Good day Water Users Coalition,
Merry Christmas and a Happy New Year to Everyone! Below are two articles from the Houston Chronicle involving multi-family tax exemptions. I thought you may find them interesting, as this issue is negatively affecting many taxing jurisdictions.
Best regards,
Jerry Homan
Looking for a $1 million tax break? For a fee, these tiny Texas agencies are willing to help
HOUSTON CHRONICLE Dec 12, 2024
About a month ago, Nathan Kelley received an unusual cold call. An executive for Houston-based Blazer Building, Kelley had just completed a large multifamily apartment development. The salesman had a seemingly too-good-to-be-true offer: How would Kelley like his new project to be tax-free?
Large housing complexes can pay more than $1 million a year in property taxes. Local communities depend on the money for schools, police and fire protection and other basic government services. But the caller said he could help Kelley erase the entire bill.
Public property isn’t taxed. And, he said, there are several under-the-radar government agencies across the state that, for a few hundred thousand dollars, will attach their name to a building deed, deleting its entire tax obligation overnight. All Kelley had to do was promise to reserve some housing units as “affordable” – a flexible term that, thanks to a flattening market, might even mean keeping rents close to regular rates.
Another selling point: The lucrative deals can be kept secret. Locals often don’t learn about the agreements until it is too late to object.
Kelley passed, but plenty of others haven’t.
Once a sleepy tool for local governments to produce inexpensive homes, in recent months housing finance corporations have become something more notorious. A small group stands to reap huge profits by quietly cutting deals with developers eager to ditch their tax bills, while often producing little meaningful affordable housing. Local taxpayers must pay more to make up for the lost revenue.
As word of the covert deals has spread among cities and counties alarmed to learn of vanishing tax revenue, local officials have complained to state lawmakers. Several vowed to slam the door shut on the deals when the Legislature convenes in January.
In the meantime, however, records suggest the so-called traveling HFCs are racing to complete as many deals as possible before the maneuver is prohibited. “I think they’re trying to ramp up to get these things done before the loophole is closed,” said Weatherford City Manager James Hotopp.
In the process, the small agencies run by unelected boards are creating a massive redistribution of taxpayer money with virtually no public input or oversight. “They’re just doing a money grab, extracting money from our communities,” said Pedro Alanis, executive director of the San Antonio Housing Trust Foundation.
From its headquarters in Brownsville, the Cameron County Housing Finance Corp., for example, has lent its public status to remove large apartment complexes from the tax rolls in Harris, Galveston, Jefferson, Dallas, Nueces, Guadalupe, Collin and Bexar counties, among others. CBS 11 first reported the agency’s North Texas deals.
In exchange, the agency has earned millions of dollars in fees off the deals. In an August 2023 meeting, it reported its bank account had grown from $250,000 to $6 million; by this summer, it was $8 million, financial statements show. The contracts can last up to 99 years, so the apartment owners it partnered with will save many times that in future property tax bills.
While the agency earns money, the cities and school districts hundreds of miles away from Cameron County have to replace their missing tax revenue. Yet in some cases local officials said there was no way to have known the money was leaving their communities.
‘I really thought a mistake had been made’
In Euless, between Fort Worth and Dallas, deputy city manager Chris Barker was preparing the city’s 2024 budget when he happened to notice a 1970s-era apartment complex that paid about $1.5 million in annual property taxes suddenly had a bill of $0. The city’s portion of the missing money from the Oak Park Apartments amounted to about 2% of its total property tax revenue.
“I really thought a mistake had been made,” he said. Barker calculated each single family home would have to chip in $27 to make up the gap – all while Oak Park continued to be a significant user of government services. Last year, the police and fire departments responded 560 times to the property, he said.
After discovering Cameron County HFC was behind the deal – “I had to look up where it was,” he said – Barker tried contacting the agency. It never returned his calls, he said.
