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Denton Municipal Electric pays price for farmland

A shroud of secrecy over the Denton Energy Center deal remains even as city leaders probe the contracts, negotiations and assumptions that went into the controversial $265 million project.

The terms of two $100 million contracts remain undisclosed. Questions also remain about the price Denton Municipal Electric paid for the land that the new power plant sits on. For reasons explained later in this story, DME bought hundreds of acres more than it needed for the project. The city-owned utility also paid more per acre — at least about 50 percent higher — than the price paid by more than a dozen other buyers who purchased land in the area from 2013 to early 2016, according to recent data from the Denton Central Appraisal District.

The Denton Energy Center, a natural gas-fired power plant, is the city’s largest capital purchase. Its financing is backed by the good faith and credit of Denton’s 55,000 electric utility customers. 

Deputy City Manager Bryan Langley said nothing went wrong in the land deal between property owner John Porter and city government. They agreed on a price without the city having to exercise its power of eminent domain.

"The purchase was a proper, arms-length transaction approved by the City Council," Langley said. 

No one asserts the energy center will not be completed and go into operation in July, as planned. But the secrecy under which the project was developed has led the Denton Record-Chronicle to backtrack and fill in some blanks about DME's $11.5 million purchase of 340 acres.  

For example, DME hired its own real estate consultant, Nikki Constanza, to help put together the land deal rather than going through Paul Williamson and the city's real estate office, city records show. 

In July 2015, Constanza sent an email to Greg Cook at Integra Realty Resources asking him to conduct an appraisal of the property DME wanted to buy. 

"This project is very confidential and needs to be handled very discreetly," Constanza wrote in an email obtained by the Record-Chronicle

DME received the final appraisal in October 2015. The city's real estate office reviewed the document to make sure it met the minimum requirements. But the city did not seek a peer review or another opinion of the land value, Langley said. 

Many governmental entities and businesses often will seek appraisal reviews and even second appraisals when making high-dollar deals, experts say.  

The summer 2015 appraisal

The Denton Energy Center will sit on the city's far west side near Denton Enterprise Airport. DME was eyeing the land long before it unveiled plans for the Denton Energy Center. DME had enough confidence in the deal to order an independent appraisal of the land it wanted in July 2015. That was three months before DME announced the project in October and a year before the City Council approved the energy center plan.

State law allows city governments to negotiate land sales in private to protect the public interest in getting the best price. It's not known what City Council members were told about the deal behind closed doors as it developed. The council ultimately voted to approve the deal in November 2016. 

Looking southeast from Jim Christal Road north of Denton Enterprise Airport shows two substations belonging to Denton Municipal Electric. DME bought 340 acres to build the Denton Energy Center. It later sold the easternmost portion to Denton Enterprise Airport for the west runway expansion. DRC
Looking southeast from Jim Christal Road north of Denton Enterprise Airport shows two substations belonging to Denton Municipal Electric. DME bought 340 acres to build the Denton Energy Center. It later sold the easternmost portion to Denton Enterprise Airport for the west runway expansion. 
DRC

Texas requires government bodies to get independent appraisals when they buy property. Because governments can condemn private property for public purposes (called power of eminent domain), the independent appraisal ostensibly protects both the taxpayer and the landowner in determining a fair price.  

Independent appraisers must hold a state license and follow uniform practices — federal requirements that followed reforms in 1989. Faulty appraisals played a pivotal role in the savings and loan crisis of the 1980s. 

<br><p><span style="font-size: 1em; background-color: transparent;">The </span><em style="font-size: 1em; background-color: transparent;">Uniform Standards of Professional Appraisal Practice &nbsp;</em><span style="font-size: 1em; background-color: transparent;"></span><span style="font-size: 1em; background-color: transparent;">(USPAP) is the generally recognized ethical and performance standards for the&nbsp;</span><span style="font-size: 1em; background-color: transparent;">appraisal profession in the United States. (</span><span style="font-size: 1em; background-color: transparent;">www.appraisalfoundation.org/imis/TAF/Standards/Appraisal</span><em style="font-size: 1em; background-color: transparent;">Standards/Uniform</em><span style="font-size: 1em; background-color: transparent;">Standards</span><em style="font-size: 1em; background-color: transparent;">of</em><span style="font-size: 1em; background-color: transparent;">Professional</span><em style="font-size: 1em; background-color: transparent;">Appraisal</em><span style="font-size: 1em; background-color: transparent;">Practice/TAF/USPAP.asp)</span></p><p><span style="font-size: 1em; background-color: transparent;"></span></p><p></p><p></p><p></p><p></p>

