Two bills to reform PFCs, which provide tax breaks to developers, make progress in Legislature

Efforts by state lawmakers to rein in the use of public facility corporations, or PFCs, which provide lucrative tax breaks to developers building mixed-income apartment complexes, have remained under the radar at the Texas Legislature, with battles over voting and gun rights dominating the headlines.

But two PFC bills have now moved forward in the House and Senate, presenting competing ideas of how the controversial housing tool should be used: 1) as a method of creating more affordable housing, or 2) as a means to resuscitating economically disadvantaged parts of town.

Meanwhile, whatever the motive, PFCs may carry important consequences for the funding of school districts, health systems and other taxing entities.

A bill filed by state Sen. Paul Bettencourt, R-Houston, that would restrict the ability of housing authorities to make PFC deals as they’re currently structured, but would allow developers to keep making them much as before, passed the Senate on April 19 and was considered by the House’s Urban Affairs committee last Wednesday. The bill has the crucial support of NRP Group, a Cleveland-based development firm that pioneered the use of PFC deals in Texas, and San Antonio, in particular, and has lobbied hard to limit any changes.

On Tuesday, the House Urban Affairs committee voted 5-3 to allow the bill to go to the floor, with one member abstaining from the vote.

Another bill, filed by state Rep. Armando Walle, D-Houston, would place tighter restrictions on developers of PFC complexes than Bettencourt’s bill, forcing them to reserve 10% of apartment units for low-income tenants and to place rent limits based on the tenants’ incomes.

The bill passed the House on April 16, but could face an uphill battle in the Senate because it will first be considered by the Local Government committee, chaired by Bettencourt.

In a PFC deal, a developer partners with a nonprofit created by a governmental entity, known as a PFC, to build an apartment complex, which receives a full property tax exemption in exchange for renting half the units to those making no more than 80% of the area median income (AMI), or $57,600 in the San Antonio-New Braunfels metro area for a family of four.

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

[ Scroll down for a chart showing AMI levels. ]

5 steps to understanding public facility corporations, or PFCs

Housing officials and developers often refer to this level of housing as workforce housing, a form of affordable housing. But housing advocates say the characterization of rents for people making up to 80% AMI as affordable is misleading, because the area median income is inflated from San Antonio’s true median income. Often, units in PFC complexes in San Antonio are offered to people making up to 60% AMI.

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

The exemption often takes more than $1 million a year off the property tax rolls. For example, The Baldwin at St. Paul Square in east downtown received an exemption worth $1,053,498 last year, according to the Bexar Appraisal District.

Along with the Baldwin, examples of the PFC tool in action include The Flats at River North, the block-wide apartment building that’s nearly complete on the northwest corner of Broadway and Jones Avenue, and the Acero complex on San Pedro Creek south of downtown.

Though the tool has come under scrutiny among housing advocates in San Antonio, there has been little awareness of the PFC bills among the public and the media, creating a risk that the bills will falter as legislators turn their attention to bigger priorities in the final month of the session.

“It’s no secret that legislators respond to political pressure—they respond to high-profile media coverage, they respond to constituents getting in contact with them,” said Christina Rosales, deputy director of Texas Housers, an Austin-based nonprofit that is advocating for reform of the tool. “Because of that, I am afraid that true reform of PFCs is going to fall by the wayside in the session.”

“But I do think that we are going to see some movement,” she said. “It might end up being simply prohibiting voucher discrimination in PFCs or something like that. I don’t think it’s going to be wide-sweeping reform.”

NRP Group and other supporters of the PFC incentive model say it was created as an economic development tool, not to create affordable housing—though when the San Antonio City Council created the city’s PFC entity in 2009, it was described in a presentation as expanding “the city’s ability to … facilitate and finance affordable housing developments.”

At a recent meeting of the San Antonio Housing Trust Public Facility Corporation, the City of San Antonio’s PFC entity, Debra Guerrero, NRP Group’s senior vice president of strategic partnerships and government relations, credited the Cevallos Lofts with the redevelopment of that segment of Southtown. This was in 2010, when San Antonio was feeling the impact of the economic recession, she said.

“This is a perfect example of a PFC that was structured based on the needs of the city at the time, and really did spur additional development in the area,” Guerrero told the San Antonio Housing Trust PFC.

