changing whims of the Legislature,” Horizon claims.  

And change those whims certainly have. Patrick and Phelan have been locked in a battle over how best to lower property taxes, with Phelan supporting appraisal tax caps for the entire legislative session just to ditch them at the start of a special session in May. 

Horizon’s attorney and representatives for Patrick, Phelan and Hegar did not return requests for comment.

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