Monday, April 24, 2023

Texas lawmakers looking to reform affordable housing tax exemption program

A state program granting lucrative tax exemptions to developers for affordable housing options has prompted lawmakers to propose reforms concerning its lack of oversight, but competing legislative proposals have allegedly drawn interference from former House Speaker Dennis Bonnen.

Two legislative proposals to reform a 2015 state law creating Public Facility Corporations (PFC) have been approved by the House Committee on Urban Affairs: House Bill (HB) 2071 by Rep. Jacey Jetton (R-Richmond), and HB 3568 by Rep. Gary Gates (R-Richmond). But last week, the House Calendars Committee set Jetton’s bill for consideration on the House floor.

“This was a disheartening development which took me by surprise,” Gates said. “My bill was written with a lot of assistance from a law professor from the University of Texas who did a study exposing the abuses of PFC loopholes in 2020.”

Under the program, local government officials may create a PFC to purchase or build a multifamily property, which is then leased back to a private developer or owner. The property is exempted from all property and sales taxes for up to 99 years if some rental units are set aside for “affordable housing.”

Gates’ bill offers stringent reforms, which include mandating state agency audits of all existing PFCs, setting minimum apartment size standards, requiring approval from all affected taxing entities for new PFCs, and prohibiting “payments in lieu of taxes” to authorizing agencies.

“Bonnen contacted me personally several times requesting I drop my bill and said only HB 2071 will ever make it out of Calendars,” said Gates.

Last month, Bonnen announced the creation of a new consulting firm, Second Floor Strategies, with lobbyist Shera Eichler, although Bonnen himself is not currently registered as a lobbyist according to the Texas Ethics Commission database.

Gates said that Bonnen claimed to have been hired by Civitas Capital Group, which is co-founded by Rep. Rafael Anchia (D-Dallas). Gates also noted that one of the Houston-area properties being converted to a PFC in the Katy Independent School District was purchased by Civitas in 2021.

“One of Anchia’s properties in my district has an appraised value of $56.7 million,” said Gates. “Once converted, he will save approximately $1.35 million per year while suffering no income loss on rents. My constituents will then have to make up the loss of revenue to the state.”

Under current law, developers may convert existing properties to PFC status to gain a 100 percent tax exemption for 75 to 99 years. Over the past few years, the Houston Housing Authority (HHA) has removed more than $5 billion in property from the tax rolls for all taxing authorities, including school districts, community colleges, and the county, without approval from those governing bodies.

To obtain the tax exemptions, developers promise to set aside 50 percent of units for families earning 80 percent of the local median income (LMI) or sometimes lower percentages of total units for families earning 60 percent of LMI. Since there are no minimum size requirements for the units, developers may designate small studio-sized apartments for low-income families.

Additionally, there is no audit requirement or registry of PFCs in the state.

Investigative reporter Wayne Dolcefino found that HHA has often re-approved existing PFC properties, originally approved solely for renters making below 60 percent of area median income, to out-of-state companies not subject to Texas transparency requirements and with only 10 percent of units set aside for low-income families.

The Houston Chronicle reported last month that of 10 recently approved PFCs, all were already charging rents below the market rate and even below reduced rents for those earning 80 percent of LMI.

Last year, a municipal management district in Travis County approved a new PFC located in Williamson County without consulting any of the taxing authorities there, which is permissible under the current law.

Dr. Heather Way, director of the University of Texas Entrepreneurship and Community Development Clinic, found in a 2020 study that the PFC program failed to provide adequate affordable housing and that the property tax losses outstripped any benefit to the community.

Way assisted in crafting Gates’ reform legislation and testified before the House Committee on Urban Affairs in March, saying HB 3568 would address problems with creating affordability, transparency, and accountability.

“This bill is so far, so much better and goes so much farther in addressing these widespread abuses,” said Way.

Gates also noted that public school districts will still need to provide services to families in PFC, and that the state will have to make up for the loss in local property tax revenues.

HHA Chair LaRence Snowden said last month that each of the 76 Houston-area PFCs removed approximately $1 million in tax revenue annually from local government authorities.

Jetton’s HB 2071 calls for a state registry for all future PFCs, and requires taxing entities impacted to receive notification prior to approval, but does not give those entities any authority to oppose the tax exemptions. Both bills would prohibit a PFC from acquiring or building a tax-exempt property outside of their boundaries, but only Gates’ would prohibit special use districts such as Municipal Utility Districts or Management Districts from sponsoring tax-exempt PFCs. These districts often receive no advance notice that these properties are set to be removed from the pool of taxable property, resulting in an unexpected drop in projected tax collections.

While both bills call for audits, Jetton’s would allow PFC owners to hire their own third-party auditors, while Gates’ states that the Texas Department of Housing and Community Development should conduct audits of all existing and future PFCs to ensure that there is a benefit to the community and affordable housing is actually increased.

“This will expose the extent of any abuses,” said Gates. “The industry and the government entities who have created these deals will go to the mat to prevent this exposure of their self-dealings. In fact, this may lead to criminal and civil charges and open up the ability of the state and the government entities to claw back many of these past deals.”

Another practice Gates seeks to eliminate is “payment in lieu of taxes,” in which a developer makes a cash payment to the authority to receive PFC status.

State Sen. Paul Bettencourt (R-Houston) has also filed bills to either reform or eliminate the PFC program, but they have not yet been considered by the full Senate. In 2021, Bettencourt’s reform legislation was approved by the Senate but not considered in the House.

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