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Home · Property Management · Financing · How Downtown landlords are receiving tax breaks and checking the affordability box without lowering rates

Walking through a vacant warehouse that has since been demolished to make way for Union Row, Trump cabinet member Ben Carson asked developer Kevin Adams how many of the massive development’s apartments would be affordable.

Carson, the U.S. Housing and Urban Development Secretary, was in town that October 2019 day to celebrate Union Row as a shining example of the benefits of opportunity zones.

Twenty percent of the 710 apartments would be affordable, Adams told Carson.

Adams was referring to an agreement that all multifamily developers sign with the Downtown Memphis Commission (DMC) when they get incentives. The policy requires 20% of new apartments be set aside for low- and moderate-income Memphians.

However, if all of Union Row’s 20% — 142 units — are leased to lower-income tenants at a rate they can afford, it would be a break from the status quo.

According to a Memphis Business Journal investigation, most of the apartment developments that are subject to the DMC’s affordability rule have either ignored it or complied with the letter of the law without reducing the rates on any of their rooms.

As a result, Memphians of low income aren’t receiving affordable access to hundreds of apartments the program would seem to offer them.

There have been no consequences in recent years for developers who receive public tax breaks but ignore the rule. That’s because the DMC hasn’t enforced its policy.

However, that may change.

In a Jan. 24 interview with MBJ, DMC president/CEO Jennifer Oswalt said she and her team looked into their policy after the MBJ began asking questions about it in September 2019.

She concluded her organization “has not done a great job of checking” for compliance.

‘Motivated in those days’

The DMC has been drawing development Downtown with PILOT (payment-in-lieu-of-taxes) incentives since 1979. (The DMC was named the Center City Commission until changing its name in 2011.)

The DMC PILOTs give developers a 75% discount on property taxes for a certain amount of years after the project is built. For more information, see the sidebar at the bottom of this article.

By the early 2000s, people began to be concerned that Downtown was gentrifying. By 2010, these concerns drove the DMC to create a new requirement for PILOT recipients, said Jeff Sanford, who was the organization’s president from 1998 to 2010.

“We were motivated in those days by the desire to ensure the growing Downtown residential community was diverse by income and race,” Sanford said.

The rule states that the owners of PILOT-incentivized apartment complexes that have more than 50 units must reserve 20% of their units for “qualifying tenants” — those whose income doesn’t exceed 80% of the county’s median. Any vacant unit can count as being reserved for a qualifying tenant.

For 2019, 80% of the county’s median income was $37,000 for a one-person household and $53,000 for four people. By comparison, traditional low-income apartment complexes are usually rented to people making less than 30% of the median income.

Since 2010, the requirement has been included in every PILOT lease the DMC has signed for developments with more than 50 apartments. The lease requires landlords obtain income certifications for each new tenant, allow this paperwork to be inspected by the DMC, and provide the DMC with a list of current tenants and available units on a yearly basis.

Paul Morris, who ran the DMC for five years starting in 2010, said his staff collected annual compliance sheets from the owners but that he didn’t spend much time on the program.

At the time, Downtown rents were low enough, he said, that some low- and moderate-income people would end up living there without a formal program.

The DMC’s primary aim was to increase property values, not provide affordable housing, Morris said.

Current DMC staff members were unable to locate in their records any of the compliance sheets Morris said he collected during his tenure. Oswalt said the president between her and Morris, Terrence Patterson, didn’t hold onto records for long since he didn’t like “clutter.”

Patterson, who served from 2015 to 2017, told the MBJ he remembered the low- and moderate-income requirement but couldn’t remember how his administration handled it.

‘It wasn’t intentional’

Oswalt joined the DMC as CFO in 2015 and replaced Patterson in the top job in 2017. Since then, the organization did not collect the annual compliance sheets or take other action to directly enforce the policy until after MBJ started asking questions in September 2019.

What her organization has done, Oswalt said, is keep an eye on the average rental rates being charged at each property.

“Red flags would have arisen if the average was higher for certain properties. We [would have] thought there must be more here that are not being affordably provided,” she said.

Oswalt said she is unsure why the process of collecting the sheets was either not passed down from Morris’ administration to Patterson’s or from Patterson’s to her own.

“It wasn’t intentional, but we can’t really figure out where the flaw happened,” Oswalt said.

She said she was told by her predecessors that the policy didn’t necessitate much compliance because the bankers who owned the developments’ mortgages would keep an eye on the landlords — not wanting them to lose the tax breaks, which are worth more than $5 million for projects like The Tennessee Brewery, The Chisca on Main, or The Citizen.

“It’s up to the DMC what level of enforcement and investigation they want to do,” Pinnacle Financial Partners’ Rick Neal said.

Oswalt said her organization’s recent review of the policy has made it realize the banks aren’t checking, so the DMC needs to be.

“We’ve now recognized that this is a systematic process issue,” Oswalt said. “We want to fix it. … We care a lot about [affordability].”

‘Everyone makes the same’ 

After MBJ started reporting this story in the fall, Oswalt’s team began to reach out to tax-break recipients to see if they were following the policy.

Of the 10 apartment communities governed by the program, four reported being in compliance — at or above the 20% mark — and six reported not hitting the threshold, though one rounds up to 20%. The 10 ranged from having 15% to 26% of their units either vacant or filled with qualifying tenants.

Property managers for two of the communities MBJ reached — Tennessee Brewery and 266 Lofts — said they were unaware of the DMC’s policy.

“Everyone makes the same,” Crystal Lewis, a regional manager with Multi-South Management Services who manages 266 Lofts, said of tenant income.

