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HEADLINE: Public housing's funding called 'bizarre';
Multisource deal to build apartments is questioned

SOURCE: Staff

BYLINE: MIKE SNYDER, MATT SCHWARTZ

BODY:
Consider a young couple struggling to buy their first home. Rather than going the usual route - making a down payment from their savings, obtaining a mortgage for the balance and paying it off over 30 years - the buyers patch together a "creative" financing plan.

A wealthy friend agrees to lend the couple about half the purchase price under generous repayment terms. The buyers could use their own assets to pay the balance, but instead they borrow the sum they need from a bank and pay it back within three years. When all is said and done they'll own the home outright and have money left over in the bank.

This fanciful scenario is roughly analogous to the deal that the Housing Authority of the City of Houston put together to build the Victory Apartments, a 100-unit public housing project in the Fourth Ward. The apartments will be part of the replacement housing for Allen Parkway Village, a 1,000-unit project that the agency demolished in 1996. On July 12, the City Council approved a $ 5 million loan of federal funds for the Victory project, despite questions from some council members about its price tag of $ 9.4 million, or $ 94,000 per apartment. Tom Scott, a real estate developer who is chairman of the housing authority board, said a private developer could build apartments of comparable size and quality for perhaps $ 68,000 each, or $ 6.8 million for the project.

Among other factors, Scott and others said, the high costs and unusual terms of the deal reflect the realities of building public housing in an era when the federal government is no longer willing simply to write a check for whatever it costs.

"Congress won't provide direct funding for public housing anymore, so everybody's left to kind of scurry around and put together these bizarre financing arrangements," said John Henneberger, co-director of the Texas Low-Income Housing Information Service, an Austin-based advocacy group.

In today's climate, housing authorities should preserve public housing stock rather than tear it down and resort to "contorted financing vehicles" to replace it, Henneberger said.

Scott, however, called the housing authority's approach a "creative way to get the project done - leveraging other programs to make our dollars go further."

The concept of "leveraging," increasingly prevalent in federal housing programs, involves combining federal grants with indirect subsidies such as tax credits and other financing sources to get projects built.

But these multisource deals sometimes carry additional costs, including the fees of the lawyers and consultants who put them together, officials say.

For example, the cost breakdown for Victory Apartments includes $ 7,500 for a market study. The study, performed by Ranger Real Estate Research and Consulting Co. of Houston, concludes that "market demand for the Victory Apartments is significant given the previously documented level of pent-up demand (for affordable rental housing) in the submarket."

Scott acknowledged that in the Fourth Ward - one of the poorest neighborhoods in a city where 20,000 families are on waiting lists for subsidized housing - a market for low-rent apartments would seem to be self-evident. But a market study is required under the low-income housing tax credit program, which is providing $ 3.2 million in financing for the project, Scott said.

"No market study, no tax credits," Scott said.

In broad terms, the financing plan for Victory Apartments is an amalgam of federal grants from three distinct programs, coupled with state bond funds and tax credits.

The chief reason for the high costs, Scott said, is a developer fee of $ 895,295 and a reserve fund of $ 450,000. Adding those fees, he said, qualified the agency for more tax credits, which are calculated based on 4 percent of the total development cost.

Once the project is built and operating, Scott said, the reserve fund and developer fee will revert to the housing authority - the developer - which can use it to develop more affordable housing in the Fourth Ward.

The $ 4.4 million in state bonds, known as private activity bonds, were awarded for the project in April by the state's Bond Review Board. These bonds, awarded through a lottery, entitle the housing authority to the tax credits, which the agency will sell to private investors who use the credits to reduce their federal income tax liability.

Another wrinkle in the financing, Scott said, was created by the fact that the U.S. Department of Housing and Urban Development will not allow housing authorities to carry debt on public housing projects. Because of this, he said, the authority will use the $ 3.2 million in tax credit equity and $ 1.1 million from a 1993 federal grant to repay the bonds within two or three years, before the project becomes operational. (The figures do not match the $ 4.4 million bond total because of rounding.)

Normally, such bonds would be retired over 30 years, he said.

Another factor that makes the project more costly, Scott said, is the requirement that federally funded projects pay higher wage scales to workers under the Davis-Bacon Act.

Moreover, the project is located in Freedmen's Town, a federally designated historic district settled by emancipated slaves after the Civil War. This designation triggers special design standards imposed by historic preservation agencies, he said, and these rules add thousands of in costs.

The land where Victory Apartments will be located - a three-block area bordered by Genesee, Victor, Wilson and Cleveland streets - has passed through several owners on its way to becoming the site of public housing.

The land was purchased from private owners by Houston Renaissance Inc., a nonprofit organization created by the city in 1994.

In 1997, the City Council gave Houston Renaissance $ 3.4 million to purchase land in the neighborhood for affordable housing. The organization also received more than $ 6 million in loans from the Houston Housing Finance Corp., another nonprofit group.

Houston Renaissance later ran out of money and was dissolved, and the property it had purchased was taken over by the housing finance corporation. The corporation created another development entity, Hou-Tex, which in turn sold the land to the housing authority for Victory Apartments.

The city controller's office, which has commissioned an audit of the housing finance corporation's role in the redevelopment project, said its research shows that two-thirds of the land on which the apartments will be built was purchased with money from the $ 3.4 million city grant.

Controller Sylvia Garcia said this means that the land has been bought twice with public money for the same purpose - to build affordable housing - even though no housing has yet been built.

"I think it's a tragedy that we spent so much in public funds for affordable housing, and yet there is no affordable housing that we can show for it," Garcia said.

But Margie Bingham, director of the city's Department of Housing and Community Development, insisted the grant to Houston Renaissance was not used to purchase the Victory Apartments land.

The city's contract with Houston Renaissance, she pointed out, was to be used for single-family and historic rental units only, not multifamily housing.

The $ 5 million loan from the city is composed of nearly $ 4 million in federal housing funds left over from the fiscal year that ended June 30, and $ 1 million in repayments of a housing program loan from a previous year.

City Councilman Mark Goldberg, who sought unsuccessfully to delay the council vote on the loan, said he still questions the way in which local housing officials have gone about this deal.

"I can see there may be problems in the future in that some of the costs have been overestimated, and I believe some of the costs have been underestimated and will rise much higher," Goldberg said.

He also questioned why housing officials have not acquired all of the land within the area of the proposed apartment project. Several lots, some amid the apartment sites, remain in private hands.

"They have designed around it, which I believe is a huge mistake," Goldberg said. "This land is not deed restricted, and it's my understanding that practically any type of business could go in there, ranging from a liquor store to a washateria or a convenience store, or some other activity that may not be conducive to the neighborhood environment."

Scott, the housing authority chairman, said the agency would love to purchase those parcels but their owners have been unwilling to sell.

GRAPHIC: Photo: 1. The Housing Authority for the City of Houston is building a 100-unit public housing project in the Fourth Ward. The apartments will be part of the replacement housing for Allen Parkway Village, a 1,000-unit project that the agency demolished in 1996 (color); Mug: 2. Sylvia Garcia (b/w, p. 10); Map: 3. Location of Victory Apartments (b/w, p. 10); 1. Ben DeSoto / Chronicle, 3. Houston Chronicle

LOAD-DATE: November 21, 2000