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Saturday, April 3, 2021

Tax breaks for developers under scrutiny in San Antonio, Texas capitol

Posted By on Sat, Apr 3, 2021 at 3:30 PM

click to enlarge Rebecca Flores protests public facility corporations outside the H-E-B SoFlo Market on Saturday.
  • Rebecca Flores protests public facility corporations outside the H-E-B SoFlo Market on Saturday.
Texas legislators are considering a handful of bills that would abolish or restrict the use of public facility corporations, or PFCs — a tool intended to create affordable housing, but that has been scrutinized for depriving public entities of millions of dollars in property tax revenue in San Antonio, and other Texas cities.

Meanwhile in San Antonio, a growing number of housing advocates are demanding that the City of San Antonio stop using the tool, arguing that developers are stuffing their pockets with levels of profit they otherwise wouldn’t receive if they had to pay property taxes, all while spurring gentrification, which raises property taxes for others. Another point of theirs: Much of the housing that PFCs help build isn’t affordable to the average San Antonian.

“We don’t think these kind of deals should go forward at all,” housing activist Sofia Lopez said after a protest held on Saturday. “They undermine the public sector on several fronts, and they build things that drive up costs for everybody else.”

Most, if not all, developers who partner with PFCs say the property tax exemption is necessary in order to make the projects work financially. They also argue that PFCs help resuscitate parts of town that have long been ignored by developers and private investment.

Such arguments raise the question as to the true purpose of PFCs: Are they an affordable housing or economic development tool?

Locally, PFC deals have played a large role in redeveloping the downtown area. The Baldwin in east downtown, and the Cevallos Lofts in Southtown, are two examples in which the San Antonio Housing Trust PFC, which belongs to the City of San Antonio, partnered with Cleveland developer NRP Group. The two entities have also partnered on The Flats at River North, the monolithic mixed-use building that’s nearing completion on the northwest corner of Broadway and Jones Avenue.

How PFCs work

As of now, the PFC tool works like this: A developer partners with a public entity to build an apartment complex, which receives a full property tax exemption, under Texas law, so long as half of its units are rented to those making up to 80% of the area median income (AMI), or $57,600 in the San Antonio-New Braunfels metro area for a family of four. Housing officials and developers often refer to this level of housing as workforce housing. Often, units are offered to people making up to 60% AMI.

[ Scroll down for a chart showing AMI levels. ]

There’s no restriction on the other half of the apartments, therefore the developer can charge whatever the market will bear, or what’s known as market-rate.

The PFC, which is technically a nonprofit created by a governmental entity, owns the land and leases it back to the development partnership, which includes the PFC.

click to enlarge pfc-explained-cropped-2-1024x549.jpg

In San Antonio, these are the public entities with PFCs:

» City of San Antonio » San Antonio Housing Trust Public Facility Corporation

» San Antonio Housing Authority » San Antonio Housing Facility Corporation, Las Vargas Public Facility Corporation

» Hemisfair » HemisFair Park Public Facilities Corporation

» Alamo Colleges District » ACCD Public Facility Corporation

The San Antonio Housing Trust PFC has produced the most apartments—16 developments, so far, across the city totaling 4,371 units. Of that unit total, 24.6% have been market-rate, 18.5% have been for households making 80% AMI or less; 50.1% at 60% AMI or less; 6% at 50% AMI or less; and 0.6% at 30% AMI or less.

Another eight Housing Trust PFC developments are scheduled to be completed this year, bringing the apartment total to 6,271 since the program started in 2011, while maintaining roughly the same percentages.

[ Download a list of the San Antonio Housing Trust PFC projects. ]

click to enlarge The Flats at River North is nearing completion at the corner of Broadway and Jones Avenue. - BEN OLIVO / SA HERON
  • Ben Olivo / SA Heron
  • The Flats at River North is nearing completion at the corner of Broadway and Jones Avenue.
In San Antonio

On Saturday, eight or so protestors held signs outside H-E-B’s SoFlo Market to inform motorists and passersby about PFCs. The group, which includes Lopez, a former SAHA commissioner, and Housing Commission Chairwoman Jessica O. Guerrero, has sent letters to Mayor Ron Nirenberg and the City Council demanding that San Antonio put an end to PFC deals. Five council members comprise the San Antonio Housing Trust PFC board—Roberto Treviño (District 1), Rebecca Viagran (District 3), Dr. Adrianna Rocha Garcia (District 4), Shirley Gonzales (District 5), and John Courage (District 9)—and ultimately decide which projects the city should back. The PFCs of SAHA, Alamo Colleges District and Hemisfair have their own governing bodies, which make similar decisions.

