BILL ANALYSIS

C.S.H.B. 3568

By: Gates

Urban Affairs

Committee Report (Substituted)

BACKGROUND AND PURPOSE

Public facility corporations were designed to provide affordable housing for families who make less than 80 percent of the area median income. The program required 50 percent of the units in a participating development to be reserved for such families, yet it has often been misused by developers who only provide efficiencies or small one-bedroom apartments at that income rate. Often, such units are rented at market rate, allowing the owner to experience no revenue loss on those units while paying no property taxes or sales taxes on materials purchased during construction. It is abundantly clear that reforms to this program are long overdue if renters are to realize the monetary relief for which it was intended. C.S.H.B. 3568 seeks to reform the public facility corporation tax exemption by providing for, among other provisions, various tiers of income-restricted housing, minimum unit size requirements, and caps on monthly rent for income-restricted units.

CRIMINAL JUSTICE IMPACT

It is the committee's opinion that this bill does not expressly create a criminal offense, increase the punishment for an existing criminal offense or category of offenses, or change the eligibility of a person for community supervision, parole, or mandatory supervision.

RULEMAKING AUTHORITY

It is the committee's opinion that rulemaking authority is expressly granted to the Texas Department of Housing and Community Affairs in SECTION 10 of this bill.

ANALYSIS

C.S.H.B. 3568 amends the Local Government Code to authorize a public facility corporation created under the Public Facility Corporation Act or a corporation's sponsoring municipality, county, or housing authority to finance, own, or operate a multifamily residential development only under the following conditions:

· the corporation or sponsor complies with all applicable provisions of the act;

· the development is located in the sponsor's area of operation, if the sponsor is a housing authority, or in the sponsor's boundaries, if the sponsor is not a housing authority, without regard to whether the sponsor is authorized to own property or provide services outside the boundaries of the sponsor; and

· the corporation is not sponsored by a municipal management district.

The bill requires a corporation created under the act that proposes to develop or acquire a multifamily residential development to hold a public hearing, at a meeting of the corporation sponsor's governing body, to approve such a development.

C.S.H.B. 3568 conditions the availability of the public facility corporation tax exemption for such a multifamily residential development on compliance with the following additional requirements:

· at least 30 days before the date the corporation takes action to approve a new multifamily residential development or the acquisition of an occupied multifamily residential development, and at least 30 days before the date of any public hearing under the bill to approve the development, the corporation delivers to the presiding officer of the governing body of each taxing jurisdiction in which the development is to be located a written notice of the development;

· for a development proposed by a corporation whose sponsor is a housing authority, the development is approved by or receives a resolution of no objection from the county or governing body of the municipality in which the development is located, as applicable;

· for an occupied development that is acquired by a corporation:

o the development is located at the time of acquisition entirely within a census tract that either has a poverty rate of less than 20 percent or a median household income in the two highest quartiles among census tracts within the uniform state service region in which the development is located; and

o a moderate rehabilitation of the development, defined by the bill as the expenditure of capital improvements in an aggregate amount of not less than the product of $25,000 multiplied by the total number of units in the development on the date of acquisition, is completed not later than the third anniversary of the date of acquisition;

· before the final approval of the development by the governing body of the corporation's sponsor, the following occurs:

o the corporation or sponsor conducts or obtains from a professional entity that has experience underwriting affordable multifamily residential developments and does not have financial interests in the applicable development, public facility user, or developer, an underwriting assessment of the proposed development to determine the appropriate category of income-restricted units to require at the development; and

o based on that assessment, the corporation makes a good faith determination that the total annual amount of rent reduction on the income-restricted units provided at the development will be not less than 60 percent of the estimated amount of the annual property taxes that would be imposed on the property without an exemption under the act for a specified period;

· the units in the development are reserved in either of the following amounts:

o at least 12 percent reserved for each of the following:

§ moderate income housing units, for occupancy by an individual or family whose annual median income is not more than the greater of 80 percent of the area median income or 80 percent of the statewide median income, as those incomes are adjusted for family size and as established by HUD;