Mark Yates, the housing finance corporation’s executive director, did not respond to a list of questions. But in an email he said the agency did important work for Texans. “I strongly believe that people should be able to afford to live in the community in which they work,” he wrote, adding it did the far-away deals only when local agencies weren’t: “We have always wanted to be the HFC of second choice.”
He said the money Cameron County earned from other communities was being used responsibly – “reinvested in our community for increasing our inventory of affordable housing,” he wrote.
BEHIND THE ACRONYMS
Created by a law change in 2015, public facility corporations can be formed by nearly any kind of government entity to promote affordable housing. Although envisioned to help developers build new housing, they also have been used to flip existing apartment complexes into tax-free affordable housing. In addition to a full property tax break, PFCs also provide a 100% sales tax exemption on building materials. New rules passed last year in response to abuses require more affordability and tenant protections, limit PFCs to deals only inside their sponsoring government’s boundaries and demand greater transparency.
Housing finance corporations have been around since the 1970s and can be created only by cities and counties. Their rules remain much looser than those for PFCs. There is nothing prohibiting them from cutting tax break deals far from their headquarters, and there is no requirement they notify local officials. Their affordability standards remain loose, and there is little transparency: Not only are the deals not scrutinized by any outside agency, HFCs are legally permitted to meet in private.
Cameron County isn’t the only housing finance corporation orchestrating the deals far from its headquarters and free of public scrutiny. South of San Antonio, records show the tiny city of Pleasanton (pop. 11,000) created a new housing finance corporation in early 2024. It rejected the Houston Chronicle’s request for a list of tax-exempt deals it was pursuing. Mayor J.R. Gallegos did not respond to an interview request.
But Texas Secretary of State records show the Pleasanton agency has created nearly three dozen business entities since late July across the state. Housing attorneys said each likely represents a separate affordable housing deal. Local deed records show the agency has gone on a buying spree recently, acquiring properties in a half-dozen counties.
On the Mexican border between El Paso and Brownsville, Maverick County (pop. about 60,000) recently activated its housing finance corporation, as well. State records show the agency has created two dozen separate LLCs since August, none in Maverick County.
Agency chairman and County Judge Ramsey Cantu declined an interview request. Like Pleasanton, the county also refused to release any records about where its pending deals were located or how much they would cost local communities.
In far West Texas, the tiny city of Pecos also recently reactivated its housing finance corporation. State records show the agency in the tiny community near the New Mexico border has created four dozen LLCs in the past three months. City officials did not return calls.
A familiar scheme
If obscure agencies earning money off taxpayers by secretly selling their governmental status to arrange far-away tax breaks sounds familiar, that’s because it is. And Texas lawmakers thought they’d solved the problem.
In 2022, the Chronicle revealed a similar scheme that had deleted millions of dollars in tax revenue from unsuspecting communities. A confusing 2015 law allowed any government, anywhere in Texas, to create “public facility corporations,” which could be deployed to arrange the valuable property tax breaks far outside their boundaries and without any local buy-in.
A handful took advantage, helping developers eliminate their property tax bills without informing local governments they were losing millions in revenue. A 2020 study by the University of Texas School of Law found the affordable housing that the deals produced in exchange often was negligible.
The PFCs collected big fees for arranging the deals. One, formed by a tiny district originally created to develop land near the Austin airport, earned more than $30 million. It paid its executive director more than a half-million dollars, making him one of the highest paid government administrators in the state, and spent $1 million on lobbyists.
Alarmed legislators closed the loophole last year. Going forward, the PFCs could orchestrate deals only inside their own boundaries. In exchange for the generous tax breaks, they also had to guarantee genuine low-cost affordable housing. State audits were required to make sure properties receiving the tax breaks followed the rules.
While they were busy fixing public facility corporations, however, legislators missed a virtually identical loophole in similar laws describing housing finance corporations. Like players in a multi-million-dollar game of publicly funded Whac-A-Mole, housing industry financiers soon discovered it.