Vince Smith, who has developed and owned multiple Downtown apartment buildings, including 266 Lofts, said he is aware of the policy and makes sure his buildings are compliant. Though he no longer owns 266, he said it is likely in compliance despite a manager not knowing about the policy.

The Tennessee Brewery was developed by a group led by Billy Orgel. It is managed by Fogelman Properties.

Orgel asked the MBJ whether the requirement was a policy or a recommendation. He said he didn’t know why a Fogelman Properties manager who spoke to the MBJ wouldn’t know about the policy but that he would check to make sure it was being followed.

About a week later, he said that his organization fills out an annual form that includes the percentage of units rented to qualifying tenants.

DMC VP of communications Penelope Huston said Orgel’s team may have been producing this form, but the DMC had not been collecting it until recent months.

Orgel said a mix of income levels has occurred organically at the Tennessee Brewery redevelopment. This is in part because most college students count as having a low income no matter their parents’ income, he said.

Multiple others people MBJ spoke to said renting to college kids helps landlords meet the income requirement without dropping rental rates. Oswalt said this is allowed and accomplishes the program’s goal, pointing out that not all college kids are supported by their families.

“To make [units] accessible for people of that income level [we] mainly do [560-square-foot] efficiencies, so units become approachable for every income group,” Orgel said of the Tennessee Brewery. “Basically, it happens naturally because our market rent is very affordable.”

Oswalt and others echoed Orgel’s sentiment that the requirement can be met without much effort.

‘Hasn’t been a problem’

Along with small units, college kids, and vacant units, another reason the requirement is easy to meet is because landlords are allowed to charge the low- and moderate-income renters any price they wish. The policy stipulates a renter’s income, not how much they will pay.

Usually, landlords prefer tenants to have a salary that is at least three times the rental rate. This makes it less likely tenants will fall behind on rent, and it is in line with the U.S. Housing and Urban Development definition of “cost burdened” families — those who spend more than 30% of their income on housing.

Managers for three complexes MBJ spoke to said they allow their lower income tenants to spend up to 50% of their income on rent.

This extra allowance is how Nicole Collett, former manager at The Citizen, said that complex has been able to meet the DMC’s requirement.

“Honestly, [the policy] hasn’t been a problem for us; we’re at 24 or 25% [low- and moderate-income tenants],” Collett said. “At a lot of conventional properties, if they don’t meet the [30%] income requirement, they could be automatically denied. … With us, as long as their credit is all fine, we’ll work with them.”

Like the DMC, EDGE has a multifamily tax break program — begun in 2017 — that requires 20% of units be rented to low- or moderate-income people. Unlike the DMC, EDGE doesn’t allow recipients to charge these qualified tenants more than 30% of their income, EDGE CEO Reid Dulberger said.

Oswalt said the DMC doesn’t tell landlords what they can and can’t charge certain tenants because it would be akin to rent control.

“If someone who meets [the income] requirement chooses to pay more than [30% of their income] in rent, that’s their choice,” she said.

‘We would work with them’

The DMC has recently begun working to enforce the policy.

Owners of the incentivized multifamily communities are now all aware of the requirement and the fact they’ll have to meet it within “a reasonable amount of time,” Oswalt said.

She did not specify how long landlords will have and said she doesn’t want to end any of the tax breaks, unless the complexes “repeatedly show a disregard for this requirement … once it was brought to their attention.”

“With this small number of [developers and landlords], and so many of them being people we continue to work with … we would work with them to give them time to cure [their compliance],” she said.

While enforcement is being improved, no changes to the policy are planned in the immediate future.

Oswalt said she believes in the goal of creating mixed-income communities but that a lack of affordable apartments hasn’t been an issue Downtown, since average rents have been so low.

Despite the DMC not enforcing its requirement in recent years, the policy has been mentioned multiple times in public settings as a positive element of different Downtown developments that are receiving tax incentives.

At an August 2019 City Council meeting, City of Memphis’ director of housing Paul Young discussed the policy as one of the many local programs that is helping provide housing to address the city’s housing challenges.

And, in a November 2019 Shelby County Board of Commissioners committee meeting, commissioner Van Turner touted the fact that 20% of the apartments in Tom Intrator’s $1.1 billion Pinch District development would be affordable.

“I know that you, [Intrator], are committed to affordable housing — 20% affordable housing — which is really great,” Turner said.

Given the MBJ’s findings, it’s unclear what percentage of Intrator’s 1,500 proposed apartments would actually end up being affordable for low- and moderate-income Memphians.

How DMC PILOTS operate

Payment-in-lieu-of-taxes (PILOT) incentives are meant to spur investment and/or job creation by giving developers or companies an abatement on their property taxes for a set number of years.

When a company is granted a PILOT, the property where the investment is being made is ceded to the entity granting the PILOT, such as the Downtown Memphis Commission (DMC).

Simultaneously, the company signs a lease with the DMC. And, under the lease, the company pays the DMC about 25% of what it would otherwise be paying in property taxes. In turn, the DMC passes this money along to Memphis and Shelby County.

This arrangement was projected to save The Citizen $6.7 million, The Chisca on Main $5.5 million, and the Tennessee Brewery $10.8 million over the life of their incentives.

The Citizen, for example, is set to pay $1.1 million more during its 15-year PILOT than if the property had been left as it was.

This is why it can be difficult to determine if PILOTs are a good deal for the public. To truly know, the DMC would have to know for sure whether or not the investment would be made sans tax break.

There are ways to try to figure this out — via pro formas and other methods — but it’s hard to know for sure.

Source: bizjournals.com

 

 

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