§ low income housing units, for occupancy by an individual or family whose annual median income is not more than the greater of 60 percent of the area median income or 60 percent of the statewide median income, as those incomes are adjusted for family size and established by HUD; and

§ very low income housing units, for occupancy by an individual or family whose annual median income is not more than the greater of 50 percent of the area median income or 50 percent of the statewide median income, as those incomes are adjusted for family size and established by HUD, or for tenants assigned project-based vouchers under the housing choice voucher program; or

o at least 30 percent reserved as moderate income housing units and at least 10 percent reserved for one of the following categories:

§ extremely low income housing units, for occupancy by an individual or family whose annual median income is not more than the greater of 30 percent of the area median income or 30 percent of the statewide median income, as those incomes are adjusted for family size and established by HUD; or

§ for tenants assigned project-based vouchers under the housing choice voucher program;

· the monthly rent charged for an income-restricted unit is capped at 30 percent of the monthly income restriction applicable to each category of reserved units, or, for a unit occupied by a recipient of a housing choice voucher, the monthly rent is capped at the greater of the following:

o 30 percent of the monthly income restriction applicable to the unit; or

o the monthly payment standard used by the housing authority that administers the voucher;

· for a development, other than an occupied development acquired by a corporation, one‑third each of the reserved units per income category are reserved for one-, two-, and three-bedroom units, and each bedroom meets the qualifications for a bedroom under applicable provisions of the low income housing tax credit program;

· for an occupied development acquired by a corporation, the percentage of units reserved in each income category, based on the number of bedrooms per unit, are the same as the percentage of each category of units reserved in the development as a whole;

· reserved income-restricted units meet minimum size requirements based on the number of bedrooms in the unit;

· each lease agreement for a unit provides the following protections that may not be waived by the tenant:

o the landlord may not retaliate against the tenant or the tenant's guests by taking an action because the tenant established, attempted to establish, or participated in a tenant organization;

o the landlord may only choose to not renew the lease under specified circumstances; and

o to not renew the lease, the landlord must serve a written notice of proposed nonrenewal on the tenant not later than the 30th day before the effective date of nonrenewal; and

· requirements governing the reservation of income-restricted residential units or the income restrictions applicable to tenants in a multifamily housing development are documented in a land use restriction agreement or a similar restrictive instrument that is recorded in the real property records of the county in which the development is located.

The bill requires the comptroller of public accounts to biennially adjust the amount of a qualifying expenditure for moderate rehabilitation to reflect inflation, with the board using 2021 as the base year for the adjustment and considering the Consumer Price Index or its successor in making the adjustment.

C.S.H.B. 3568 sets out further tax exemption requirements for a multifamily residential development that is owned by a corporation with respect to a public facility user, defined by the bill as a public-private partnership entity, developer, or other private entity that has possessory interest in a public facility that is a multifamily residential development. The bill requires the public facility user to use the HUD definition of annual income when calculating the income of an individual or family for an income-restricted unit and to apply certain federal tax laws in determining the unit's continued qualification as an income-restricted unit if the income of a tenant exceeds an applicable limit. The bill requires the Texas Department of Housing and Community Affairs (TDHCA) to conduct an audit of each public facility user to determine whether the public facility user is in compliance with the tax exemption requirements and to identify the difference in the rent charged for income-restricted units and the estimated minimum market rents that could be charged for those units without the rent or income restrictions. The bill requires the audit to be conducted annually for the first three years after the date the development is acquired or after certificate of occupancy for the development is issued, as applicable, then every third year thereafter. The bill requires TDHCA to issue its audit findings in a report that must be made available on TDHCA's website, be issued to the user that is the subject of the audit, and describe in detail the nature of any failure to comply with the tax exemption requirements. The bill requires a public facility user to comply with the following:

· affirmatively market available residential units directly to individuals and families participating in the housing choice voucher program;

· notify local housing authorities of the multifamily residential development's acceptance of tenants in the housing choice voucher program and include on the development's primary website information regarding that acceptance and the inclusion of income-restricted units in the development;

· reimburse TDHCA for conducting the audit by paying TDHCA $40 per unit not later than April 1 of each year for which the audit is required; and

· provide a copy of the audit report received from TDHCA, not later than the 60th day after the date of receipt, to the following entities:

o the comptroller;

o the applicable appraisal district;

o the corporation and the governing body of the corporation's sponsor; and

o if the sponsor is a housing authority, the elected officials that appointed the authority's governing board.