The Uniform Standards of Professional Appraisal Practice  (USPAP) is the generally recognized ethical and performance standards for the appraisal profession in the United States. (www.appraisalfoundation.org/imis/TAF/Standards/AppraisalStandards/UniformStandardsofProfessionalAppraisalPractice/TAF/USPAP.asp)

To determine a property value, appraisers use several guiding principles. For example, recency is important. Appraisers should compare properties that have sold within the past one to five years, experts say.

Proximity is important, too. Appraisers should compare sale prices of adjacent properties, or properties within a few miles,  experts say.

The point is to mirror the marketplace, said John Brenan of The Appraisal Foundation, which oversees certification and continuing education for appraisers nationwide.

“You want to replicate the steps that a buyer would make,” Brenan said. “Appraisers simply reflect, or mirror, the marketplace. They do not establish it.”

To determine the value of the land DME was interested in buying, DME retained Florida-based Integra Realty Resources. Integra appraisers Greg Cook and Allison Whitehead Jackson focused on John Porter's tract near the airport. They found one parcel of land nearby to compare. They also selected three other properties in adjacent counties as much as 35 miles away to compare.  

Cook and Jackson now work for another company, JLL. Neither returned multiple requests for comment on this story.

Integra’s CEO, Anthony Graziano, said his company is nationally recognized and is staffed with respected appraisers who know their local markets.

Anthony Graziano
Anthony Graziano

“The selection of comparables sales is an important component of valuation, but it’s also a complex and locally driven decision that is within the individual appraiser’s control as they, not the firm, will be the experts who are subject to judicial scrutiny,” Graziano said in an email to the Denton Record-Chronicle.

In their appraisal report, Cook and Jackson wrote they found few sales in Denton County. 

“Therefore, we expanded our search to include older sales along with those located in the surrounding counties of Tarrant, Collin and Dallas Counties,” they wrote.

To compare, they selected parcels near airports, including Fort Worth Alliance Airport, McKinney National Airport and DFW International Airport. They included only one 4-year-old sale in Denton County in their initial analysis.

During the same time DME was putting its land deal together, other Denton County landowners sold large parcels. It is unclear why the appraisers left out at least nine other publicly known sales in Denton County from 2013 to 2015.

Graziano said he didn’t have specific knowledge of the Denton market. However, property sales along a major interstate in different counties may have more in common with each other than two sales in the same county when one parcel is on the interstate and the other isn't, he said. 

According to Denton Central Appraisal District data, the average price paid for a 100-acre parcel (or more) in Denton County was about $15,000 per acre.

Land to the west of the Denton Energy Center sold for $2,000 per acre. Land to the east, near Interstate 35, sold for $22,000 per acre.  

Cook and Jackson's opinion of the Denton Energy Center land was it was worth about $39,200 per acre, or 75 cents per square foot. 

Apparent rule of thumb

The 75 cents per square foot is close to the price a Denton developer paid for another piece of land nearby.

In a footnote to their appraisal of the Porter property, Cook and Jackson shared what they learned about the comparable Denton sale from local developer, Phil Baker. Close to half of the 70-acre parcel Baker bought in 2011 was in a floodplain. Baker told them he paid the equivalent of $1 per square foot for all the land that wasn't in the floodplain. 

When DME finally closed its deal, it bought hundreds of acres more than it needed for the project. But there was a good reason. DME initially wanted to buy about 120 acres. But carving out that amount of acreage from Porter's holdings would have caused his remaining property to be worth less per acre. So DME agreed to buy it all to simplify the deal.

About 20 percent of the land was in the floodplain, Cook and Jackson said. To buy the land, DME paid Porter Investments the same price Baker mentioned — about $1 per square foot for the land that wasn't in the floodplain. 

