You don’t expect me to LOSE money, do you? Part 2: who, me?
[Continued from yesterday’s Part 1.]
Yesterday we saw that Cornerstone Apartments in
The maintenance staff is fully committed
[Editor’s note: each LIHTC property will be owned by a special-purpose entity, usually a partnership, with one or more managing general partners. Presumably Mr. Hance has investors, but since he is the controlling person, we will simply call him the ‘owner.’]
Evidently the property was being managerially neglected until the
Over the years, the state failed to keep tabs as conditions deteriorated. Today’s visit came about only after the Star-Telegram started asking questions about the complex.
The owner said he has nothing to fear.
Fearless Mr. Hance
In financial terms, there are three things that an LIHTC owner could potentially fear. Since Mr. Hance professes no worries, let us worry for him.
What, me get recaptured?
First is tax credit recapture. As I described it in why tax credits work:
Recapture is collectible because enforcement is against an investor, not against the property, and hence there is no economic hostage problem.
Appropriated programs (where the government pays cash up front) can simulate these three features — risk transfer, post-audit compliance, and recapture collectibility — but cannot duplicate them. For governments whose financial ecosystem is sufficiently complex, soft equity is a better kind of money to spend than either soft debt or hard debt.
For Mr. Hance’s investors, however, whose property started taking credits in 1996, the recapture is declining rapidly:
But not entirely gone, as the state’s actions showed:
For the Cornerstone he and his partners received $300,000 in development fees and were awarded $2 million in tax write-offs, in return for their pledge to convert the complex into decent, affordable housing.
Back in 1996, $1 of LIHTC sold for about $0.65, so we can presume the investors contributed $1,300,000 or so, leaving plenty of room to put $1,000,000 into rehab and give Mr. Hance’s development company a $300,000 cash development fee.
That’s not what state inspectors found 18 months ago during their last visit. They found such dismal conditions that they reported Hance to the Internal Revenue Service, which had the power to pull the tax breaks.
The report, an IRS Form 8823, is a notice of non-compliance leading to tax credit recapture – but like most administrative findings, it can be appealed or cured.
But after Hance submitted records showing that rotting wood and crumbling asphalt had been repaired and that the exterior had been painted, the state backed off without paying a [return – Ed.] visit.
The state housing department says it typically clears properties that provide receipts of work performed and hadn’t planned to reinspect until next year.
Second, fines that can be levied against owners with material building code violations. But these depend on the city coming out to enforce.
A place to call home?
Some cities have stepped in, through code-compliance efforts, to force improvements at other tax-credit properties in
Cornerstone residents say they are reluctant to make formal complaints for fear of being evicted. They can’t afford to live anywhere else.
Retaliation is illegal. That doesn’t make it impossible, nor readily detectable. And threats of retaliation are well-nigh unobservable.
It’s not impossible to retaliate
Rent is $415 for a one-bedroom unit and no more than $640 for a three-bedroom unit.
Since we have limited information, let’s figure $600 average for a 3-BR, and $510 for a 2-BR. That works out to a GPT of $36,000 monthly, which at 96% occupancy (stated elsewhere in the Star-Telegram article) gives the complex about $415,000 in annual effective gross income (EGI), not counting ancillary income. There’s money to work with.
In public-private partnership, there is a three-way bargain among owner, resident, and government. Any such three-way creates opportunities for tacit bilateral bargains. A slumlord who rents to illegal tenants, for instance, has a nice symbiosis: you don’t report my code violations, and I won’t report your nocturnal activities.
“We don’t want any problems,” said K. Deann Garrison, who did not want to give her married name.
Third, Texas DHCA can levy fines:
Good if they’re collectible and motivated. Bad if they’re uncollectible. Also bad if the effect is simply to divert their money into legal defense rather than property improvements.
Around the same time, Michael Gerber, executive director for the state housing department, sent a wake-up call to owners of nine of
His message: Clean up or you’re gone.
“We want these bad actors out,” Gerber said.
And I know a lot about bad actors
Penalties on the books require enforcement by actual inspectors, and that costs money:
The housing department is trying to beef up inspections but struggles with a limited budget. It has a staff of 17 to monitor 1,500 tax-credit properties. Property owners are supposed to pay fees to defray monitoring costs, but the department let Cornerstone go nine years without paying. Hance now is chipping away at the $10,000 debt.
There’s my ten grand buried somewhere around here
Let me get this straight — a complex that’s received $2,000,000 in LIHTC, that generates an annual EGI of $415,000 or so, managed to be unable to pay $1,000 a year of required monitoring fees, and the state let this pass unenforced? Whichever way you look at it, that’s awful.
I just cannot find the money to pay those niggling fees
Perhaps the reason Mr. Hance believes he has nothing to fear from inspections is his own dereliction in paying his legally obligated share of the cost of those inspections.
Blackwell and Fowler say Hance didn’t deliver on promises, especially a pledge that the complex would house only seniors.
In Hance’s opinion, he has fulfilled state requirements.
Except for paying his mandatory fees for nine years.
In 2002, he spent more than $90,000 at the complex [$1,250 per apartment — Ed.] to pay for improvements including some new refrigerators, air-conditioning systems, water heaters and carpets. Some water and sewer lines have also been replaced in recent years.
Please, no need to canonize me for replacing sewer lines
After the dismal state inspection in July 2006, Hance put $176,000 into capital improvements. [$2,200 per apartment, or about four months’ EGI — Ed.]. Today, occupancy is at 96%.
This level of occupancy tells us two things: (1) current rents are indeed below market, and (2) there is clearly a need for the affordable housing.
It doesn’t tell us the apartments are in tip-top condition — in fact, the residents have much less leverage to demand quality housing than if they were at market. If they are evicted, they will have difficulty finding anything else as affordable. So they could be afraid of retaliation, and reluctant to claim their rights.
Only now, after years of vacant units and red ink, is the complex making a small profit.
“It was a bad investment,” Hance said.
Including the $300,000 development fee?
“A friend of mine told me, ‘If you ever get your money back on this project, they should have made you secretary of the Treasury of the
What are friends for?
He never made a profit on an LIHTC property
There’s one way a landlord can recover money from a bad investment; stop maintaining the property. That’s why slums are economically rational. An owner who values cash return above all else can achieve it, by creating a slum.
This week, officials of UAH Property Management, the
This is common practice – perhaps more common when one knows the newspapers are coming!
UAH President Mike Clark also took the local property manager to task for the tone of the flier and her reference to the Child Protection Service.
He could hardly do otherwise, especially with the media publicity.
We’ll have no more flyers like that … if there’s anybody watching
She then sent a new flier to quell fears, saying that she had mentioned CPS “only to warn you that we have had to contact them, in the past, when minor children were left unattended, and we believed they were in a dangerous situation.”
I’m sure that worked.
Not to mention a violation of applicable building codes.
Mr. Clark, resident-sensitive though he may be, is not in fact the owner. What does Mr. Hance think of this property?
[Concluded tomorrow in Part 3.]
Write a comment