The bill requires TDHCA to adopt forms and reporting standards for the auditing process. An audit is subject to disclosure under state public information law, except that tenant identifying information may be redacted. The bill prohibits a corporation or sponsor from accepting payment from a public facility user or developer in exchange for the corporation's or sponsor's participation in a development without complying with the tax exemption requirements.

C.S.H.B. 3568 prohibits a public facility user from doing the following:

· refusing to rent a residential unit to an individual or family because the individual or family participates in the housing choice voucher program, if the assistance received by the individual or family through the program is equal to or greater than the amount established as the maximum monthly rent for the applicable unit; and

· using a financial or minimum income standard that requires an individual or family participating in the housing choice voucher program to have a monthly income of more than 250 percent of the individual's or family's share of the total monthly rent payable for a unit.

C.S.H.B. 3568 restricts the eligibility for the property tax exemption available for leaseholds and other possessory interest in the real property of a public facility during the period that a corporation owns the facility to a public facility that is a multifamily residential development.

C.S.H.B. 3568 authorizes the applicable appraisal district to impose a penalty on a public facility user that the audit report establishes is not in compliance with the tax exemption requirements on grounds that the user collected rent for an income-restricted unit in an amount that exceeded the authorized amount or rented such a unit to a tenant not qualified for occupancy. The bill sets out the following with respect to such a penalty:

· establishes the penalty amount as 125 percent of the amount by which the amount of rent collected exceeded the authorized amount of rent or 125 percent of the difference between the amount of rent collected for a unit occupied by a tenant not qualified for occupancy of that unit and the full market rental rate for the unit, as applicable;

· prohibits a collected penalty from being refunded before a final disposition of any applicable appeal;

· establishes that a collected penalty is in addition to any other remedy provided by law; and

· requires the penalty to be distributed to each taxing unit with jurisdiction over the development pro rata according to the applicable property tax rate of the jurisdictions.

The bill establishes that a tax exemption does not apply in a tax year in which a development is determined in the audit to be noncompliant with the exemption requirements and fails to cure the noncompliance within the 60-day period following the date of receipt of the audit establishing the noncompliance.

C.S.H.B. 3568 requires a public facility corporation that owns a multifamily residential development with an applicable tax exemption to submit to the comptroller and to TDHCA, beginning April 1, 2024, and subsequently not later than April 30 of each year, a report that includes the following:

· a list of each multifamily residential development owned by the corporation that includes specified information, including information relating to any income and rent restrictions, disaggregated by the category of income restriction and the number of bedrooms per unit of each such category; and

· a copy of all agreements between the corporation and the public facility user for the development, if such agreements have not previously been submitted to the comptroller and TDHCA.

The bill requires the comptroller to post a copy of the report on the comptroller's website, and, for each submitted report, to collect from the submitting corporation a reasonable fee capped at the amount necessary to offset the comptroller's costs of administering the reporting requirements. The bill requires TDHCA, not later than January 1, 2024, to adopt rules necessary to implement the audit and reporting requirements.

C.S.H.B. 3568 exempts from the additional tax exemption requirements a multifamily residential development that meets the following criteria:

· has at least 20 percent of its residential units reserved for public housing units;

· participates in the Rental Assistance Demonstration program administered by HUD; or

· receives financial assistance from the low income housing tax credit program.