The advocacy group, which hasn’t decided on a name, blames PFC deals for helping to raise property taxes in the areas they’re built in. The tax exemption means the land the housing sits on isn’t contributing to the tax rolls of various public entities, such as independent school districts, the City of San Antonio, Bexar County, the University Health System, and the San Antonio River Authority. Many of the leases involving PFC-owned land and developer last for 75 years. While the partnerships don’t pay taxes, their mere presence drives up land values, and therefore taxes around it, opponents say.

Critics of PFCs also argue that nearly half of the units being produced are priced at market-rate or for people making up to 80% AMI, which is universally recognized as being inflated from San Antonio’s true median income because New Braunfels is also included in the calculation. While housing for people making up to 80% AMI may still be needed, it’s still the upper echelon of rents many San Antonians can’t afford, they say. The Census Bureau’s American Community Survey 5-year estimates put San Antonio’s median income at $52,455.

[ Read: The San Antonio-New Braunfels median income rises to $72,000. Here’s why it matters ]

Treviño said the PFC discussion is a worthy one, but that it should wait until after the May 1 election, when voters will be asked to change the city charter. If approved, the charter amendment would allow for future voter-approved bond dollars to be used for affordable housing initiatives. Should voters not approve the amendment change, Treviño said, the PFC would be one of the only remaining methods the city would have that produces apartments for people making below the area median income.

“I don’t know that I can just say we should ban PFCs right now,” Treviño said. “We’re better off having this discussion after (the city election).”

[ Read: Charter amendment intended to add ‘affordable’ housing in San Antonio. Here’s what you’ll be voting on in May ]

In recent years, the San Antonio Housing Trust PFC board has demanded more affordability from agreements with developers and their investors. Also, recently, the Housing Trust PFC board approved a tenant protection policy, which prohibits future developments from denying a Section 8 voucher holder a lease, as well as prohibits insufficient rental history and credit history as the sole reasons for rejecting a lease.

The changes have come since local media outlets—mostly the San Antonio Express-News, which first wrote about esoteric PFCs in 2018, followed by the Heron — have shown light on what was once an opaque housing incentive process.

click to enlarge screen_shot_2021-04-03_at_3.14.26_pm.png

Advocates like Lopez say the levels of below-market-rate apartments that PFCs produce barely address San Antonio’s true housing needs as identified in the Mayor’s Housing Policy Task Force in 2017. Last year, the city’s Neighborhood and Housing Services Department, in conjunction with an outside consultant, began recalibrating the housing goals.

Whereas the task force identified a need for 18,681 affordable units, the recalibration effort more than doubled that number to 47,686. These numbers were presented publicly last summer. The Heron asked NHSD for updated numbers on Wednesday and the department hasn’t provided them yet. 

The updated numbers show a goal of 22,430 over the next 10 years in apartments priced for people making less than 30% AMI, which is less than $21,600 for a family of four. 

“We have known for entirely too long what level of affordable housing we need and we’ve been avoiding it,” said Lopez, who’s a housing researcher. “Sure, it’s hard. But hard things take work. Things like PFCs take so little work. A developer pitches the Housing Trust or SAHA on a deal—it’s not good enough.”

In Austin

At the Texas Legislature, two competing bills have gained support from stakeholders such as NRP Group, the most prolific developer of PFC complexes in the state, and Texas Housers, an affordable housing advocacy group, respectfully. Both would impose stricter transparency requirements on PFC deals, responding to criticism that they are done with little public input or scrutiny. But they differ in the levels of affordability they would require.

NRP Group is putting its weight behind a bill filed by Sen. Paul Bettencourt, R-Houston, which wouldn’t change affordability requirements for complexes built in partnerships between private developers, such as itself, and cities and counties, but would tighten them for complexes built with housing authorities, such as SAHA.

Jim Plummer, a local attorney who spearheaded the use of PFCs, and who negotiates with developers on behalf of the San Antonio Housing Trust and SAHA’s PFCs, has also come out in support of that bill. 

Another bill, filed by state Rep. Jon Rosenthal, R-Houston, and supported by Texas Housers, would require that all PFC complexes offer apartments priced more affordably than under the current law. The Rosenthal bill would require that half of the below-market-rate units—or 25% of the total—be reserved for those making up to 60% AMI, the threshold which the U.S. Department of Housing and Urban Development (HUD) defines as “affordable.” Of the affordable units, 20% would have to be leased to tenants with housing choice vouchers.