The main question for taxpayers
Housing experts agree Texas needs more affordable housing. Yet most also say it’s not a great solution to have a distant government agency parachute into a community to earn money by secretly flipping tax-paying apartments into tax-free units with no oversight.
Alanis said the main question for any taxpayer-subsidized affordable housing deal is this: What is the community getting for its money? Traveling HFC deals fail in nearly every meaningful measurement, he said.
For starters, “You have entities not within a jurisdiction making decisions on what to do in local communities.” That means there is no taxpayer representative calculating whether the project is producing affordable housing worth the tens of millions of dollars it will cost in lost tax revenue.
When Bexar County officials last month asked why they hadn’t been told about a pending Cameron County HFC deal to erase a San Antonio apartment complex’s tax bill, a lawyer for the property was direct: They didn’t have to. Texas law “does not require an HFC … to seek the consent of any level of local government,” he wrote.
After housing officials in the Dallas suburb of Irving heard that in nearby Euless a mysterious agency across the state had relieved a large landowner from its property tax bill, they wondered if their city, too, had been an unwitting victim.
“Sure enough, we found two apartment complexes that had been removed from the tax rolls,” said Jon Weist, the city’s legislative liaison. Both were arranged by the Cameron HFC “before we could do anything about it.”
Thanks to the deals, the city was out about $1 million in annual tax revenue, Weist said. What Irving-area residents got in exchange seems modest.
One property the Cameron HFC took off the rolls was the 40-year-old Montoro Apartments. Since being relieved of the expense, the apartments have not been substantially upgraded, city permitting records show. Meanwhile, “affordable” units are available to tenants earning as much as $155,000 a year, according to its website.
By comparison, in the San Antonio area, Alanis said when his organization arranges an affordable housing tax break, it demands much deeper rent discounts to help poorer local families. The fees the trust receives also stay local and can be poured back into the community for more inexpensive housing.
Some Cameron County deals do offer greater affordability, its financial documents show. But by competing with local housing officials instead of working with them, Alanis said, “they’re undermining what we’re trying to do here.”
Feeling the pressure
Weatherford’s Hotopp said he’s already felt the pressure. In May, he said he was approached by a financier representing Lone Oak Apartments, a relatively new market-rate apartment complex on the Fort Worth suburb’s east side.
“We want you to take it off the tax rolls,” Hotopp recalled the man telling him.
Although inexpensive housing in exchange was supposedly part of the deal, “the affordable component was very secondary,” Hotopp recalled. “The main emphasis was them getting a tax exemption.”
If Weatherford didn’t play ball, Hotopp remembers the man telling him, “There are others who will take the deal all day long.” (Hotopp identified the salesman as Noah Laredo, a loan officer with Dallas-based BMC Capital; he did not respond to an email or phone call.) By way of example, the salesman provided Hotopp with a copy of a model agreement with the Pleasanton Housing Finance Corporation.
In response to requests for records of its activity, the Pleasanton agency released only agendas and minutes of its meetings — which, according to state law, don’t have to be held in public.
The records show the housing finance corporation first met in February 2024, when it convened for a discussion of the new HFC and “possible economic benefits to the corporation and the city of Pleasanton.”
In March, the fledgling Pleasanton agency approved its first deal – a complex arrangement of general and limited partners, members, LLCs, etc. — in an eight-minute session, meeting notes show. In April, it approved another deal in four minutes; in May, it OKed four deals in nine minutes. The June meeting required four minutes to approve two deals.
The notes don’t reveal project details. But records at the Texas Secretary of State’s office show Pleasanton Housing Finance Corporation is a party to nearly three dozen partnerships formed between July and November.
County deed records show in recent months the small Central Texas city has become the owner of a number of apartment complexes in Harris, Dallas, Tarrant, Travis, Bexar, Hays and Denton counties. A public prospectus for one of the deals, in Travis County, shows rents at the recently completed property would already qualify as affordable before the tax exemption.