The bill clarifies that a "public housing unit" is a residential unit for which the landlord receives a public housing operating subsidy from the federal Public Housing Operating Fund. The bill establishes that an occupied development that is acquired by a corporation is eligible for an exemption for the one-year period following the date of the acquisition, regardless of whether the development complies with certain requirements other than the bill's audit and reporting requirements, and for a year following that year on the condition that the development comes into compliance with those requirements not later than the first anniversary of the date of acquisition.

C.S.H.B. 3568 prohibits the following persons from owning or obtaining a direct or indirect ownership interest in a public facility that is a multifamily residential development, and from providing or deriving any material economic benefit from the provision of public facility financial consulting services associated with a public facility that is a multifamily residential development:

· a member of the governing body of a corporation's sponsor;

· an elected member of the governing body of the municipality, county, or school district in which such a development is located; or

· an immediate family member of either such person, defined by the bill as a spouse, domestic partner, cohabitant, child, stepchild, grandchild, great-grandchild, parent, stepparent, mother-in-law, father-in-law, son-in-law, daughter-in-law, grandparent, great-grandparent, brother, sister, half-brother, half-sister, stepsibling, brother-in-law, sister-in-law, aunt, uncle, niece, nephew, or first cousin.

For purposes of this prohibition, public facility financial consulting services are consulting or advisory services, excluding legal, accounting, tax, or auditing services, with a value in excess of $25,000 that are provided to a prospective public facility user in connection with the user's application for approval of the acquisition of a possessory interest in a public facility that is a multifamily residential development. The bill exempts from the prohibition an elected official or their immediate family member who owns publicly traded securities issued by an entity that provides those services or securities issued by any investment vehicle that directly or indirectly owns an interest in any such entity.

C.S.H.B. 3568 establishes the following:

· the bill's provisions regarding a multifamily residential development owned by a public facility corporation and regarding the additional exemption requirements, other than the bill's auditing and reporting requirements, apply only to a tax imposed for a tax year beginning on or after the bill's effective date and to a multifamily residential development that is approved by a public facility corporation or sponsor of a public facility corporation on or after June 1, 2023, for purposes of which the development is considered approved if the applicable governing body takes initial action approving the development; and

· provisions relating to tax exemption eligibility periods for an occupied development apply only to such a development that is acquired by a corporation on or after June 1, 2023, for purposes of which the development is considered acquired if the applicable governing body takes initial action approving the acquisition.

C.S.H.B. 3568 sets out the following with regard to the bill's audit and reporting requirements for applicable multifamily residential developments:

· the requirements apply to all multifamily residential developments owned by a public facility corporation; and

· the provisions relating to the audit requirement take effect January 1, 2025.

C.S.H.B. 3568 sets out the following definitions for purposes of its provisions:

· "capital improvement" means a property improvement that has a depreciable life of at least five years under generally accepted accounting principles, excluding typical expenses that are routine in making a multifamily residential unit ready for lease after a turnover of the unit, including expenses for plasterboard repair, interior painting, and floor coverings;

· "developer" means a private entity that works with a corporation to propose or operate a multifamily residential development as a public facility;

· "housing choice voucher program" means the housing choice voucher program under federal Section 8, United States Housing Act of 1937, including housing choice vouchers provided through the Veteran's Affairs Supportive Housing Program; and

· "rent reduction" means the projected difference between the rent charged for a unit subject to rent and income restrictions under the bill's provisions and the maximum market rate rent that could be charged for that same unit without the rent and income restrictions.

EFFECTIVE DATE

Except as otherwise provided, on passage, or, if the bill does not receive the necessary vote, September 1, 2023.

COMPARISON OF INTRODUCED AND SUBSTITUTE

While C.S.H.B. 3568 may differ from the introduced in minor or nonsubstantive ways, the following summarizes the substantial differences between the introduced and committee substitute versions of the bill.

