"In this situation, we extended the agreement to buy us more time to deliberate and make some strategic decisions about the future. We have just come off of a round of significant annexation activity," said Joel Hardy, Pearland's grants and special projects administrator.
Under state law, the city cannot annex an industrial district unless the contract establishing the district expires, or if the terms of the contract otherwise allow for it. Under the extension of this Industrial District Agreement, Pearland can't annex the property until after January 2019.
This is the city's first and only such agreement in place.
Using incentives
The contract stipulates that Denbury pays taxes at 65 percent of its property value. The deal has been in place since 2011, and the company began producing oil at the site the following year.
Since then, Pearland has collected $596,969 in tax revenue from the arrangement, according to documents shared with the Pearland City Council on Jan. 22. The annual revenue varies, with the highest coming in 2014 at $198,419, and the least in 2016 at $61,043. In 2017, the city estimates it would earn $120,000. The variability is due in part to the fact that Denbury may not use the entire site from one year to the next, Hardy said.
"It’s a good deal for the city overall. It produces a small amount a revenue in an area where we don’t have to exert much in the form of services," Hardy said. "The incentive is to create and retain businesses and jobs, and that's what this helps accomplish."
The taxes collected from the agreement represents a small portion of the city's total property tax revenue, which was budgeted to be over $20 million in the current fiscal year.
For Pearland, tax-incentive deals for business have been used in other situations recently.
In 2015, the city and the Pearland Economic Development Corporation partnered to help secure a Costco location by using performance agreements with incentives that kick in when certain criteria are met. Specifically, Costco was required to build a 150,000 square-foot store on Business Center Drive with an investment of at least $30 million, and it had to create 78 full-time and 75 part-time jobs. When those terms were met, the corporation reimbursed Costco $246,827 for infrastructure costs, said Matt Buchanan, president of the PEDC.
Pearland has also agreed to refund to Costco 50 percent of the city's 1 percent sales tax generated at its facility, with a maximum payout of $750,000 over 10 years. That said, incentives are rare for retailers, according to Buchanan.
In recent years, Pearland has used incentives to attract Kelsey-Seybold's headquarters and Merit Medical's manufacturing facility, among others.
"It grows the economic base of our community," Buchanan said.
Long-term outlook
As for the Denbury deal, the city could push for annexation, another extension of the discount or a different percentage altogether. How the city proceeds could depend in part on how strong the oil market is and what Denbury's long-term plans are for the site. An analysis in 2017 found that the city could double its revenue from the site by annexing the site, according to the documents presented to the council.
Denbury acquired a majority interest in Hastings Field in February 2009. The company uses a carbon-dioxide-enhanced oil recovery process that it uses to extract more oil out of old drill sites.
The Hastings site employs about 40 people and has yielded about 12 million barrels of oil since Denbury took it over, company spokesman John Mayer said.
There's a good chance the company will operate the Hastings location for many years. At other sites using the carbon dioxide process, operations have spanned over several decades, Mayer said.
Annexation brings some costs, Hardy said, including the up-front costs of preparing for such a move by doing land studies and legal work, which could total over $40,000, according to city estimates.
Hardy said that city staff will likely present options to the council ahead of the new fiscal year.
"It's up to the council. Whatever the council’s temperament is one way or another, that's what will determine how we proceed," Hardy said.
