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Presentation, discussion, and possible action on a waiver of 10 TAC §11.302(e)(6) for Sunset Gardens (HTC #22445)
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RECOMMENDED ACTION
recommendation
WHEREAS, Sunset Gardens (Development) was approved for a 4% Housing Tax Credit (HTC) award in 2022, for the acquisition and rehabilitation of 330 units, all of which are designated as low-income units, in Houston, Harris County, and was issued a Determination Notice reflecting an annual HTC award in the amount of $3,058,153;
WHEREAS, Sunset Gardens Preservation, LP (Development Owner or Owner) purchased the Development on September 1, 2022, and rehabilitation was completed in September 2024;
WHEREAS, the cost certification documentation for the Development has been submitted by the Owner with an annual credit request of $3,354,150, and is under review the Department;
WHEREAS, staff’s analysis at cost certification identified $1,553,553 representing construction security expenses that are capitalized and classified in the Development Cost Schedule as Indirect Construction Costs and included Development’s rehabilitation basis;
WHEREAS, §11.302(e)(6) of the 2022 Qualified Allocation Plan (QAP) identifies jobsite security as one of the general requirements that is a General Contractor Fee, and the General Contractor Fee is limited to 14% of the Hard Costs for this Development;
WHEREAS, the amount classified in the Development Cost Schedule as General Contractor Fee is at the maximum threshold allowed under 10 TAC §11.302(e)(6) prior to the reclassification of the construction security costs, and therefore, the costs must be excluded from eligible basis in staff’s underwriting analysis, which results in an annual recommended HTC amount of $3,245,168, a reduction of $108,982 from the annual HTC amount requested by the Owner;
WHEREAS, the Board has the duty under Section 2306.148 of the Texas Gov’t Code to adopt underwriting standards for housing tax credits allocated by the Department; and
WHEREAS, the Owner seeks a waiver of certain provisions of 10 TAC §11.302(e)(6) of the 2022 QAP regarding staff’s classification of the construction security costs as general requirements and General Contractor Fee in the cost certification underwriting analysis;
NOW, therefore, it is hereby
RESOLVED, that the waiver of 10 TAC §11.302(e)(6) of the 2022 QAP for Sunset Gardens is denied as presented at this meeting, and the Executive Director and his designees are each authorized, directed, and empowered to take all necessary action to effectuate the foregoing.
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BACKGROUND
Sunset Gardens (Development) was approved for a 4% HTC award in 2022, for the acquisition and rehabilitation of 330 units, all of which are designated as low-income units, in Houston, Harris County, and was issued a Determination Notice in the amount of $3,058,153. The Development is composed of two HTC properties, formerly known as Kings Row and Scott Plaza, that are located adjacent to each other. The Owner purchased the properties on September 1, 2022. At the time of purchase by the Owner, the Development was approximately 87% occupied. Rehabilitation of approximately half of the Development’s 35 residential buildings was completed in December 2023, and rehabilitation of the remaining half was completed in September 2024. The cost certification documentation for the Development has been submitted by the Owner with an annual HTC request of $3,354,150 and is currently under review by the Department. The Owner’s credit request represents an increase of 9.68%, or $295,997, from the HTC amount identified in the Determination Notice. Total development costs increased from approximately $72.5 million at application to approximately $80.2 million at cost certification.
When the Application was submitted, the Owner did not identify security costs as part of the Development costs. However, the applicant did identify security costs as an expense that was estimated to be $120,000 annually, and this amount was included in the operating pro forma in the original underwriting analysis. The Owner’s cost certification submission now identifies an estimate of $793,997 as an annual security expense. Staff requested and received a copy of the Security Services Agreement dated January 1, 2025, that identifies a monthly fee of $62,400, which is an annual expense of $748,800, and the agreement includes additional fees for emergency calls, special operations/surge deployments, and investigative/analytical support. The agreement states it is ongoing month-to-month unless amended in writing. The operating history provided in the cost certification package supports that the Development is expensing approximately $62,400 monthly. Additionally, the Development Cost Schedule in the Owner’s cost certification package includes $1,553,553 identified as construction security that is classified as Indirect Construction costs and included in both the total development costs and in eligible basis.