The substitute revises the introduced version's authorization for a public facility corporation or sponsor to finance, own, or operate a multifamily residential development as follows:

· includes a provision absent from the introduced restricting that authority to an applicable sponsor that is a municipality, county, or housing authority;

· includes a prohibition absent from the introduced against a corporation sponsored by a municipal management district financing, owning, or operating a residential development; and

· requires a development to be approved by the applicable municipal governing body or county if the corporation's sponsor is a housing authority, whereas the introduced did not include that requirement.

The introduced conditioned the authorization for a public facility corporation to finance, own, or operate a development on the development being located in the jurisdictional boundaries of a sponsor that is not a housing authority. The substitute instead conditions that authorization on the development being located inside the boundaries of the sponsor. The substitute includes a specification absent from the introduced that the condition applies without regard to whether the sponsor is authorized to own property or provide services outside the boundaries of the sponsor.

The substitute includes provisions absent from the introduced that prohibit certain individuals and their immediate family members from owning or obtaining a direct or indirect ownership interest in a development and from providing or deriving any material economic benefit from the provision of public facility financial consulting services associated with such a development. Accordingly, the substitute includes definitions for the terms "immediate family member" and "public facility financial consulting services," both of which were absent from the introduced.

The substitute includes a requirement absent from the introduced for the comptroller to biennially adjust the amount of a qualifying expenditure for moderate rehabilitation regarding an occupied development that is acquired by a corporation to reflect inflation, with the board using 2021 as the base year for the adjustment and considering the Consumer Price Index or its successor in making the adjustment.

The introduced included the following requirements:

· for a corporation created by a housing authority under the Public Facility Corporation Act to hold a public hearing, at a meeting of the authority's governing body, to approve the development; and

· for a corporation, other than a corporation created by a housing authority under that act, to hold a public hearing at a meeting of the corporation's board to approve the development.

The substitute does not include those requirements and instead requires a corporation created under the act that proposes to develop or acquire a multifamily residential development to hold a public hearing, at a meeting of the corporation sponsor's governing body, to approve such a development.

The substitute includes the following provisions, which were absent from the introduced:

· a provision setting out the period for which an occupied development that is acquired by a corporation is eligible for the tax exemption; and

· a prohibition against a corporation or a sponsor of a corporation accepting a payment from a public facility user or developer in exchange for the corporation's or sponsor's participation in a multifamily residential development without complying with applicable requirement.

The substitute revises the tax exemption eligibility requirements for multifamily residential developments in the introduced as follows:

· omits a requirement that appeared in the introduced for the initial construction of the development to occur while the development is owned by the corporation;

· changes the deadline for a corporation to notify the applicable taxing entity of the development from the 60th day before the public hearing to approve the development, as in the introduced, to at least 30 days before that date and the date any action is taken for that approval;

· makes eligible for an exemption an occupied multifamily residential development that is acquired by a corporation under specified conditions, whereas the introduced did not;

· includes requirements absent from the introduced for a corporation or sponsor to conduct or obtain an underwriting assessment of a proposed development for purposes of making certain determinations regarding the appropriate category of income-restricted units to require at the development and regarding the annual amount of rents for those units;

· with respect to the categories of income-restricted housing, the substitute:

o changes from 65 percent of the applicable median income, as in the introduced, to 60 percent of that income the qualifying income threshold of an individual or family income for occupancy of low income housing units;

o establishes that the applicable median income for each category is the greater of the area median income or the statewide median income, as both are adjusted for family size and established by HUD;

o changes the distribution of units reserved on a percentage basis for each income category in a development required in the introduced;

o omits the provisions present in the introduced that provided for higher monthly rent rate caps in each category if certain tenants are not responsible for any utility costs;

o whereas the introduced required the public facility user, in calculating the income of an individual or family for an affordable unit, to consider the income of each individual who will be living in the unit, the substitute requires the public facility user, in calculating the income of an individual or family for an income-restricted unit, to use the definition of annual income described in federal regulations, as implemented by HUD; and

o revises the requirements of the introduced for the distribution of one-, two-, and three-bedroom units in each category.

