Allegations Of Rampant PFC Abuse Put Future Of Housing Incentive On Thin Ice

A tool meant to incentivize the creation of affordable housing in Texas could be in peril, as allegations of rampant abuse led some to advocate the program’s repeal during a state Senate committee debate Wednesday.

Approved by the Texas Legislature in 2015, public facility corporations grant a 100% property and sales tax exemption for apartment owners that set aside half of their units for residents making less than 80% of the area median income.

But critics of the program say it has failed to address the state’s affordable housing needs and that a lack of reporting requirements and accountability has allowed owners to target higher-income renters.

“Big private equity shops have come into our state and purchased multifamily properties using this structure just to avoid paying taxes, significantly increasing the property’s cash flow, significantly improving their bottom line, with little to no benefit in the ultimate goal of real affordability,” Nathan Kelley, a trustee with Houston Regional Business Coalition, testified at the April 12 public hearing.

Three Senate bills making their way through the 88th legislative session are aimed at addressing PFCs. SB 805, authored by Sen. Paul Bettencourt, a Republican from Houston, would remove the exemption entirely. Another bill authored by Bettencourt, SB 1278, would implement stricter governance by calling for more transparency, reporting and accountability.

A third bill, SB 199, authored by Sen. Sarah Eckhardt, a Democrat from Austin, would address concerns of discrimination by ensuring PFCs accept tenants using housing vouchers.

“If you’re going to use a tool that the legislature provides, it needs to be responsibly done, and that has not occurred in the last few years with PFCs,” Bettencourt said at the hearing. “We are not going to have a tool that is this wide-open, that is subject to this amount of abuse — period.”

Between 2016 and 2020, at least 30 apartment complexes in Texas financed by PFCs were acquired, developed or in active development, with 17 of those deals approved in 2019, according to a 2020 report authored by the University of Texas at Austin’s Entrepreneurship and Community Development Clinic. 

A lack of governance has led to a scenario where the vast majority of PFC residents are in “no way, shape or form low-income or needing any assistance from the state,” said Rod Bordelon, distinguished senior fellow for regulatory affairs for the Texas Public Policy Foundation.

“The beneficiaries of these tax exemptions tend to be developers, and to a certain extent, the public facilities, and that is not at all what I believe you intended,” Bordelon said during his public testimony.

Bettencourt has been highly critical of public housing authorities’ ability to approve PFCs. Unlike cities and school districts, housing authorities aren't impacted by lost property tax revenue, providing little incentive to act judiciously in the approval process, Bettencourt said.

“PFC deals are being cut in opaque settings in the supposed name of 'traditional public housing,'” Bettencourt said in a texted statement to Bisnow. “When in reality, unelected Housing Authority and taxing authority bureaucrats are taking BILLIONS of Dollars of property value off the tax rolls and not meeting the low-income unit requirements.”

Critics claim the hit to local tax bases far outweighs the marginal number of affordable units that have been produced as a result of PFCs.

UT Austin researchers found that the 30 PFC projects tracked in 2020 could remove more than $12B in property values off the tax rolls by 2026, resulting in a loss of about $326M in revenue to local taxing entities per year.

The loss is especially acute for the state’s smallest taxing entities. Roger Flood, board member of the Northampton Municipal Utility District in far north Harris County, said a $35M PFC project approved in his district removed $175K from the tax base last year, hamstringing the board’s ability to repay bonds issued to create the MUD.

As a result, the district will likely have no choice but to pass the burden on to homeowners in the form of an increased property tax rate.

“When these apartment projects go tax-free in these districts, it can affect their revenues dramatically, which affects everybody in the district,” Flood said. “In our case, it’s about 3.4% of our total levy, and we have three other projects that, if they go tax-exempt, will be about a 17% reduction of our revenues.”

Others claim PFCs have created an unfair competitive advantage by allowing owners to shirk a property’s largest operating expense. 

“Competition is an important thing with these properties, and when you start allowing the springing up of comparable properties that have zero tax burden without a sufficient nexus and benefit that’s been provided to the community, you’re really creating an unlevel playing field in the multifamily community,” said Lorri Michel, a property tax attorney with Michel Gray & Rogers in Austin.

More guardrails are needed to prevent PFC abuse, but eliminating the program would remove an important tool that, when used correctly, brings housing affordability to high-need areas, Eckhardt said. She suggested language be strengthened to ensure properties are meeting the minimum number of affordable units.

“Without some kind of incentive, particularly in areas like mine where dirt value is so high, without some mechanism, private-market multifamily will be out of reach for a sizable percentage of my constituents,” she said.

At a minimum, PFCs should be required to engage in annual compliance audits that prevent developers from sidestepping affordability requirements, said Susan Spataro, former Travis County auditor.

“What happens with many programs is it looks good at the beginning, but no one really follows through, and all of a sudden you’re not getting the housing, but the exemptions are still there,” she said. “If they’re getting an exemption of taxes, then really, they should be able to answer questions, just like any other government, but an evaluation of a program can only take place if you’ve got really good, well-defined criteria.”

After more than two hours of public testimony, all three bills were left in committee. A spokesperson for Bettencourt confirmed his bills will be brought up again at a later date.