So far our exploration of Cornerstone Apartments in Haltom City, Texas, has covered rapes, shootings, backed-up sewers, dead rats, no heat over a weekend, enormous water bugs, and an astonishing flyer from the management agent demanding that residents repair defects that are the owner’s responsibility and tacitly threatening them with the loss of their children (since disavowed).

What standard of performance should we expect?  Should we make allowances for Mr. Hance’s busy schedule?  After all, he is sponsor of fourteen properties and has a full-time job three hundred miles away.

Kent Hance, a former congressman and ex-state senator who is chancellor of Texas Tech University, says he has poured more money into the complex than he ever got out of it –

A man who has “poured money into the property”

Perhaps so.  If we had the complex’s financial statements, we could see what if anything Mr. Hance has lent into the property versus what he and his partners have taken out.

The property is not Mr. Hance’s sole, or even principal, source of revenue from Cornerstone Apartments.  Sale of the LIHTC to tax-motivated investors will have generated a substantial developer’s fee to Mr. Hance’s company.  So I suspect his company is well ahead, on balance – and even if it were not, where is it written that the amount one must or should put into a property is limited by what one has previously taken out of it? 

“I wish to be left alone,” said Scrooge. “Since you ask me what I wish, gentlemen, that is my answer.  I don’t make merry myself at Christmas and I can’t afford to make idle people merry. I help to support the establishments I have mentioned–they cost enough; and those who are badly off must go there.”

What business are you in, Mr. Hance?

“It’s enough for a man to understand his own business, and not to interfere with other people’s.  Mine occupies me constantly. Good afternoon, gentlemen!” 

I wear the chain I forged in life.  I made it link by link, and yard by yard.

– and [Mr. Hance says he has] always fixed any problems the state pointed out.

That’s not the standard, Mr. Hance.  It’s not the state’s job to point out problems in your property.  It’s your job to spot them and fix them whether or not the state or anybody else is pointing them out.

Hance said he feels a moral obligation to maintain Cornerstone.

“Otherwise,” he said, “I would have walked away five years ago.”

Had you walked away five years ago, Mr. Hance, your investors would have suffered substantial tax recapture.  You get no moral credit for staying in the face of recapture, interest, and penalties.

He also says he has done his best.

“I tell you, people renting there get a bargain compared to what they get at any other place.”

That is no defense, Mr. Hance.

Forget moral obligations, you are legally obligated to give them a bargain rent, and to provide quality affordable housing at that rent. 

Mr. Hance has no inner qualms about his ownership:

“I don’t feel I ought to make it like living in Highland Park, Dallas. That wasn’t the purpose.”

I’ve previously written about the disgusting mentality which says that ‘those people’ do not deserve quality affordable housing:

Ever since I started in affordable housing thirty-plus years ago, knowing nothing about it but what I observed and deduced, I’ve been confronted with prejudice against ‘those’ people:

·         Those people aren’t like us.

·         Those people are lazy and just don’t want to work.

·         Those people are just out to beat the system.

·         Those people have too many children.

Pots for sale, Kibera, Nairobi, Kenya

After all, we don’t need to give ‘those people’ anything too comfortable to live in, do we?

“At this festive season of the year, Mr. Scrooge,” said the gentleman, taking up a pen, “it is more than usually desirable that we should make some slight provision for the Poor and destitute, who suffer greatly at the present time. Many thousands are in want of common necessaries; hundreds of thousands are in want of common comforts, sir.”

“Are there no prisons?” asked Scrooge.  “And the Union workhouses?  Are they still in operation?”

“Many can’t go there; and many would rather die.”

“If they would rather die,” said Scrooge, “they had better do it, and decrease the surplus population.”

Mr. Hance wishes no such ill upon his tenants:

“I don’t think you could find anyone else who would put that kind of money in a project,” Hance said during a phone interview.

Actually, Mr. Hance, you could find a great many owners who would do that.  Some of them are non-profits.  An extremely good one has its headquarters in Austin.  A national non-profit with a long and successful track record has its Texas office in Fort Worth.  Some are large for-profits who value their reputation as high-quality owners and managers.  Allow me to call them to your attention.

What then must we do?  

We must shave our beard, that’s what

Tolstoy asked it a hundred and twenty years ago.  In Mr. Hance’s mind, he has done what the owner should; he has used the residents’ rents to pay such expenses as he could.  The flow of tax credits – well, that’s just a sideline. 

Rapes, shootings, break-ins, rats, water bugs, leaks.  They’re not your problem, Mr. Hance. 

You’re only the owner. 

`Or would you know,’ pursued the Ghost, `the weight and length of the strong coil you bear yourself? It was full as heavy and as long as this, seven Christmas Eves ago. You have laboured on it, since. It is a ponderous chain!’