Whereas the introduced required at least 10 percent of income-restricted units in a development to be reserved for occupancy by recipients of housing choice vouchers, the substitute omits that requirement and instead does the following:

· establishes an option to reserve 10 percent of units for voucher recipients as an alternative to reserving the units as extremely low income units;

· prohibits a public facility user from refusing to rent a residential unit to voucher recipients if the assistance received is equal to or greater than the maximum monthly rent for the unit, whereas the introduced did not include such a prohibition;

· prohibits a user from using a financial or minimum income standard that requires a voucher recipient to have a monthly income of more than 250 percent of the recipient's share of the total monthly rent for the unit, whereas the introduced did not prohibit the use of such a standard; and

· establishes requirements absent from the introduced for the public facility user to affirmatively market available units to voucher program participants, to provide notice to local housing authorities of the development's acceptance of tenants participating in the voucher program, and to include on the development's website certain related information.

The substitute includes provisions absent from the introduced that require each lease agreement for a unit in a multifamily residential development to provide certain tenant protections that the tenant may not waive.

The substitute includes a requirement absent from the introduced for the requirements governing the reservation of income-restricted units to be documented in a land use restriction agreement or a similar restrictive instrument that is recorded in the real property records of the county in which the development is located.

With respect to the audit requirements that appeared in the introduced, the substitute does the following:

· expands the purposes of the audit set out in the introduced and the contents of the audit report;

· includes a requirement absent from the introduced for TDHCA to conduct the audit for an occupied development that is acquired by a corporation;

· includes a requirement absent from the introduced for a public facility user to pay to TDHCA a reimbursement fee per unit contained in the development as determined by the audit;

· requires a public facility user to provide a copy of the audit report received by TDHCA to specified entities;

· provides for penalties to be imposed on and collected from noncompliant public facility users and establishes that a tax exemption does not apply in a tax year in which the applicable development is noncompliant and fails to cure the noncompliance within a specified 60-day period; and

· establishes that an audit is subject to disclosure under state public information law, except for certain tenant identifying information.

Whereas the introduced required the report by a corporation to be submitted to the comptroller not later than February 1 annually, the substitute requires that submission to both the comptroller and TDHCA not later than April 30 annually. The substitute further revises the required contents of the report established in the introduced, and includes a requirement absent from the introduced for the comptroller to collect a reasonable fee from the corporation submitting the report capped at the amount necessary to offset the comptroller's cost of administering the reporting requirements.

The substitute omits a provision of the introduced that applied a tax exemption under the Housing Authorities Law to a multifamily residential development acquired or constructed after January 1, 2024, by a housing authority, other than a public facility corporation created by a housing authority, only if the development meets specified criteria.

Whereas the introduced established that development requirements apply only to a multifamily residential development that is approved by a corporation on or after the bill's effective date, the substitute establishes that those requirements apply to developments approved or acquired on or after June 1, 2023.

Whereas the introduced defined "developer" as a private entity that constructs a development, the substitute defines that term as a private entity that works with a corporation to propose or operate a multifamily residential development as a public facility.

Whereas the introduced defined "moderate income housing unit" as a residential unit reserved for occupancy by an individual or family earning not more than 80 percent of the area median income, adjusted for family size, the substitute defines the term as a residential unit restricted for occupancy by an individual or family whose annual median income is not more than the greater of the following:

· 80 percent of the area median income for the household's place of residence, as adjusted for family size and as established by HUD; or

· 80 percent of the statewide median income, as adjusted for family size and as established by HUD.

The definition of "housing choice voucher program" in the substitute specifies that it includes housing choice vouchers provided through the Veteran's Affairs Supportive Housing Program. The introduced did not include this specification.

The substitute includes definitions for the following terms, which were absent from the introduced:

· "capital improvement";

· "extremely low income housing unit";

· "moderate rehabilitation";

· "rent reduction"; and

· "very low income housing unit."

The substitute omits the definition of "lower income plus housing unit," which was present in the introduced.