“Whether they are teachers or bus drivers, janitors, counselors, cafeteria workers, a lot of folks wall into this 60% to 80% (AMI) area,” Rosenthal said in an interview. “A lot of them are spending half of their income or even more than that just to put a roof over their heads. It’s a challenging situation for a lot of constituents in my district.” 

As originally written, the Bettencourt bill would have required for an eighth of the under-market-rate units in PFC complexes to be reserved for those making up to 60% AMI, and another eighth for those making up to 30% AMI. But after discussions with NRP Group, the bill has been changed so that only housing authorities face new requirements.

At committee hearings last week, Plummer and Debra Guerrero, NRP Group’s senior vice president of strategic partnerships and government relations, argued that imposing such restrictions on all PFC deals would hinder their use as an economic development tool.

They say that PFC complexes should not be seen as “affordable housing.” Rather, the complexes offer “workforce housing” within the budgets of middle-income renters. 

PFC deals can also be used to build housing in areas where investors have been unwilling to risk their money, they say. Once the complex is open, othert investors can see how well it is doing and have the confidence to build nearby. 

“In San Antonio, we have a public facility corporation that has been used on a consistent basis to do economic development in areas of town that haven’t seen development in 30 years,” Plummer said before the House’s local government committee last Monday. “By virtue of utilizing the PFC tool, we are bringing about development and redevelopment of areas of town that the city would like to target.”

As an example of this kind of use of the PFC tool, Guerrero cited the Salado at Red Berry, a complex which NRP Group recently built at the Red Berry Estate on the East Side.

The Bettencourt bill would impose stricter affordability limits on housing authorities using PFCs because the purpose of those authorities is to create affordable housing, said Brian Thornton, his deputy legislative director. 

In effect, the bill would give the PFC tool different purposes depending on who is using it. For housing agencies, it would be an affordable housing tool, while for cities and counties, it would be an economic development tool.

Heather K. Way, a professor at the University of Texas at Austin School of Law who recently studied PFCs, points out that PFC complexes don’t create permanent jobs, which is typically seen as the purpose of economic development.

Guerrero declined to comment for this story, and Plummer did not respond to requests for comment.

SAHA has dabbled in PFCs. Aspire at Tampico is a $33.6 million development the housing authority’s PFC is partnering on with locally-based developer Mission DG. It’s been criticized by West Side activists for not providing affordable units more in line with the West Side’s median income. The housing authority has also partnered with the Lynd Company on the 210 Josephine Apartments, two blocks west of the Pearl, on a 259-unit complex, in which 10% of the units, or 26, will be set aside for households making up to 60% AMI.

In an interview in January, SAHA’s interim President and CEO Ed Hinojosa Jr. said SAHA’s current partnerships will be required to accept Section 8 vouchers. He also said all future partnerships must include significant levels of public housing. 

“We will be pursuing all avenues to increase the amount of public housing in San Antonio,” Hinojosa said. “That’s what we’re going to be asking in new transactions, in new deals that come forward.”

Is it really affordable?

Way, the UT professor, said that the economic development rationale for PFC deals is “very problematic.” Last summer, she published a study on PFC deals which found, among other things, that their income-restricted apartments are often no more affordable than units in nearby market-rate complexes.

“The starting rents are not even affordable to teachers or cops starting out. So it’s questionable—when we talk about serving the workforce, what part of the workforce are we talking about?” she said in an interview. 

At the Friedrich Lofts redevelopment on the East Side, a partnership between Dallas developer Provident Realty Advisors of Dallas, American South Real Estate Fund of Atlanta, and the San Antonio Housing Trust PFC, a studio apartment for a single person making up to 80% AMI is projected to be $1,100. One-bedrooms for a household in the same income bracket would range from $1,375 to $1,420.

[ Read: “Analysis: It’s time to call BS on ‘workforce housing’ “ ]

For this project, the Housing Trust PFC chose not to adhere to rent limits established by HUD. Housing Trust Executive Director Pete Alanis told the Heron last year that higher rents were needed in order for the financials to work on the long-stalled Friedrich, a decision that was influenced, at the very least, by Atlanta’s American South Real Estate Fund, the equity provider.

“It’s the deal that is going to finally allow this project to proceed, and we’re finally going to have the Friedrich done,” Alanis told the Heron in June. “Otherwise, it just wouldn’t have happened.”

Afterward, Alanis said, future Housing Trust PFC partnerships will adhere to HUD’s rent limits.

In a statement for this article, Alanis said he welcomed more PFC guidelines from Texas lawmakers, including “lowering income targets, standardizing rent and income requirements, improving access for Section 8 voucher holders, and enhancing tenant rights.”