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Yesterday we saw that Cornerstone Apartments in Haltom City, TX, a mature and nearly post-mature LIHTC property rehabbed in 1994, is in deplorable condition, despite being owned by a partnership controlled by the esteemed Chancellor of Texas Tech University, Kent Hance. 

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 Fort Worth Star Telegram came calling:

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 Texas. But Haltom City doesn’t perform routine inspections for code violations. The city only follows up after complaints from the public.

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:

Texas only recently gained the power to take action itself. Last year, the Legislature authorized the Department of Housing and Community Affairs to fine owners $1,000 a day per violation.

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 Tarrant County’s 80 tax-credit complexes.

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 United States.’”

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 Dallas company that oversees the complex, inspected Cornerstone ahead of the state’s visit.

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.

Clark also told her that it is against company policy to allow anyone to go without heat.

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.]

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Kent Hance, Chancellor of Texas Tech University, is an unlikely owner of LIHTC properties, but back in 1994, he made a financially brave decision, to take over as controlling general partner of Cornerstone Apartments in Haltom City, Texas, a small town northeast of Fort Worth.  As described in an article from the Fort Worth Star Telegram:

Hance rescued the apartments from the wrecking ball in 1994.

At the time, the city was trying to condemn the complex, which had been boarded up for years. It had become an eyesore, attracting transients and crime to what was a country-club neighborhood.

I’ve previously posted about the necessity for some properties to go somewhere to die, and I’ve commented on the challenges of post-mature LIHTC properties, or zombie properties, as the Star-Telegram quoted me. 

Why have some complexes — whose owners have included a government official, high-profile real estate developers and an affordable-housing advocate — fallen into disrepair?

The agency has lost its clout with many complexes, because all the tax credits have been cashed in and the period of IRS oversight has ended. That means an increasing number of owners have little incentive to make repairs.

“My informal name for them is zombies — you can’t hurt them,” said David A. Smith, chief executive officer of Recap Advisors, a Boston firm that specializes in tax-credit properties.

I eat your compliance records

Fortunately – or unfortunately? – sometimes properties that should have gone somewhere to die are in fact revived, instead of being demolished and rebuilt, with acquisition-rehab financing. 

Rehab money?

A Houston developer who was a former business associate of Hance’s had first tried to rehabilitate the property. He sank more than $1 million into it but ultimately hacked off the city, which sued him for not completing the project.

Acquisition-rehab is a highly difficult business, because unlike new construction or greenfield development, you do not know what’s inside the building envelope until you open it up.  With the economic gravity of trying to close the cost-value gap, rehab tends to be squeezed down, and only those who really know what they are doing can make slimmer rehab work. 

Neighbors called the rehab attempt botched, saying workers masked fire damage in two units.

“They just left all the burnt Sheetrock up there and put more stuff right over it,” said Charles Bolton, who has lived by the apartments since 1967.

Charles Bolton’s house is behind Cornerstone. He and his wife, Margie, say they’re unhappy with the complex’s upkeep, and find trash and drug paraphernalia on their property.

Hance said that, having made a lot of money working with the Houston developer, he was confident about taking over the project.

“Back then, the hook was in my mouth pretty far,” he said.

That’s what happens when you swim with the sharks

He won federal tax credits over the protests of the Diamond Oaks Homeowners Association and city leaders, who were skeptical that the $1 million Hance would invest was enough for an adequate renovation.

Out of curiosity, I looked up Cornerstone in our national LIHTC property database.  It’s a total of 74 apartments — 24 one-bedroom, 44 two-bedroom, 6 three-bedroom — that was placed in service in 1996, meaning it delivered annual LIHTC’s through 2006 and has recapture exposure (declining) through 2011.

A million bucks over 74 apartments is only $13,500 apiece.  Even by 1996 standards, that is very low, particularly in light of a property that had been boarded up.  (Money spent by the previous developer may be regarded as lost, since a building that sits open is always a target for clandestine occupancy, and usually suffers more damage than any interim rehab could have been worth.)

In other words, very likely it was a minimal rehab, a form of housing that has been plagued with problems ever since the mid-Sixties. 

Affordable housing amidst attractive single-family homes, with a golf course to the east

Today, nearly fourteen years later, evidently it wasn’t enough, as the Star-Telegram documents:

Dismal conditions

No one would ever confuse Cornerstone with any hoity-toity Dallas suburb.

Residents say some downstairs apartments flood every several months when sewers back up.

One recent weekend, with temperatures in the 40s, heat was out for a family of five. They said the property manager told them that the maintenance man would not be available until Monday.

