Almost four years ago, a state law quietly took effect that eased the property tax burden on nonprofit organizations that rent apartments to the working poor.
In Houston, community groups have been slow to take advantage of the tax break. To date, just two nonprofits -- one of them based in Los Angeles -- have claimed the exemption, siphoning about $500,000 a year from public coffers.
In the last six months, however, more than a half-dozen nonprofit ventures have been proposed. If approved by Houston City Council, the projects would cost the city, county and school district an additional $3.5 million a year in property tax revenue.
The most ambitious, and curious, of the proposals is being pitched by the Reverend Harvey Clemons Jr., an adviser to Mayor Lee P. Brown and president of the nonprofit Pleasant Hill Community Development Corporation. The details of the project aren't final, but a preliminary plan that Clemons submitted a few months ago raises questions about the purpose of the tax exemption, as well as who ultimately would benefit from it.
Clemons wants to buy and rehabilitate 2,000 apartment units scattered among six complexes around the city. He hopes to finance the venture with a $77 million loan from the quasi-public Houston Housing Finance Corporation -- a transaction that would appear to be a conflict of interest: Clemons was appointed by Brown to HHFC's board of directors last year.
Apparently HHFC rules require only that Clemons recuse himself when the board votes on Pleasant Hill's loan application. Still, even some of the reverend's colleagues have expressed reservations about the deal.
"I think it's safe to say that I don't have complete comfort executing a contract for a board member to do business with HHFC," acknowledges HHFC board president Art Morales.
Morales might have fewer qualms if Clemons's plan offered more tangible benefits. For one thing, Pleasant Hill wouldn't create any new affordable housing. Three quarters of the units Clemons wants to buy have only one bedroom -- not much use to low-income families with children, who are most in need of inexpensive housing. And the average monthly rent in the six complexes is $464, well below the maximum allowed under federal housing guidelines. In fact, Pleasant Hill intends to raise rents across the board by 3 percent, or about $15 a month.
Another condition of the nonprofit exemption is rehabilitation of the complexes, all of which were built in 1984. Pleasant Hill proposes to invest almost $16 million of the HHFC loan -- about $7,900 per unit -- for new roofs, appliances, cabinets, carpets and floors. But according to one expert on affordable housing, those kinds of improvements are more accurately defined as routine maintenance.
"If you're not spending better than ten grand per unit, it's not really a rehab," said John Henneberger, director of the Texas Low-Income Housing Information Service in Austin. Henneberger has monitored the tax exemptions since they were first awarded in 1998. He seemed baffled by Pleasant Hill's proposal, which he characterized as "very strange."
"If you're not lowering or capping the rents, and you're not rehabbing something that's junked out, what's the point?" he asked.
Clemons, pastor of Pleasant Hill Baptist Church for almost 20 years, is a well-known proponent of affordable housing. He is founder and past president of the Fifth Ward Community Redevelopment Corporation, which has built dozens of low-cost single-family homes in the near-northeast neighborhood. Clemons formed the Pleasant Hill nonprofit a few years ago to develop a seniors' apartment complex on Lyons Avenue.
The project was subsidized by the Texas Department of Housing and Community Affairs, whose board of trustees at that time included Clemons. The Brown administration contributed $475,000 in city housing money as well.
The loan to buy the six apartment complexes would be funded by revenue bonds issued by HHFC, which is subject to City Council approval. In mid-August, the city gave Pleasant Hill a $300,000 advance to pay for the market surveys and property appraisals required by bond underwriters. The Brown administration urged council to approve the payment, despite warnings by Art Morales that nonprofit tax exemptions like those sought by Pleasant Hill may not make fiscal sense.
In an August 14 letter to the mayor, Morales pointed out that given the city's persistent budget problems, Brown should adopt a policy known as payment in lieu of taxes, or PILOT, that would reclaim at least a portion of the revenue lost to the exemption. A PILOT would "provide reasonable incentive to nonprofits to develop new affordable housing," Morales wrote, "but discourage those who would attempt to take advantage of the financing without really adding anything to the stock of affordable housing."
Since the nonprofit exemption has been on the books, housing finance agencies across the state have adopted similar policies to offset the cost of police, fire and other public services. Harris County Commissioners Court, for example, requires nonprofits that finance projects through the county to pay taxes on the original appraised value of the property or, for new construction, 25 percent of the estimated future value.
"We see it as a win-win," said David Turkel, county economic development administrator. "The developers still get a heck of a deal, and the various taxing jurisdictions who are expected to deliver services to the residents get some amount of continued income."
The Southeast Texas Housing Finance Corporation, which serves a ten-county area, won't even consider a project unless the nonprofit has negotiated a PILOT with taxing authorities. "If the local jurisdictions say they're willing to give up the revenues," says Ron Williams, deputy director of Southeast Texas, "then it's okay with us."
Apparently, though, the city of Houston has no plans to follow that trend. Brown has never even responded to Morales's advice to adopt a PILOT. Clemons did not return calls for comment, and the mayor referred Houston Press questions to housing department director Margie Bingham.
In a written reply, Bingham said that requiring nonprofits to pay even a portion of their taxes would be "counter-productive" to the city's affordable-housing mission. She noted that a recent change to the exemption statute will require nonprofits to provide social and educational programs for residents.
"The intent of the new law will foster more accountability for agencies receiving the tax exemptions," Bingham argued. If Clemons's project is approved before the law goes into effect in January, he would not be required to provide the programs for residents.
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The statute change had the support of many housing advocates, including the Texas Association of Community Development Corporations. Reymundo Ocañas, the group's executive director, said that requiring nonprofits to offer GED classes, day care, job training and other programs for residents will "shore up the intent" of the exemption. "The state doesn't provide enough money for these kinds of services," Ocañas says. "This is the smart thing to do, because you're giving up taxes, but you're also giving people a chance to get ahead. If it's just an apartment unit, is that really the best use of tax dollars?"
That's a question City Council hardly considered when it approved two nonprofit exemptions earlier this year. But those were modest deals compared to the Pleasant Hill project, which is expected to come before council in October.
According to Clemons's preliminary plan, the exemption for the six complexes will cost taxpayers more than $1.5 million a year. And while the public benefits of the project seem negligible, Pleasant Hill stands to gain considerably: The nonprofit intends to award itself $3.5 million in "developer fees," payable up front from the HHFC loan.
On the other hand, that loan is far from a done deal. Earlier this year, Pleasant Hill tried to get a jump on the project by requesting a $4.2 million loan from HHFC's cash reserves. Apparently, though, Clemons's colleagues weren't convinced Pleasant Hill had the experience or financial wherewithal to pull off the venture. The loan request was unanimously rejected.