How HUD OIG’s Dallas Audit Exposes Developer Challenges In Creating Affordable Housing

A Department of Housing and Urban Development Office of Inspector General report citing the city of Dallas for misspending $6.6M in HUD funds is capturing headlines.

But public concern over the audit overlooks the bigger picture, which goes beyond one audit kerfuffle at City Hall and into chronic inefficiencies there that thwart multifamily and housing development in Dallas. 

The HUD inspector general advised Dallas this month to repay $2.4M in funds tied to housing projects that lacked appropriate environmental reviews in addition to more than $3.8M in draws on funds not supported by documentation. 

But with a new mayor in charge of Dallas and several newly elected council members, the real dilemma for developers and housing advocates is not what happened at Dallas City Hall in the past, but what continues to happen when federal and municipal regulations lack clarity or appropriate streamlining between federal agency rules, city codes and developer expectations.

“There are lots of rules that prevent many developers from getting involved,” said Dreien Opportunity Partners CEO Sam Ware, a developer with 30 years of development experience. “You can do everything right, and the counterpart does something improper or wrong, and you’re both indicted.”

City Wide Community Development Corp. President Sherman Roberts said the tension between the private sector and the government is creating stalls and controversies, particularly as the city looks to have more oversight with less benefit to developers. City Wide is a nonprofit group working to revitalize neighborhoods with affordable housing and neighborhood redevelopment initiatives. The group interacts with government agencies, financing sources and foundations with the goal of fostering an environment that allows for affordable housing development.

“Right now, the city likes to invest 10% to 30% in a project, but overall they want to rule the whole 100% ... with kind of stringent rules,” Roberts said. “And you can’t find too many for-profit developers, who have been doing it on their own, who now all of a sudden have to come in and let the city say 'we’re not ready to do this, you have to get this, you have to extra subsidize this.' There are just so many rules that don’t make the project feasible.”

In the wake of the HUD OIG's audit findings, the city is tasked with instilling confidence in its process to get developers and banks to pony up for affordable housing projects.

Right now, the confidence is just not there for some developers.

Bisnow asked Ware if he was surprised by the audit results.

“Not at all,” Ware said. “You have people dealing with millions — tens of millions — [of dollars] that have little or no experience and very little oversight. That is a recipe for disaster.” 

As to what keeps developers away from partnering with cities to build more affordable housing, Ware points to conflicting rules and inefficient processes. Heaping on that are the financial and litigation risk private developers find themselves taking on alone. 

Cities that fail to instill confidence in a streamlined and less risk-prone development process lose out when private developers fearing unseen losses step away. 

“I think the projects don't happen without some type of incentive just due to where we are with land costs and construction costs alone,” Nashville-based Holladay Properties partner and Senior Vice President Allen Arender said. Arender also serves as national chapter president for the NAIOP Commercial Real Estate Development Association. 

“It does necessitate incentives to keep the projects at an affordable level and to still generate returns that make the projects worth pursuing. I think all cities are wrestling with how do they appropriately staff the effort and tailor the right incentives to induce developers to take on that risk.”

Even though bureaucracy at the local level and conflicting rules are stifling, developers still see value in HUD and its national efforts at achieving home affordability.  

“They serve a wonderful purpose,” Ware said. “They put out billions no one else can match. It's for the entire country. ... Every major city in America has the mismanagement issues.”

Dallas' new mayor, Eric Johnson, was not in office when the alleged violations cited by HUD took place, but he publicly addressed the issue this week. 

“I am aware of the HUD OIG audit findings, and I support the City Manager’s approach to reform the City’s administration of Community Housing Development Organizations,” Johnson said in a statement. “I look forward to working with my colleagues on the City Council to provide policy guidance to ensure that organizations receiving federal grants through the City are held accountable. I will continue monitoring the situation as we work through the process of addressing the audit findings.” 

As for how to fix the problem, Roberts believes the city needs to pull all applicable development rules together and lay them out in a clean format where developers and stakeholders can easily follow them from beginning to end with no surprises or twists along the way. 

“We need to blend the public rules with the private [developer] rules,” Roberts said. “We need to blend those [sets of rules] together and not just have one that supersedes the other one. Right now, the public rules say we’re the rules no matter what.” 

Ware is in favor of putting a third set of eyes on any private-public deal and recommends using an experienced objective not-for-profit third party to oversee such transactions, perhaps a major accounting firm with construction oversight experience. 

“This would prevent fraud and waste; they would have the veto ability under scenarios they don't agree with,” Ware said.