If true, that’s highly abnormal.  Most professional management companies process work orders on a twenty-four hour basis.  Something essential, like heat, I would expect to be processed within six hours — or less.

Too bad the utilities are individually metered

UAH Property Management President Mike Clark [told] the local property manager … that it is against company policy to allow anyone to go without heat.

Not to mention a violation of applicable building codes.

I went looking for UAH Property Management, to find information about them.  The Web site listed for the company (www.uahmgmt.com) does not work.

We respond as soon as you succeed in finding us

If the Star-Telegram’s interviewees are representative, the property has been plagued by problems ever since it was completed, with the neighbors saying I-told-you-so:

“I just knew … they would never do anything they promised,” said Ann Blackwell, who was the leader of the association. “We fought it and fought it, and we lost.”

After Hance entered the picture, city leaders knew that the battle was over, said Trae Fowler, who was then Haltom City’s mayor.

“I’m not saying he exercised any political pressure,” Fowler said, “but I’m sure that people were aware at the time that he was a pretty powerful political figure.”

Mr. Hance is certainly no stranger to the program, nor to the mother’s milk of politics:

Jess Unruh of California, who knew a thing or two about politics and lobbyists

Landmark Affordable Housing, run by lobbyist and ex-Congressman Kent Hance and his children, has received more than $36 million in tax credits for four TDHCA projects during the time period studied.  Hance has contributed almost $335,000 to Texas political committees and candidates since 2004.  Over the past decade he also has lobbied Texas officials on behalf of three low-income housing interests: Kilday Realty, Lankford Interests and the American Housing Foundation.  TDHCA tax-credit recipient Edgewater Affordable Housing also hired Hance to lobby federal officials in 2005.  Hance took a leave of absence from his firm after Governor Rick Perry appointed him chancellor of Texas Tech University in late 2006.

Mr. Hance’s lobbying was not just for others, but also for himself:

Why are you lobbying for an allocation for Myles Standish, John, when you yourself are much more worthy?

Hance said that over the past decade, he has gotten 14 such awards, most for new construction.

All on the merits, I’m sure.

While it’s by no means mandatory for a general partner to live close to the properties he owns, nor even necessarily to be in the business of developing and operating affordable housing, it is – to say the least – quite remarkable that a general partner not steeped in the affordable housing business would be able to provide high-quality supervision over his properties and his management company while holding down a full-time job several hundred miles away.

320 miles, five hours of Texas driving

This would be more tolerable if the management company were doing an outstanding job and the residents were expressing their gratitude, but they are not:

Earlier this year, a mother of three dislodged a dead rat from the back of her stove after the maintenance man did not address the foul odor in her kitchen, she said.

Water bugs are the size of your thumb, several residents say.

“My cat eats them,” one resident said.

Shown actual size — yuck

Security is also a challenge:

The complex has had 22 reports of assaults in four years and several rapes, police reports show. Last year, a 17-year-old resident was shot by another resident in a field behind the apartments. Break-ins in the parking lot are common.

A very dense site, with a shopping mall across the street

Actually, there’s compelling evidence that the management company is inclined to ignore the property and the residents, as illustrated by the Star-Telegram’s opening paragraphs:

HALTOM CITY — When the manager of the Cornerstone Apartments learned that state housing inspectors would pay a visit today, she switched into high gear.

Griselda Chairez sent a bilingual flier to tenants telling them of the visit and warning that Child Protective Services would be called “at the spot” on any parent with a “filthy” unit.

On it went: All tenants must make sure that electrical outlets work and that doors properly shut.

Sorry, but that’s the owner’s responsibility.

You have mold? Bleach it out.

Owner’s responsibility, owner’s legal liability.

Leaks?  Make sure they’re gone.

Owner’s responsibility.

Holes in the wall?  Get rid of those, too.

Owner’s responsibility, although the residents will be liable for damages. 

In short, Ms. Chairez’s flyer is just about the worst imaginable thing one could send – I can’t begin to count the number of implicit violations of proper procedure and program requirements are captured within it — and the attitude of fearful belligerence that lies behind it is even more damning. 

It’s mind-boggling the paperwork I have to put up with

Several mothers were panicking. “How am I going to fix a leak?” one woman asked. Another woman, smoking outside her unit, said: “I’ve just had a baby. What am I going to do?”

Residents, of course, aren’t responsible for most of the problems detailed in the flier, as the property management company later acknowledged.  The ones who should be scrambling, residents say, are the owners who promised to maintain the apartments and the state officials charged with ensuring that they do so.

Well, who is responsible?

Now, Chancellor, if your property were something kept in the refrigerator …

[Continued tomorrow in Part 2.]

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