Important Tool Or 'Poor Public Policy'? Property Tax-Exempt Affordable Housing Structure Under Fire.

Building affordable housing in Houston has always been challenging, but it could potentially get even more complicated as the public spotlight moves toward a decidedly unsexy issue: property tax.

The use of public facility corporations — nonprofit subsidiaries to acquire or build properties — to waive property tax for affordable housing has come under fire this month from business owners and private developers who say the practice lacks transparency and removes needed tax dollars from public coffers.

Under Texas law, PFCs are nonprofit institutions that are created to acquire and finance property that will be dedicated to public use. Various governmental entities are able to create PFCs, including counties, school districts, housing authorities and municipalities.

There are a number of benefits in using the PFC structure to acquire affordable housing. As a subsidiary of a housing authority, PFCs retain all the same rights and exemptions as their parent but are able to partner with private sector financing to acquire, renovate, repair and build affordable housing. 

Crucially, a property acquired by a PFC does not have to pay property tax, providing additional incentive for developers and lenders to get involved with the project.

AP Residential Solutions founder Arnold Padilla, the former executive director of the McAllen Housing Authority and former head of the San Benito Housing Authority, said PFCs tend to be the most usable product for a housing authority, if it wants to diversify and move away from the traditional public housing model and federal subsidies.

“Public facility corporations are the perfect instrument for a housing authority to be able to own private property, negotiate that property and borrow against it and find ways to either rehab what original stock it may have or even expand their stock and utilize [PFCs] for low-income housing tax credits,” Padilla said.

Houston ranks fifth in the nation and first in Texas for having the most severe affordable housing shortage, according to the National Low Income Housing Coalition. The city has 19 affordable housing units for every 100 households in need, or about an 80% deficit.

The need for that affordable housing is only expected to become more acute in the face of the coronavirus pandemic, which has led to hundreds of thousands of people across Texas filing for unemployment since March.

With so much need for affordable housing, Houston Housing Authority interim President Mark Thiele told Bisnow that the authority is looking to utilize its limited toolkit, including PFCs, as shrewdly as possible.

Thiele said the authority began using the PFC structure in 2018, when it acquired Milano Apartments in Westchase. Since then, HHA has used PFCs a few more times to acquire mixed-income affordable housing in Houston.

During the HHA board meeting on March 24, the authority outlined its next planned acquisition: Circuit Apartments in East Downtown, a 321-unit apartment complex across the street from BBVA Compass Stadium.

“The Circuit is an example of workforce housing near downtown. Housing for our firefighters, for our nurses, for mid-income professionals, and we need more of that downtown as we are finding folks getting more and more priced out,” Thiele said.

Aside from the proximity to downtown Houston, Thiele said Circuit Apartments is in a qualified census tract and an opportunity zone, which the housing authority liked. HHA intends to lease at least 156 apartments within the complex to those who make 80% of the area median income of $53,400, according to data provided by HHA.

The proposal raised eyebrows because the property is higher-end than typical affordable housing deals, with one-bedroom rents starting at $1,245.

Thiele said that while the 80% AMI threshold is at the higher end, it still serves many mid-income professionals that require some help as they move up in their careers.

“It's at the higher end, but it certainly is affordable,” Thiele said.

Not everybody is a fan of PFCs. The Houston Realty Business Coalition released a statement on May 7 criticizing the removal of PFC-owned properties from the tax roll.

The city of Houston is facing a significant tax revenue shortfall. In April, Mayor Sylvester Turner said the budget deficit going into fiscal year 2021 could be between $170M and $200M, the worst deficit Houston has ever faced. Fiscal year 2021 begins on July 1.

HRBC noted that by exempting Circuit Apartments from property tax, HHA’s purchase would eliminate $60M of Houston’s tax revenue. Under current tax rates, that would equate to $840K from the Houston Independent School District, $336K from the city of Houston, $370K from Harris County and $60K from Houston Community College.

“In summary, the Houston Housing Authority is abusing taxpayers by removing properties from tax rolls without proper oversight or transparency,” according to the statement.

HRBC Trustee Chairman and Fidelis Realty Partners CEO Alan Hassenflu told Bisnow that the use of PFCs is bad public policy, because the city of Houston only loses 25% of tax revenue if a property is removed from the tax roll, while Harris County and HISD lose the remaining 75% without any input.

“It doesn't appear to us that the county and the school district actually has any say in the matter,” Hassenflu said.

HHA has considered the development and/or acquisition of over 10,000 units and to date has closed on roughly 2,700, of which 70% were existing units removed from the tax rolls, HRBC said.

Thiele said HHA’s process involves several reviews from different committees and subcommittees within the organization, as well as multiple votes conducted by HHA’s board. The housing authority is also in constant communication with city and county officials, according to Thiele.

Padilla said that in general, housing authorities are encumbered by more restrictions than any private developer in order to remain in compliance with state and federal law.

“There's tremendously more oversight on the performance of the housing authorities than there is over private development,” Padilla said.

While that might be the case, HRBC has called for more transparency, debate and oversight around the process from other entities and elected officials outside of the HHA, including the mayor and the city council, Harris County and HISD.

“If you're taking taxes away from these entities, they all have to have a seat at the table,” Hassenflu said.

Another criticism leveled at HHA is that developers who partner on affordable housing projects using the PFC structure are receiving an unfair advantage over other developers in the same area because of the lack of property tax.

“There's an absolute unfair advantage for this particular owner, and they're leasing to the same pool of renters and applicants, by and large, because they're in the same area,” Hassenflu said.

“It's an extremely beneficial transaction, if you just look at all the elements going on, for that particular person that's involved from a private standpoint.”

HRBC is also critical of acquiring properties through PFCs that target renters who make 80% AMI, especially if a complex is only required to have 51% affordable housing units.

However, there are some caveats to the elimination of property tax. Thiele said that while developers receive the tax abatement when they partner with a PFC, they also receive less rent, because at least 51% of the apartments are being leased at affordable housing rates.

That loss in rent makes up for a significant portion of the tax savings, meaning that much of what is gained on the operating expenses front is lost in income.

Thiele also said that developers who receive the tax abatement have to comply with strict affordability rules or they will lose it, meaning more oversight and audits. In addition, the operations of the property are more complex than a private development, so developers have to hire management companies that have individuals trained in affordable housing.

“We would encourage anybody who has interest to look into it and apply and help us develop more affordable housing,” Thiele said. “We don’t see the market developing enough affordable housing in the face of tremendous need.”

Padilla noted that the competition argument ignores the fact that affordable housing is not inherently designed to compete with market-rate developments.

“The intent of the housing authority was to be the safeguard to assure that affordable housing was always in your community,” Padilla said. “Housing authorities are invested in their communities because they were created by the community for that purpose.”

HRBC is not convinced that PFCs are the right tool to expand affordable housing. The coalition is reaching out to state officials to discuss the policy and whether it could be changed in the future. That could have ramifications for housing authorities across Texas.

“We have actually discussed this with some state representatives who didn’t really understand how this was working as well,” Hassenflu said.

“We think this is such a poor public policy method to provide affordable housing that we would like to see it changed, and we’re going to talk to officials at the state to see if they can change that.”