It wasn’t the first time DME made an important land deal with John Porter and Porter Investments.

In 2011, as DME began expanding its electrical grid in anticipation of the project, the utility erected steel power poles along Bonnie Brae Street. In the northern portion, DME paid Porter for easements on his land.

DME did not pay home and business owners for easements on the southern portion until they sued. They used the value the city paid Porter to make their claim that they should be paid, too.

Mike Stolle, Porter's representative, told the Record-Chronicle that Porter would want to answer questions. But neither man returned phone calls about the land deal.

No further review

The city has its own real estate office as part of its engineering services. The real estate team works on projects small and large, whether the city needs a few square feet to widen a sidewalk or space to build a new fire station. 

DME bypassed the real estate office and had Constanza, its private real estate representative, order the independent appraisal, documents showed. And the final 106-page appraisal was delivered to former DME employee Jim Maynard.

Maynard was one of two high-level DME employees fired in the wake of an investigation into contracting irregularities. According to a termination letter issued by the city government, Maynard was not truthful answering questions from investigators who were probing the relationships that he and other DME employees had with other businesses involved with the Denton Energy Center. 

Maynard did not return a call for comment. He and DME colleague Mike Grim have sued the city of Denton in state district court. Both Maynard and Grim claim they are whistleblowers and were fired because they pointed out wrongdoing at City Hall. 

The first hearing in their case is scheduled for Monday.

Once the appraisal of Porter's land was in Maynard's hands, the city's real estate office made sure it met the minimum requirements under the law. However, the city did not commission a formal review of Integra's appraisal for DME. Nor did the city get another opinion of the land’s value in the form of a second, independent appraisal.

To perform an appraisal review, appraisers follow other uniform standards to approve or disapprove of the appraisal. A property owner might commission their own appraisal, but they don't have to share it with the city as they negotiate the terms of a sale. It's not known whether Porter got his own appraisal.

Many other cities and states consider an appraisal review or a second independent appraisal a necessary step before making a major purchase, according to Brenan, the national appraisal foundation spokesman.  

Banks routinely perform appraisal reviews before issuing home mortgages. But neither the state of Texas nor the Denton city charter requires the city to seek a formal appraisal review for its major purchases.

Texas also allows property owners to withhold their sales price from public disclosure, which makes it even more difficult for appraisers. An appraiser's opinion may later become court evidence, should the sale eventually be forced through eminent domain proceedings.  

“As much as I would love it to be true, a single appraisal is rarely the sole basis of any final determination on price,” Graziano said.

PEGGY HEINKEL-WOLFE can be reached at 940-566-6881. 

In the Know

Listed in chronological order below are key property sales that preceded DME's purchase of 340 acres for the Denton Energy Center. Both publicly available sales data in Denton County (100 acres or more) and those property sales Integra's appraisers considered comparable (indicated by an asterisk *) are included:

Sale description Date Paid per acre
Comparable 1 (near Denton Airport) 7/1/2011 $22,930
Interstate 35 and Ganzer Road 2/8/2013 $10,147
Shepard Road 6/21/2013 $5,451
Comparable 3 (near McKinney Airport) 6/1/2013 $127,865
FM1385 and Crutchfield Road 11/7/2013 $20,049
Comparable 2 (near Alliance Airport) 12/1/2013 $43,254
Comparable 4 (near DFW Airport) 6/1/2014 $148,104
FM407 8/11/2014 $10,213
Jackson Road 9/5/2014 $2,602
Lights Ranch Road 9/19/2014 $13,857
FM2153 and Gribble Springs Road 12/30/2014 $4,699
FM423 (Near Panther Creek Road) 1/7/2015 $72,791
Naylor Road 4/10/2015 $10,848
9060 Teasley Lane 5/12/2016 $15,000
LALA Ranch 6/15/2016 $3,084
Pickens Lake 6/30/2016 $10,391
Bryan Road near Fishtrap Road 9/15/2016 $23,241
Denton Energy Center 11/1/2016 $33,824

Real estate closing documents 

FEATURED PHOTO: The southern engine hall at Denton Energy Center is being made ready for the remaining six engines to be moved inside after assembly.
DRC/Jake King