Corporate tax treaties for Texas public entities entail bipartisan scrutiny

The Housing Authority’s agreements de-tax apartment complexes and exempt their owners from all property taxes in exchange for making some of their units affordable. While the Housing Authority has said it is creating much-needed affordable housing in well-endowed neighborhoods, others argue that the legal definition of affordable housing is too lax and there is not enough transparency about how tax breaks affect rent rebates.

After two such deals with so-called public facility corporations caused an uproar in the affluent Tanglewood area, the mayor took a pause.

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And the clock is ticking. As commercial property owners wait to see if the deals that would exempt them from about $1 million in annual property taxes pass, Texas lawmakers are fiercely debating changes to state laws that would allow them. The proposed legislation could change the rules governing tax break treaties — or abolish them altogether.

The public utility tax break was approved by the Texas legislature in 2015 when then-Senator Craig Estes introduced it in a last-minute change to the funding laws.

Estes said only non-profit organizations would be involved in the deals.

But the law says nothing of the sort, and now for-profit homeowners are demanding the deals. Those lining up for a Houston Housing Authority vote include two major Houston developers, Morgan Group and Lovett Commercial, and a California investment firm with interests in real estate and oil and gas exploration, Schumacher Interests.

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A 100 percent multi-family home tax break in the tens of millions is an exceptionally large concession, and the exemptions last for up to 99 years. In contrast, low-income home tax credits are far less lucrative and can lead to stiff competition.

Heather Way, a law professor at the University of Texas and an expert on affordable housing, first heard about them in 2019, when they were still relatively uncommon.

When she started looking at the offers, what she saw on some of them was stunning. While the idea was that developers would use what they saved on property taxes to lower rents, some properties already considered “affordable” by law took advantage of the tax break without further rebates from the public to grant their units . Many didn’t even advertise that the devices were supposedly affordable. And when graduate students who work at Way called leasing offices, several brokers said there were no income restrictions on their units.

Not all dealings with public institutions are so extreme.

The Deerwood, which sparked an outcry from residents in Houston, for example, pledged to create 97 affordable homes. According to Housing Authority documents, 32 of those apartments were already considered affordable and had little to no discount, as $1,440 a month for a one-bedroom apartment was considered affordable.

However, the deal resulted in significant discounts on some units — two three-bedroom apartments and one two-bedroom apartment, for example, cost half what they would otherwise cost, with a discount of between $1,200 and $1,590 per month. On average, affordable units rent at a discount of $310 per month, about half of the $750,000 per year that Deerwood will save in property taxes.

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Following the release of Way’s 2020 report, which detailed the program’s abuses and suggested ways to improve the law, two things happened. On the one hand, the number of deals skyrocketed. According to Way, there are currently over 200 in the pipeline. She regularly receives calls from investors across the country who want to use the tool.

“Word got around,” she said. “All sorts of people from across the country are daring to find out how they can take advantage of this huge tax advantage.”

At the same time, taxpayers and lawmakers began viewing the deals with growing concern. Aside from Turner’s confrontation with the Houston Housing Authority, controversy erupted over an obscure tax agency outside of Austin using the law to remove properties from the tax lists of cities — including Houston — that were far removed from their own tax base and voters . And in western Harris County, a small municipal service district fears tax break deals the Houston Housing Authority plans to vote on will take away 20 percent of its tax revenue.

“Districts like mine struggle every year with operations, aging infrastructure and tax rates,” said Jack Baber, who sits on the board of directors for City Utilities District 188, which builds and maintains water, sewage, drainage and parking infrastructure. “Then out of the blue you change everything.” If the three proposed deals within the county lines were all implemented on top of the deal already approved, the $410,000 annual revenue loss would have to be offset by an increase in taxes on the 550 single-family homes, he said he inside.

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During this legislature more than half a dozen bills were introduced to reform contracts with public bodies. When a bill drafted by Fort Bend County Rep. Jacey Jetton reached the plenary session of the Texas House of Representatives, an hour-and-a-half argument ensued.

Rep. Gary Gates, also from Fort Bend County, discussed with Jetton how to ensure PFC abuses are curbed. Gates, who owns 44 apartment complexes across the Houston area, reached out to Way after her report was released, and she spoke at length about the program’s pitfalls.

Gates firmly believed there should be guard rails to ensure a significant portion of the tax break is used to lower rents.

“Under this law, 42 of my properties would qualify and I wouldn’t have to reduce my rent by a penny,” he said.

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That’s because its properties tend to be older and are already affordable for families earning less than 80 percent of the average Houston-area income, which is $71,000 for a family of four. He urged that at least 60 percent of the funds saved by the tax break must be used for rent rebates.

State officials broadly agreed with Gates and voted to include the requirement. They also voted on an amendment that would require counties, cities and school districts affected by a tax break to approve each tax break before it is approved.

The bill, which eventually passed the House of Representatives, also reduced the maximum term for new contracts from 99 to 12 years and requires the state to conduct an annual audit to determine how much of the tax break is passed on to tenants in the form of rent became discounts. However, such reviews would not be required for deals approved before the law came into force.

Now the ball is in the hands of another Houston-area politician — that of Senator Paul Bettencourt, who represents most of West Harris County. Bettencourt’s committee will decide whether to submit the bill – or a similar measure – to the Senate. Bettencourt said he firmly believed contracts with public bodies needed to be reformed and said a bill would soon be tabled.

Way said she is confident lawmakers will find a way to curb abuse of the PFC program while still allowing it to create meaningful affordable housing. “The days of the session are drawing to a close and there is a sense of urgency that major reforms are needed.”

A new law is not expected to come into force until September. “So until then, there will be a rush to get as many as possible done,” Gates warned.

Meanwhile, in Houston, it’s unclear how long the hiatus in PFC deals will last.

“The City of Houston is closely monitoring legislative developments regarding PFCs,” Mary Benton, the mayor’s communications director, said in an email. “However, our review and assessment of PFCs is independent.”

rebecca.schuetz@houstonchronicle.com