Public Facilities Used for Affordable Housing - NEW! Redbook Article
In 2023, the Texas Legislature approved HB 2071 which substantially changed the way public facility corporations are owned and operated to provide affordable housing in the state. HB 2071 is subject to interpretation and additional rulemaking. This article reflects TAA’s understanding as of July 24, 2023. Because of the new law’s unique and specific legal requirements for PFCs, TAA strongly encourages members considering utilizing a PFC structure to seek qualified legal assistance.
What are PFCs? Public Facility Corporations, or PFCs, are legal entities that own or operate multifamily properties that must meet certain requirements for providing affordable housing in exchange for an exemption from ad valorem property taxes. Note, other taxes imposed such as taxes imposed by a conservation and reclamation district are not exempted.
- PFCs are created by sponsoring organizations, which include local housing authorities, as well as county and municipal governments, school districts or special districts.
- PFCs may enter into agreements with “Operators” to construct new affordable housing, renovate an existing multifamily property or place income and rent restrictions on an existing multifamily property in exchange for becoming a PFC property. Operators include real property owners and developers.
- Generally, PFCs may only own or operate multifamily properties within the jurisdiction of their sponsoring organization. Housing authority PFCs may own or operate multifamily properties outside of their jurisdiction provided the housing authority has a cooperation agreement with the housing authority where the property is located.
- PFC property tax exemptions are 30 years for occupied properties and 60 years for new properties. These exemptions may be extended for the same term of years provided the PFC provides notice to the governing body of the municipality or county within five years of the expiration date, the extension is approved in the same manner as when the PFC development was originally approved, and the property is in compliance with applicable statutes.
HB 2071 became effective June 18, 2023. All properties whose construction or occupancy was approved by a PFC prior to June 18, 2023 are governed by the law in effect at the time of the original approval. Caveat – All PFC properties will be required to submit an annual audit to TDHCA (see below).
The new law does not apply to multifamily residential properties that:
- have at least 20% of its residential units reserved for public housing units;
- participate in HUD’s Rental Assistance Demonstration Program;
- receive financial assistance from tax exempt bonds; or
- receive financial assistance from low-income housing tax credits.
Notice, approval and publication process
A PFC must provide notice to local taxing entities at least 30 days prior to a public hearing being held by the PFC to approve the construction of a new multifamily property or the acquisition of an existing multifamily property. If a majority of the PFC Board of Directors are not elected public officials, the proposal must be approved by the governing body of the municipality, or if a property is outside a municipality, the governing body of the county.
At least 30 days prior to final approval of a PFC property, the PFC, or its sponsoring entity, must obtain underwriting assessment for the property. The assessment must be prepared by the PFC, the PFC’s sponsor, or a professional entity experienced in underwriting multifamily developments that does not have a financial interest in the development. The assessment must include the following:
- For an existing, occupied multifamily property, an analysis demonstrating that the total annual amount of rent reduction on the property’s income restricted units will not be less than 60% of the estimated amount of ad valorem taxes that would be imposed on the property without the property tax exemption for the second, third, and fourth years after the date of acquisition.
- For a newly constructed multifamily property, an assessment that demonstrates that the multifamily development would not be feasible without the participation of the PFC.
The assessment must be published on the PFC’s website at least 30 days prior to final approval.
Restrictions on Household Income & Rent
Properties participating in the PFC program must reserve 10% of the property’s units for households earning not more than 60% of the area median income (“lower income units”). In addition, 40% of the property’s units must be reserved for households earning not more than 80% of the area median income (“moderate income units”).
For lower income units, monthly rent may not exceed 30% of 60% of the area median income (AMI). For moderate income units, monthly rent may not exceed 30% of 80% of the area median income.
The percentage of reserved units (based upon the number of bedrooms per unit) must be proportional to the unrestricted units (based upon the number of bedrooms per unit) located on the property.
Collectively, units covered by these restrictions are referred to as “Restricted Units.”
