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Council takes first step in new type of affordable housing deal

Friday, June 12, 2009 by Kimberly Reeves

Council agreed to move forward last night on negotiations with the developer of The Village on Little Texas, a 240-unit complex in far Southwest Austin that city leaders call “an innovative approach to financing” and some competitors in the local affordable housing sector call suspicious.

Council serves as the board of the Austin Housing Finance Corporation. During an afternoon meeting on Thursday, City Manager Marc Ott’s Chief of Staff Anthony Snipes walked through the process of approval for the Little Texas application, emphasizing that both AHFC staff and its four-member bond review board had enthusiastically endorsed the application.

In opening comments to Council, Neighborhood Housing and Community Development Director Margaret Shaw emphasized she had recused herself of any involvement in the Little Texas project seven months ago, long before the affordable housing project was selected for funding.

In recent newspaper reports, questions were raised about Shaw’s relationship with the affordable housing consultants on the project, Bill Lee and Bill Skeen. Four years ago, Shaw developed a project with Skeen and Lee called the Boulevard. Shaw said she had no financial interests in Little Texas or Lee and Skeen’s business. She had voluntarily stepped aside when the Little Texas project came forward.

“Out of an abundance of caution, I recused myself seven months ago,” Shaw said.

Snipes defended the Little Texas proposal, calling it an innovative step to deal with the current economy and running down a timeline that led to the proposal. Out of 74 potential developers who attended a meeting last October, the development team for Little Texas was one of three to make it through the full process, Snipes said.

The agreement, as outlined by Snipes, is that the city would offer $2 million for the 11-acre parcel on which the Little Texas would sit. That’s not unusual for city-backed ventures. A subsidiary of the AHFC, created for the purpose, would be the managing partner on the property. While not involved in the day-to-day management of the property, AHFC’s subsidiary for Little Texas would be actively involved in financial decisions, having put up a total of $2.9 million in financing.

For its commitment, the AHFC would own 50 of the 240 units on the property. All units would be aimed at renters able to pay 80 percent of median family income or lower. The city’s ownership with be 18 units for families at below 30 percent median family income and another 32 units on the property priced for families below 50 percent median family income, hitting one the most important housing segment needs for Austin.

For its efforts, AHFC would own a 30 to 35 percent ownership stake in the apartment complex. The developer would pay an annual lease payment of $10,000. And the AHFC subsidiary would be entitled to a third of the rent off the project, except in the project’s first year of operation.

If the developer chose to sell Little Texas, the AHFC would have the right of first refusal on the sale of the property. And 35 percent of the proceeds of the sale would then belong to the AHFC’s subsidiary. The only liability to the subsidiary would be the amount invested by the AHFC, which would be $2.9 million.

When asked directly by Council Member Randi Shade what risks might be associated with the deal, AHFC told her there were no risks.

What makes the project unprecedented, noted Mayor Pro Tem Brewster McCracken, was that the developer agreed to a 99-year term of affordability on the project. And, as consultant Alice Glasco noted, this would be only the second apartment complex west of Interstate 35 with affordable housing units.

The timeline on this project was short. AHFC is expected to purchase the parcel on June 17 and execute partnership and loan documents for Little Texas by the end of June. Then the application would be forwarded to HUD for final approval. HUD, too, is an investor on the project, which Snipes assured Council would not have happened if the deal had been questionable in any way.

Water Moreau, executive director Foundation Communities, however, has his doubts about the deal and told Council they had gotten a very one-sided presentation.

Moreau told Council that for this area where Little Texas was being built, 80 percent of median family income was comparable to most complexes in the market. So AHFC had a major financial stake in a project – plus would offer a 100 percent property tax exemption – on a project with rates comparable to most in the area.

Moreau offered another charge: The Little Texas deal had almost no public scrutiny. It had not gone through public boards, nor had the bond review committee made any of its deliberations in public. Moreau asked who controlled the sale, who set the budget, who covered the shortfall and whether the city could get out of a transaction if it was apparent it had turned bad.

The city and HUD have a stake in Little Texas; the developer did not, a charge that Skeen disputed, saying the developer had put $1.3 million in the project.

Moreau also questions the assumptions for the financing.

Moreau considered the occupancy rate too rosy and the operating cost too low, with no construction contingency in the budget. Little Texas had all the ingredients that made the project a potential millstone around Council’s neck: a developer with no money at risk, a lot of debt, tight underwriting and sudden urgency.

Lee emphasized the developer had followed all the proper steps. The project was granted the exemptions set out by state law. And every unit on the project would be affordable. He also stressed that the developer had $1.2 million on the table, which means he, too, had “skin in the game.” And, he said, there was no better deal on the table, when it came to a project that would produce new affordable units.

With some trepidation, Council did go ahead and approve the start of negotiations with the developer. Shade questioned confusing aspects of the scoring matrix. She supported the motion “with reservations.” Council Member Laura Morrison noted that it was important, as a city with some of the first affordable housing bonds in the nation, that the city get the very best deal possible on its affordable housing deals.

Mayor Will Wynn and Mayor-elect Lee Leffingwell also raised questions about the green building standards the builder would meet, a point raised by Moreau. There seemed to be some confusion on what kind of standard the developer would have to meet. City-owned buildings must meet four-star green building standards.

One interesting detail that emerged in an online search of AHFC activity was that AHFC bonds were downgraded 19 notches, from “AAA” to “CC,” in February. The dip in the Standard and Poor’s rating was attributed to “insufficient assets.” The downgrade only applied, however, to one series of bonds, issued in 1997.

Council voted 6-0 in favor of negotiations. Final documentation, Wynn noted, would return to the board for additional review. 

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