Are Public Facility Corporation Projects Adding Value or Just Taking Assets Off The Tax Rolls?

It seems most everyone supports the idea of affordable housing, and more housing in general — although there’s always going to be an argument about where it should go and what it should look like. But are public facility corporations the answer to Dallas’ affordable housing crisis?

Dallas has embarked on the relatively new public facility corporation financing mechanism, and experts and residents are split on the practice of taking a development off the tax rolls for 75 years.

Is it a boon for affordable housing or a windfall for apartment developers? That’s what researchers asked in a 2020 study by Heather Way, director of the University of Texas Entrepreneurship and Community Development Clinic.

“There are some structural flaws,” Way said Thursday in an exclusive interview with CandysDirt.com. “It’s a big, huge tax break. That results in shifting the property tax burden to other taxpayers. There are no reporting requirements, and no accountability. In the case of the City of Dallas, they’re also giving up county and school taxes. That’s really problematic.”

Here’s how it works. 

To receive the exemption, a private apartment developer transfers land to a public facility corporation (PFC) set up by a local government entity — such as a public housing authority, county, or city — which then leases the land and any buildings on the land (including those built in the future) back to a limited partnership controlled by the developer. 

The local government entity gets paid to participate in the venture. Other local government entities — such as school districts — have no say over these property tax breaks to for-profit apartment developers, even though the tax breaks directly impact these other entities’ property tax base and bottom line. 

In contrast, the state’s other property tax break programs supporting economic development by for-profit entities provide taxing units with the option to participate in the tax break. The ability of public housing authorities to approve exempt projects under Section 303.042(f) is particularly troubling since the housing authorities are not impacted by any of the lost property tax revenue and their boards consist entirely of unelected officials who lack any political accountability to taxpayers.

University of Texas Entrepreneurship and Community Development Clinic.

Local Projects Using Public Facility Corporations

The Dallas City Plan Commission approved Ojala Holdings’ rezoning request for the Standard Shoreline in September, avoiding questions about the PFC structure by saying its job was to make decisions about land use.

The 60-foot multi-family development on Garland Road is designating 51 percent of its 300 units for those earning less than 80 percent of the area’s median income. 

The city is expected to get a one-time payment of $250,000, and no taxes will be collected for 75 years. The city is also getting annual lease payments of $3.5 million over 15 years for a total of $50 million over the 75-year period. And, as District 1 Councilman Chad West pointed out, the Shoreline site is currently a church and had not been generating any tax revenue anyway.

The PFC financing is a win-win because the city gets the much-needed affordable housing and the developer receives a financial incentive, said Assistant Director of Housing and Neighborhood Revitalization Kyle Hines.

“With the kind of Dallas real estate market people want to be in, we can command that type of structuring,” Hines told CandysDirt.com in September, while the Standard Shoreline project was under review. “This development has a pretty high construction cost. There has to be some way to make them whole because they’re not getting the same amount of money they would if all the units were market rate. We want to make sure the developer is not underfunded, but we also don’t want to overfund them. We’ve found a sweet spot here.”

PFC meetings are open to the public, thus providing a layer of transparency. Lochwood resident Thomas Buck addressed the funding mechanism in an October guest column for CandysDirt.com. 

The Missing-Middle is Still Missing: Lochwood Shares Cautionary Tale For Neighborhoods Across Dallas

Also in September, the city agreed to purchase and repurpose the luxury Briscoe development on Coit Road for affordable workforce housing. At least half the units in the 322-unit building will have reduced rents. In the first 15 years, the city will lose about $9 million in property tax revenue needed to fund city services.

As Hines pointed out in an email Monday morning, Briscoe was acquired using the Housing Finance Corporation, not the PFC.

“We actually closed on the transaction last Thursday so those residents that are income qualified will start seeing their rents reduced when they renew their lease,” Hines said. “The HFC issued almost $100 million in essential use bonds to fund the transaction. These bonds are in no way an obligation of the City and are non-recourse to the DHFC. The article mentions that we’re losing about $9 million in property tax revenue over 15 years, but as was discussed at the horseshoe, we’re expecting about $21 million in rental savings over that time period. Not to mention that we are the sole owners of an almost $100 million mixed-income multifamily development. This financial structure is much different than a typical PFC deal.”

District 12 Councilwoman Cara Mendelsohn said she’s all about affordable housing, but she doesn’t support taking it off the tax rolls. 

“We haven’t set the right goals,” she told CandysDirt.com. “What you’re seeing is this continued effort to take income-producing apartments at market rate off the tax rolls for 75 years. They make some of the units affordable, but we haven’t housed any new people. All we’ve done is reduce our income. What have you actually accomplished? It’s just a real estate play.”

‘Someone else is going to have to pay the taxes’

Forty percent of the land in Southern Dallas is undeveloped, Mendelsohn said. There’s space for affordable housing and developers willing to build it. So why would the city give away the land tax-free? 

Way said there could be a benefit if the developer produces housing that the market wouldn’t otherwise produce. 

“Whether there is a benefit is based on the project,” she said. 

The UT professor has now set her sights on researching the Texas Essential Housing PFC, a Travis County-based entity that is developing tax-free properties across the state. 

“It doesn’t have to be a municipality or housing authority,” she said. 

Houston Chronicle reporter Eric Dexheimer took a deep dive into the subject of PFCs in this October report, particularly analyzing how the Texas Essential Housing PFC is operating.

“No local elected body reviewed the deals to determine if it made sense for taxpayers to subsidize the tax-exempt real estate projects in their backyards,” Dexheimer writes. “In fact, city and county officials often have been unaware the money was being taken from their schools, libraries, hospital districts, and local governments. The small district, meanwhile, stands to collect generous profits from the exemptions it helped arrange. Some of the deals also involve businesses tied to its board members, raising questions about how they are using the government entity they formed.” 

Way said she and her students spent nine months filing open records requests and studying PFCs leading up to the publication of her 68-page report in 2020. 

“San Antonio was the first jurisdiction to do it,” she said. “It’s a fairly new tool and has exploded in growth over the past two years. There’s no public inventory to identify where these projects are and assess their public benefit. Dallas is much more advanced than most other jurisdictions in putting it through a level of scrutiny and requiring some basic guardrails on the definition of affordability.” 

The professor said she is hopeful legislation will be introduced in 2023 that requires some reporting so the entities will be more accessible for research. 

Mendelsohn said she doesn’t plan to vote for any such project unless a public benefit can be proven. 

“What’s with all the PFCs?” she said. “We’re just taking something off the tax rolls for no reason. Someone else is going to have to pay the taxes. It’s just raising taxes on everyone else.”