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Critics of deals include Houston Mayor Sylvester Turner and state Sen. Paul Bettencourt.
R.A. SCHUETZ, STAFF WRITER
May 8, 2023
After the Houston Housing Authority’s March meeting, Mayor Sylvester Turner sent a letter to the organization’s chairman, sternly rebuking him for going against his instructions when it moved forward with 14 new tax break deals, which still need final approval. At the authority’s April meeting, there wasn’t a single item on the agenda regarding such tax breaks.
“This will probably be one of our shorter meetings,” said Lawrence B. Snowden, the housing authority’s chairman.
The housing authority deals remove apartment complexes from the tax rolls — exempting their owners from all property taxes – in exchange for making a portion of their units affordable. While the housing authority has said they create much-needed affordable housing in amenity-rich neighborhoods, others assert that the law’s definition of affordable is too lax and there is not enough transparency about how the tax breaks translate to rent discounts.
After two such deals involving what are known as public facility corporations caused an uproar in the wealthy Tanglewood area, the mayor hit pause.
And the clock is ticking. While commercial property owners wait to see whether the deals – which would exempt them from roughly $1 million in yearly property taxes apiece – go through, the Texas Legislature is fiercely debating changes to the state law that makes them possible. Proposed bills could change how the tax break deals are regulated – or banish them entirely.
The tax breaks for public facility corporations were approved by Texas lawmakers in 2015, when then-state Sen. Craig Estes introduced them in a last-minute amendment to financing legislation.
Estes said the deals would only involve nonprofit organizations.
But the law specified nothing of the kind, and for-profit owners of apartments are now clamoring for the deals. Among those waiting in line for a Houston Housing Authority vote are two major Houston developers, the Morgan Group and Lovett Commercial, and a California investment firm with holdings in real estate and oil-and-gas exploration, Schumacher Interests.
A 100-percent tax break for apartment complexes worth tens of millions is an unusually large concession, and the exemptions last for up to 99 years. Low income housing tax credits, by contrast, are far less lucrative and can command steep competition.
University of Texas law professor Heather Way, an expert in affordable housing, first heard of them in 2019, when they were relatively uncommon.
When she started looking into the deals, what she saw on some was jaw dropping. While the idea was that developers would take what they saved in property taxes and put it toward lowering rents, some properties that were already considered “affordable” by the law took the tax break without granting any further discounts on any of their units for the public. Many weren’t even advertising that any units were supposedly affordable. And when graduate students working with Way called the leasing offices, multiple agents said that there were no income restrictions on their units.
Not all public facility corporation deals are that extreme.
The Deerwood, which sparked an outcry by nearby residents in Houston, for example, promised to create 97 affordable apartments. Thirty-two of those apartments were already considered affordable with little to no discount, according to housing authority documents, because $1,440 a month was considered affordable for a one-bedroom.
However, the deal created sizable discounts for some units – two three-bedroom apartments and one two-bedroom, for example, cost half of what they would otherwise, with between $1,200 and $1,590 a month off. On average, affordable units are being rented at a $310 a month discount, which accounts for about half of the $750,000 a year the Deerwood will be saving in property taxes.
After Way’s report, which detailed abuses of the program and suggested ways to improve the law, published in 2020 two things happened. For one, the number of deals surged. Over 200 are currently in the pipeline, according to Way. She regularly gets calls from around the country from investors eager to use the tool.
“Word has gotten out,” she said. “All sorts of people are coming out of the woodwork from around the country to figure out how they can take advantage of this huge tax benefit.”
At the same time, taxpayers and legislators began looking at the deals with growing concern. Outside Turner’s confrontation with the Houston Housing Authority’s, controversy has been swirling around an obscure taxing authority outside of Austin, which has been using the law to remove properties from the tax rolls of cities – including Houston – far away from its own taxbase and voters. And in western Harris County, a small municipal utility district is worried that tax break deals the Houston Housing Authority is preparing to vote on will take away 20 percent of its tax revenue.
“Districts like mine agonize every year over operations, aging infrastructure and tax rates,” said Jack Baber, who is on the board of directors for Municipal Utility District 188, which builds and maintains water, sewage, drainage and park infrastructure. “Then out of the blue, you change everything.” If the three proposed deals within the district’s boundaries all go through on top of the one that has already been approved, he said, the $410,000-a-year loss of revenue would have to be filled by raising taxes on the 550 single-family homes in it.
This legislative session over half a dozen bills were introduced to reform public facility corporation deals. When a bill authored by Rep. Jacey Jetton of Fort Bend County reached the floor of the Texas House, an hour-and-a-half battle ensued.
Rep. Gary Gates, also of Fort Bend County, sparred with Jetton over how to make sure that PFC abuses were reined in. Gates, who owns 44 apartment complexes across the Houston region, had reached out to Way after her report published, and they’d spoken at length about the pitfalls of the program.
Gates felt strongly that there should be guardrails in place to make sure a significant portion of the tax break was used to reduce rents.
“Under this bill, 42 of my properties would qualify and I would not have to reduce my rent one penny,” he said.
That’s because his properties tend to be older and are already affordable to families earning below 80 percent of the Houston area’s median income, which is $71,000 for a family of four. He pushed for a requirement that at least 60 percent of the money saved from the tax break be used toward rent discounts.
State representatives largely agreed with Gates, and voted to add the requirement. They also voted for an amendment that would require the county, city and school district impacted by a tax break to consent to each tax break before it is approved.
The bill that finally passed the House also reduced the maximum term for new deals to 12 years from 99 and requires the state to conduct an annual audit that will take stock of how much of the tax break was passed along to tenants in the form of rent discounts. It would not, however, require such audits for deals that were approved before the legislation takes effect.
Now, the ball is in yet another Houston-area politician’s court – that of Sen. Paul Bettencourt, who represents most of West Harris County. Bettencourt’s committee will decide whether to advance the bill – or a similar measure – to the Senate floor. Bettencourt said he feels strongly that the public facility corporation deals needed reforming and said a bill will be advanced soon.
Way said she’s hopeful that the Legislature will find a way to limit abuses of the PFC program while allowing it to create meaningfully affordable housing. “The days are waning in the session and there’s a sense of urgency that there needs to be big reforms.”
Any new law likely will not go into effect until September. “So there’ll be a rush to do as many as possible between now and then,” Gates warned.
Meanwhile, in Houston, it’s unclear how long the pause on PFC deals will last.
“The city of Houston is closely monitoring developments in the Legislature regarding PFCs,” said Mary Benton, director of communications for the mayor, in an email. “However, our review and evaluation of PFCs is independent.”