Texas Legislature Approves HB 2071 Which Revises Public Facility Corporation Exemption for Affordable Housing

The 88^th Regular Session (2023) of the Texas Legislature approved HB 2071 (the "Bill"), which revises the way public facility corporations ("PFCs") can be utilized to own and operate affordable housing. Affordable housing is typically understood as rental housing that places limits on both the household incomes of a certain percentage of the units, as well as the rents that can be charged to those households ("Restricted Units"). The Bill took effect on June 18, 2023.

Historical PFC Tax Exemption

A public facility owned by a PFC is generally exempt from ad valorem taxation. However, when the facility is leased to a private user, that private user is responsible for ad valorem taxes on the property. The Texas Legislature approved an amendment containing an exception to the general rule in 2015, under which, if a PFC owned a multifamily residential development utilized for the purpose of affordable housing (an "Affordable Housing Property" or "AHP") with at least 50% of units reserved for households having an income less than 80% of the area median income ("AMI"), and leased the property to a for-profit entity for operation, the AHP would be exempt from all ad valorem tax. Thus, a 100% property tax exemption was available with the PFC owning the AHP and leasing it to the operator.

The Bill’s New Requirements

Jurisdiction

1. When a PFC’s sponsor is a housing authority, the PFC may operate only within the housing authority’s statutory area of operation.  When the PFC’s sponsor is any other form of entity, the PFC may operate only within that entity’s boundaries.

Notifications and Approvals.

1. A PFC must deliver notice of the proposed transaction to the presiding officer of each taxing unit with jurisdiction over the AHP, at least 30 days prior to (i) the date the PFC takes action to approve the transaction and (ii) the date of any required public hearing.
2. At least 30 days before approving a transaction for an AHP, the PFC (or its Sponsor) must obtain an underwriting assessment.
3. If the Sponsor is a housing authority, it must hold a public hearing at a meeting of its governing body to approve the transaction.
4. If a majority of the members of the governing body of the PFC are not elected officials, the PFC must obtain approval for the proposed transaction from the governing body of the municipality.

Household Income Requirements.

1. Household income is calculated in accordance with HUD rules under 24 C.F.R. Section 5.609.
2. Once rented to a qualified household, it will continue to qualify as a Restricted Unit even if the household’s income increases beyond the applicable household limit at the time of renewal.
3. Each AHP must reserve at least 10% of the units for households with incomes at 60% of AMI or less and at least 40% of the units for households with incomes at 80% of AMI or less (the "Baseline Income Requirements").
4. For any AHP occupied at the time of acquisition by the PFC and not already restricted by a regulatory agreement with the Texas Department of Housing and Community Affairs ("TDHCA"), the PFC and Operator have a choice whether to renovate the property. This requires spending at least 15% of the total gross cost of the AHP, as shown on the settlement statement, on rehabilitating, renovating, reconstructing, or repairing the AHP (the "Renovation Requirement"). For an occupied property that chooses to comply with the Renovation Requirement, the Baseline Income Requirements apply.
5. For an occupied property that chooses not to comply with the Renovation Requirement, the Bill states that at least 25% of the units must be reserved for households with income at or below 60% of AMI.

Rent Requirements. Rents for Restricted Units shall be calculated as defined by HUD and adjusted for household size.

1. Annual rent charged for a Restricted Unit reserved for a household at or below 60% of AMI may not exceed 30% of 60% AMI for the applicable household size.
2. Annual rent charged for a Restricted Unit reserved for a household at or below 80% of AMI may not exceed 30% of 80% AMI for the applicable household size.
3. If a household is using a Section 8 Housing Choice Voucher to pay its rent and is the payment standard is less than the amount of rent established for the Restricted Unit, the Operator may require the household to pay the difference.

Exemption.

1. The exemption does not apply to ad valorem taxes imposed by a conservation and reclamation district that provides water/sewer/drainage services to the AHP unless the PFC agrees with the district to provide payment in lieu of taxes.
2. An ad valorem tax exemption lasts only for 30 years from the date of acquisition for a property that is occupied at the time of acquisition by the PFC or 60 years from the date of approval by the PFC for a newly constructed property. The Bill provides an opportunity to extend the date of termination of the exemption for another 30 or 60 years, as applicable, if, during the 5-year period preceding termination, the PFC notifies the governing body of the municipality or county, as applicable, of the request for extension and the extension is approved in the same manner as was originally required to establish the exemption.

Tenant Protections.

1. An Operator may not refuse to lease a Restricted Unit to a household because the household intends to pay its rent using a Housing Choice Voucher. Nor may the Operator impose a minimum income requirement whereby a household using a Housing Choice Voucher is required to have a monthly income in excess of 250% of the household’s monthly rent requirement.
2. Each lease agreement for an AHP (for both Restricted and Non-Restricted Units) must include:
   1. The Operator may not retaliate against a resident for participation in a resident organization.
   2. Non-renewal of a resident’s lease is permitted only in certain circumstances, including the household’s material non-compliance with the lease or failure to provide required eligibility information.
   3. A household must be given 30 days advance notice for any nonrenewal of a lease.

Compliance.

1. A PFC must post information about each AHP it owns on its website
2. An Operator must affirmatively market each AHP to households with Housing Choice Vouchers and notify local housing authorities of the AHP’s acceptance of those vouchers.
3. The requirements for Restricted Units must be memorialized in a regulatory agreement filed in the real property records. The regulatory agreement must have a term of at least 10 years, subject to early termination for foreclosure or loss of the exemption for any reason other than the failure of the AHP to comply with the restrictions in the regulatory agreement.
4. To be eligible for the exemption, an AHP that is occupied at the time of acquisition by the PFC must come into compliance with the requirement to reserve the Restricted Units by the first-year anniversary of the acquisition.
5. The Restricted Units must be dispersed among the various unit types in the AHP in the same proportion as the non-Restricted Units.

Audit and Monitoring. The Bill creates a compliance monitoring function for TDHCA and requires TDHCA to adopt rules related to the monitoring function by January 1, 2024. All AHPs receiving an ad valorem tax exemption must comply with the audit and monitoring provisions. The first audit for each AHP approved/acquired by a PFC before the effective date will be June 1, 2024 or June 1 of the year following the year in which the AHP was first occupied, if newly constructed.

Continued Applicability. The Bill does not apply to any new construction AHP that was approved by a PFC (or its Sponsor) prior to the Bill’s effective date, nor does it apply to any AHP that was occupied at the time of the PFC’s acquisition, provided that such acquisition occurred prior to the Bill’s effective date.
 

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Contacts:

David Dawson | 512.370.2847 | ddawson@winstead.com

Laney Howard | 512.370.2817 | lhoward@winstead.com

Disclaimer: Content contained within this news alert provides information on general legal issues and is not intended to provide advice on any specific legal matter or factual situation. This information is not intended to create, and receipt of it does not constitute a lawyer-client relationship. Readers should not act upon this information without seeking professional counsel.