RENOVATIONS: Renovating Existing Multifamily Properties
PFCs acquiring existing, occupied multifamily properties to renovate or repair must demonstrate that not less than 15% of the total gross cost of the property as shown on the settlement statement will be expended on repairs or renovations. The repairs/renovations must begin no later than the first anniversary of the property’s acquisition and be completed no later than the property’s third anniversary.
Materials used to repair or renovate a property meeting the 15% requirement noted above are exempt from sales and use taxes.
For occupied properties that will not be repaired or renovated but wish to be owned or operated by PFCs, 25% of the property’s units must be reserved for lower-income households (60% AMI). Although the legislation is silent about reserving units for moderate-income households (80% AMI), some commentators have suggested that the best approach would be to reserve 40% of the units for moderate-income households.
RESIDENT PROTECTIONS & LEASE REQUIREMENTS:
Leases for PFC properties must include the following provisions:
- Prohibition on retaliation because the resident establishes or participates in a tenant organization
- Non-renewals of leases are only allowed under the following circumstances:
a. Resident is in material non-compliance with the lease, including non-payment of rent
b. Resident has committed one or more substantial violations of the lease
c. Resident has failed to provide required information regarding household income or other eligibility criteria
d. Resident has committed minor violations of the lease that disrupt the livability of the property, adversely affect the health and safety of any person or the right to quiet enjoyment of the premises, interferes with management or has an adverse financial impact upon the property, including the failure to pay rent.
- PFC Operators must provide at least 30 days written notice of non-renewal.
These provisions may not be waived by the resident.
In addition, PFC Operators may not refuse to lease a Restricted Unit because the resident will pay rent using a housing choice voucher or utilize a minimum income standard that requires a voucher holder to have a monthly income of more than 250% of the household’s share of the monthly rent.
PFC property websites must include a notice of their compliance with these resident protections and participation in the housing choice voucher program on their website. In addition, PFC Operators must “affirmatively market” their properties to persons participating in the housing choice voucher program and notify local housing authorities of their acceptance of housing choice vouchers.
To ensure compliance with resident protections that are required to be included in a lease, TAA encourages its members to use the TAA Lease Contract Addendum for Units Participating in Governmental Regulated Affordable Housing Programs, which includes these protections.
COMPLIANCE: Compliance, Auditing & Reporting
Income and Rent Restrictions used for Restricted Units must be documented in a land use restriction agreement that remains in effect for at least 10 years and is filed in the county in which the property is located.
PFC Operators must annually submit an audit report to both the Texas Department of Housing and Community Affairs (TDHCA) and the chief appraiser of the appraisal district in which the property is located. The annual audit must be completed by an independent auditor or compliance expert. The audit must determine whether the multifamily property is in compliance with the applicable provisions noted above and “identify the difference in rent charged for income restricted units and the estimated maximum market rents that could be charged for those units without the rent or income restrictions.”
Not later than the 60th day following receipt of the audit, TDHCA must publish a report on its website summarizing the findings of the audit. The TDHCA report must also be provided to the Comptroller’s Office, the PFC, the PFC Operator, the governing body of the PFC’s sponsoring entity and, if the sponsor is a housing authority, to the authority’s governing board.
If the TDHCA report documents a PFC property’s non-compliance and the PFC Operator does not timely resolve the non-compliance, the property’s ad valorem property tax exemption will not apply to the tax year of the non-compliance.
All PFCs, regardless of whether they were established prior to the effective date of the new law (June 18, 2023) are required to submit the annual audit to TDHCA. PFC properties established prior to the effective date of the new law must submit their audit report to TDHCA by June 1, 2024. Other PFC properties must submit their report by June 1 of the year following the first anniversary of either the date of the property’s acquisition or the date a new property becomes occupied by one or more residents.
AGENCY RULEMAKING; INTERIM STUDY
- TDHCA must adopt rules to implement this section by January 1, 2024.
- The Legislative Budget Board will prepare a study of the long-term effects of PFCs on state funding and revenue to be released no later than December 10, 2024 – one month ahead of the 2025 session of the Texas Legislature.