The Bettencourt bill would also require PFC complexes to submit to compliance audits each year, and to release information to the public, such as rental rates—a response to criticism that the deals are done with little public scrutiny. The complexes would have to accept Housing Choice vouchers, as well.

[ Related: Tax breaks for developers under scrutiny in San Antonio, Texas capitol ]

‘A step in the right direction’

Many of the proposed changes in the bills are in response to a study released last summer by Heather K. Way, a professor at the University of Texas at Austin School of Law, who found, among other things, that income-restricted apartments in PFC complexes are often no more affordable than ones in nearby market-rate complexes.

In its first draft, the Bettencourt bill would have put in place stricter income limits for PFC deals, with an eighth of the affordable units reserved for those making up to 60% AMI and another eighth for those making up to 30% AMI. But after input from NRP Group, the bill was changed so that only housing authorities will face new requirements—and they are looser than in the original language, requiring for 10% of the units to be leased to those making up to 60% AMI.

In effect, the bill would give the PFC tool different purposes depending on who is using it. For housing agencies, such as the San Antonio Housing Authority, it would be an affordable housing tool, while for cities and counties, it would serve as an economic development generator.

“I believe that (Bettencourt’s bill) is a step in the right direction… but it does not do nearly enough to address the lack of public benefits in relation to the size of this very lucrative tax break,” Way said at the Urban Affairs hearing on last Wednesday.

At the end of the hearing, the bill was left pending, leaving it uncertain whether it will be voted on by the full House.

In San Antonio, a new teacher can typically afford an apartment rent of $1,300 a month, Way said, but under the Bettencourt bill, a PFC complex would be able to charge tenants as much as $1,900 a month for a one-bedroom apartment in the city.

“This is simply not affordable and something we should not be giving fairly precious tax subsidies for,” she said.

‘They wanted market-rate housing’

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

The Bettencourt bill “preserves a valuable economic development tool used by cities, counties and other elected bodies across the state of Texas,” Guerrero said in an interview.

As an example of this kind of use of PFCs, she cites the Salado at Red Berry, a complex which NRP Group recently built at the Red Berry Estate on the East Side.

For years, the city had been struggling to draw private investment to Red Berry, but by using the PFC and other economic development tools it put together a public-private partnership resulting in the renovation of the estate into an events venue, a new headquarters for local company The RK Group and a 330-unit apartment complex built by NRP Group.

“None of that would exist had the city not had a series of tools to create investment. Because guess what, (the AT&T Center) hadn’t done it,” she said. “Because private investment wouldn’t go out there. You have to mitigate the risk for private investors. And the neighborhoods—they were tired of affordable housing. They wanted market-rate housing.”

NRP Group has hired the services of Austin lobbyist Brian Sledge for the legislative session, paying him between $46,580 and $93,150, according to the Texas Ethics Commission.

In the Urban Affairs hearing last week, Rep. Gary Gates, R-Fort Bend County, submitted Guerrero to intense questioning on PFC deals, claiming that the rents in many of NRP Group’s tax-subsidized complexes are practically market-rate.

“I’ve looked at your rents, I’ve looked at the market rents next door, and I don’t see any benefit, not only to the taxpayer, but to anyone who is truly low-income,” Gates told Guerrero.

Gates has filed his own bill which would abolish the PFC tool altogether, but it remains in the House’s Ways and Means committee.

Texas Housers and Heather Way had favored another bill filed by Rep. Jon Rosenthal, D-Houston, which would require that all PFC complexes offer apartments priced more affordably than the current law’s threshold of 80% AMI. That bill also remains in committee.

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. Jim Plummer, a local attorney who spearheaded the use of PFCs, and who negotiates with developers on behalf of the San Antonio Housing Trust PFC and SAHA’s two PFCs—, 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 a cost to school districts, cities, counties, health systems and other public entities, according to Way’s report.

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.

Earlier this year, the San Antonio Housing Trust PFC board, which is composed of five council members, approved a tenant protection policy, which holds future developments to rent restrictions by household size established by the federal government, as well as prohibits future landlords from denying a Section 8 voucher holder a lease based solely based on the fact that they hold the voucher.

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Richard Webner is a freelance journalist covering Austin and San Antonio, and a former San Antonio Express-News business reporter. Follow him at @RWebner on Twitter

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