October 12, 2023
The affordable landscape of multifamily real estate in Texas was recently rattled, particularly in Houston, where a brewing controversy cast a spotlight on the use of Public Facility Corporations (PFCs). Initially conceived as a beacon of hope for middle- and lower-income tenants seeking rent relief, the program spiraled into a hotbed of debate, drawing relentless scrutiny since its more active expansion in 2015.
Under the mandate of providing affordable housing, sponsors found a financial haven in PFCs, partaking in a tax abatement in exchange for restricting half the property for middle-income earners. They navigated a loophole by selling land and improvements to the PFC and then leasing them back, in deals that extended up to a term of 99 years. This arrangement, codified by Chapter 303 of the Texas Local Government Code, seemed an ingenious strategy — until the repercussions hit some of the largest Texas city’s hard.
Houston became the epicenter of this tumult, with the Houston Housing Authority leading a charge that saw a staggering 76 deals sealed under the PFC program as of February 2023. This aggressive adoption outpaced other Texas cities, unraveling a tapestry of issues that the original 1990s legislation and subsequent 2015 amendment failed to anticipate.
The controversy erupted like a wildfire. Properties were pulled off tax rolls, with some elected officials believing they were sidelined and kept in the dark, triggering a backlash from municipalities caught off guard with declining tax roles. The situation took an even more intriguing turn with the Texas Essential Housing PFC, spawned by a Municipal Management District in Austin, which executed numerous projects not just locally but audaciously across city and county lines, however, all apparently in compliance with Texas state law at the time.
The contentious points were numerous:
- Elected bodies were bypassed, with massive projects taken off tax rolls, sparking governance concerns.
- PFCs went beyond their own jurisdictions, involving themselves in projects beyond their geographic confines.
- Accusations swirled that some projects, under the guise of aiding lower-income demographics, were, in fact, already within affordable limits.
- Compliance standards seemed more like a decorative trim than an enforced mandate, with the PFC program lacking rigorous checks and balances.
2023 marked a turning point when the Texas Legislature, pressured by the uproar, introduced sweeping reforms. The new mandates imposed stricter income brackets for tenants, demanding greater transparency and operational disclosures from PFCs. Audits became compulsory, and public hearings and community advisory committees were established, giving a voice to the once-ignored public. The days of PFCs engaging in deals outside their jurisdictions were also brought to an end.
Unfortunately, the future remains murky for desperately needed affordable housing in Texas. With tighter controls and heightened scrutiny, the once-booming PFC activity has waned. Sponsors with deeply ingrained affordable missions are looking for new avenues to provide affordable housing to Texas for middle- and low-income earners. With the new landscape going forward, they could pivot towards partnerships with local Housing Finance Corporations (HFCs), which offer similar pre-2023 PFC benefits but necessitate a public-private partnership that many private entities traditionally shun. In addition, private sponsors have also introduced a new program into the state of Texas where HFC’s purchase the assets themselves and finance it through tax-exempt bonds, with the properties being managed by private sponsors.
In order to avoid further controversy, many HFC’s have also been implementing “public good” tests to their proposed projects whereas a certain percentage of the tax abatement has to result in aggregate combinations rent reductions for tenants or fees into the HFC.
As the dust tries to settle on this upheaval, one reality is starkly evident: the journey to balancing affordable housing needs with financial and operational propriety in Texas, and nationwide, is fraught with complexities, controversies, and continuous politics. The Texas PFC saga serves as a dramatic chapter, a catalyst for change, and a lesson engraved in the annals of real estate history.
This is a world that Offerd is well versed in and actively assisting affordable groups through the maze of entities, programs, and politics. If you have an affordable focus or are interested in learning more book a call with us.