The Owner’s CPA provided an explanation of the security costs stating that they were incurred to protect the supplies and the buildings from theft during the construction period. Staff notified the Owner that jobsite security is a general requirement under the definition of General Contractor Fee in 10 TAC §11.302(e)(6) of the 2022 QAP, and therefore, the costs would be reclassified in the staff’s underwriting analysis as a General Contractor Fee, which is limited to 14% of the Hard Costs for this Development. Because the General Contractor Fee included in the staff’s analysis already exceeds the maximum allowable threshold for this Development, the $1,553,553 must be excluded from the costs and basis for credit sizing purposes. This results in a recommended annual credit allocation of $3,245,168, a reduction of $108,982 from the Owner’s credit request and a 6.12%, or $187,015, increase from the HTC amount in the Determination Notice. If the security costs remain classified as Indirect Construction costs, then $1,553,553 would remain in both costs and basis, and staff’s underwriting analysis would support a recommended annual credit amount of $3,338,071, a reduction of $16,079 from the Owner’s credit request and a 9.15%, or $279,918, increase from the amount in the Determination Notice. It should be noted that the $16,079 decrease from the Owner’s credit request is due to other Indirect Construction Costs and additional General Contractor Fee from change orders that were misclassified as Direct Construction costs in the Development Cost Schedule and reclassified in staff’s analysis.
The Owner disputed staff’s reclassification of the security costs to General Contractor Fee. Therefore, staff consulted with the Department’s contact at the IRS to confirm if there is guidance regarding how security costs should be treated. The IRS contact stated is that there is a lack of guidance or precedent regarding how security costs should be treated or that confirms they are an eligible cost, and therefore, that the Owner has the option to pursue a private letter ruling regarding the security costs. Staff conveyed this response from the IRS contact to the Owner.
On August 26, 2026, Sarah Andre, the consultant for the Owner, submitted a request for a waiver of 10 TAC §11.302(e)(6) of the 2022 QAP regarding the reclassification of the $1,553,553 security costs as General Contractor Fee. The waiver requests that the costs remain classified as non-construction soft costs in staff’s underwriting analysis in agreement with the classification of the costs to Indirect Construction Costs in the Development Cost Schedule by the Owner’s CPA.
The Owner states that staff’s reclassification of the costs is not supported because the security services were contracted directly between the Owner and a third-party provider and that the General Contractor had no involvement, coordination, or oversight of the security. Therefore, they assert that the security costs are not part of the General Contractor Fee and should not be subject to the 14% threshold specified in 10 TAC §11.302(e)(6). The Owner further states that the portion of the security costs attributable to protecting the rehabilitation work, site, and material during the active construction period is properly capitalized as part of the rehabilitation costs, eligible to be included in basis, and consistent with the approach taken by other state housing finance agencies.
The Owner representative states that at Application the Owner was aware of the required significant rehabilitation, safety, resident environment, and overall community conditions, but the extent and level of the required specialized security measures required were not foreseeable or preventable. As rehabilitation progressed, the Owner discovered that traditional property security would not be sufficient and a more comprehensive security presence was necessary to effectively stabilize the Development due to the span of multiple residential buildings over 15 acres that are separated by a public street and the continued occupancy of the Development of more than 650 residents during the rehabilitation construction. The Owner representative states that a fundamentally different approach to the security needs was needed, and without the rehabilitation effort and need to restore the Development to a safe and stable community, the extraordinary security costs would not have been necessary. Ms. Andre states the security services were not part of the General Contractor’s scope of work and the need for the level of specialized security and the associated costs were not reasonably foreseeable, preventable, or within the General Contractor cost structure contemplated by 10 TAC §11.302(e)(6).
The Owner representative states the exclusion of the security costs will have a material impact on the financial feasibility of the Development with the loss of equity proceeds needed to complete the rehabilitation. The Owner recognizes staff’s cautious approach in the absence of an IRS ruling specifying the eligibility of treatment of the security costs. However, the Owner requests that staff recognize the security costs as eligible soft costs and not general requirements that are defined as General Contractor Fee. The Owner believes that granting this request furthers the purposes and policies specified in Texas Gov’t Code §§2306.001, 2306.002, 2306.002, and 2306.6701.
As specified in 10 TAC §11.302(e)(6) of the 2022 QAP, jobsite security is a general requirement that is defined as General Contractor Fee. The rule does not specify that the definition of jobsite security only applies to security costs contracted through the General Contractor.
Staff recommends denial of the Owner’s request for a waiver of §11.302(e)(6) of the 2022 QAP as presented herein.