Another bill, filed by Rep. Gary Gates of Fort Bend, would abolish the PFC tool altogether. 

“I went and looked up each of these projects—I’ve looked up over probably 30 of them—and we went and did a rent comparison of what the free market rent is, and the vast majority of the times the free market rent was at or less than what these projects were,” Gates said. “So I really don’t think it provided virtually any real affordable housing stock.”

Christina Rosales, deputy director at Texas Housers, said that Gates’ bill is a “reasonable bill.” But Texas Housers is fighting for reform of the PFC tool because the organization considers that effort a more achievable goal considering NRP Group’s influence at the Texas Legislature.

“I hesitate to say it, but they came in with a lot more power,” Rosales said of NRP Group. “They have a lot more sway with lawmakers, to be honest, and I’m just not sure that we can contend with that. So that’s why we’re talking about reforms.”

Way said that she thought the Rosenthal bill was “the most comprehensive” in fixing the problems with the PFC tool.

“Even the Bettencourt bill is a huge step in the right direction and there’s a lot of really great, positive reforms in there,” she said. “It’s disappointing to see the carve-outs for the city and county-sponsored projects, but I still think there are a lot of good things. I’m really excited to see this conversation taking place in the Legislature. This is a conversation that should have taken place when this was originally proposed in 2015.”

'Every deal is just a little different'

Treviño says that revenue gained from Housing Trust PFC partnerships has helped fund other city housing initiatives, such as more than 1,000 home repairs via the Under One Roof program. “Much of that is funded by the PFC,” Treviño said. “The minor home repair (program)—much of that is funded by the PFC.”

One question that seems to be up in the air: Can developers still build without the property tax exemption?

Projects’ pro formas, the financial document that tells whether a project will work, or not, financially, are hard to come by. Several Heron open records requests seeking PFC pro formas have been challenged by various developers to the Texas Attorney General.

“It’s hard to know when they don’t show anybody their pro formas,” said Paul Demanche, a housing consultant and board vice president of the San Antonio Housing Trust Foundation, the administrative entity that runs the Housing Trust, at Saturday’s rally. “Are we supposed to believe a company that is profit motivated to take their word for it? And I don’t think the five council people that make those decisions should take their word for it either.”

Treviño said the council members that approve PFC partnerships will see a project’s pro forma. 

“We review those projects individually, so we have regular meetings to go over projects that are happening in our district to understand the numbers,” Treviño said. “There are a number of projects that just don’t pencil out, and don’t come to the PFC. There is a level of trust we have to put on Jim Plummer.

“Every deal is just a little different. One of the things I’ve been very adamant about is: Depending on where you build, it may be more expensive to build the same number of units at one spot versus another.”

Doesn't go far enough
click to enlarge The Baldwin, which opened in 2018, was built by NRP Group. - SA HERON FILE PHOTO
  • SA Heron file photo
  • The Baldwin, which opened in 2018, was built by NRP Group.

The PFC tool was “created quietly” in 2015 through the passage of an amendment on the Texas Senate floor, where it was misrepresented as only being for the use of non-profits, according to Way’s report. Plummer had earlier testified in committee that the bill created no significant changes, calling it a “clean-up bill.”

At the time of Way’s report, at least 30 apartment complexes had been built or renovated through PFC deals, removing an estimated $1.2 billion in property value from the tax rolls at great cost to school districts, cities, counties, health systems and other public entities.

The report identified other problems with the tool: It does not require complexes to carry rent restrictions, or to adjust for household size in its income limits, as most affordable housing programs do. The process of making PFC deals is typically ad-hoc, without a bidding process.

Rosenthal’s bill would require the owners of PFC complexes to limit rents in the income-restricted units to 30% of the income limit. For example, a tenant living in a unit reserved for someone making 60% of the area median income would have to pay a rent below 30% of that 60% income, minus an allowance for utility costs.

Both Bettencourt and Rosenthal’s bills would require PFC complexes to accept housing choice vouchers, responding to another concern Way cited in her report. 

Rosenthal said he wanted to coordinate with Bettencourt to put together a bill that could make it through the House and Senate, and that he was ready to compromise with NRP and other stakeholders. 

“The goal would be to help make these stakeholders happy, to help them become allies instead of opposition,” he said. “You have to be open to compromise. What the compromise looks like, I don’t know. I would argue that where we’re at with this thing already doesn’t go far enough. It’s an incremental change.”

Former Heron intern Carson Bolding's reporting from 2020 also contributed to this report.

This story was originally published by the San Antonio Heron, a nonprofit news organization dedicated to informing its readers about the changes to downtown and the surrounding communities.

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