The Eagle Pass-based Maverick County Housing Finance Corporation also rejected a request for financial and transaction records. Minutes show its initial meeting was held this past July.
“The county will be able to get a great return in financial capability,” Judge Cantu predicted, according to the minutes.
Like Pleasanton, Maverick County’s new housing finance corporation has moved quickly. It is a party to two dozen partnerships formed between July and November, state records show. Deed records show it has acquired properties in Harris, Tarrant, Dallas and Bexar counties.
‘Finally catching wind of it’
The traveling HFC tax-break boom may be short-lived. Several legislators vowed they will move quickly to close the loophole when the 2025 legislative session gets underway in January.
State Rep. Gary Gates, R-Richmond, who owns several apartment complexes, said he had received unsolicited offers to help remove his properties from the tax rolls, even though his rents were already below market rates. He said he will ask for a select committee to be appointed to craft a law to prohibit the deals.
The HFCs “have become so greedy,” he said. “And cities now are finally catching wind of it.”
Gates also asked Attorney General Ken Paxton to weigh in on whether state law allowed housing finance corporations to cut deals outside of their jurisdictions. The non-binding opinion is expected soon.
In recent meetings, Houston Republican Sen. Paul Bettencourt, who in 2023 wrote legislation curbing the PFC excesses, said he, too, intended to take aim at housing finance corporations this time around. “The idea that [they] can parachute into major cities is very bad public policy and needs to be stopped,” he said.
The Texas Association of Local Housing Finance Agencies recently issued a statement declaring its opposition to the out-of-jurisdiction deals done without local buy-in, as well.
Fearful that overzealous lawmakers could ban the affordable housing agencies altogether, the organization said it is already working with legislators to tighten up the law while allowing HFCs to continue doing good work within their own communities.
“It does no good to provide a community with something they don’t want or need,” said executive director Todd Kercheval.
Key Texas legislators plan to close housing finance corporation loopholes in Texas
HOUSTON CHRONICLE Dec 12, 2024
Texas lawmakers already have expressed displeasure with obscure housing agencies that secretly cut deals with developers to arrange far-away tax breaks. In 2023, legislators took aim at “public facility corporations,” entities that could be created by almost any government to arrange lucrative tax exemptions for affordable housing projects anywhere in Texas.
After Houston Chronicle reporting revealed abuses, a suite of new laws prohibited PFCs from operating outside their own boundaries unless they had permission from a local agency. They also spelled out what “affordable” really meant and subjected the deals to state audits to ensure taxpayers were getting their money’s worth.
Yet the new laws failed to address nearly identical loopholes for housing finance corporations. Following a stream of complaints from city and county officials that a small group of HFCs were picking up where PFCs had left off, several lawmakers already have vowed similar reforms for HFCs when the Legislature convenes in January.
Here are several likely to be key players:
State Sen. Paul Bettencourt
The Houston Republican introduced several PFC reform bills in 2023, including two that passed. In a recent committee hearing, he solicited testimony from witnesses who described how a small number of HFCs are now exhibiting the same behavior now prohibited by PFCs.
“This idea that they can parachute into major cities is very bad public policy and needs to be stopped,” he said, adding in an interview: “It’s become an explosive cottage industry – another excess that needs to be curbed.”
State Rep. Gary Gates
The Republican from Richmond, whose job is managing his collection of apartments, said he had been approached by a broker proposing an HFC tax break for one of the properties. Gates, who also sponsored a PFC reform bill last session, said he would ask for a select committee to be appointed to craft a law to prohibit the deals.
“It’s the same thing; they’ve just abandoned the PFC model and moved over to this [HFC] model,” he said. A spokeswoman added that he had already received an early bill draft.
State Sen. Tan Parker and State Rep. David Cook
Tarrant and Dallas counties both have had numerous properties removed from their tax rolls by distant housing finance corporations. Local officials say they have contacted the North Texas Republican lawmakers for relief, and both have pledged to seek changes. Neither responded to interview requests.