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Presentation, discussion, and possible action on an appeal for Solano Apartments (#24457)
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RECOMMENDED ACTION
recommendation
WHEREAS, Solano Apartments is a 4% Housing Tax Credit (HTC) Application that proposes the acquisition and rehabilitation of an existing multifamily property in Webster;
WHEREAS, for existing properties, an Appraisal must be submitted to substantiate the value of the buildings to be included in the Development’s Eligible Basis, which is used to determine the amount of credits for which the Application is eligible;
WHEREAS, an Appraisal was submitted that attributed an “as-is” value to the underlying land, as if vacant, and an estimated “as-is” market value of the buildings and pursuant to 10 TAC §11.302(e)(1)(A)(ii) staff underwrote using such values;
WHEREAS, the Department posted an underwriting report recommending an annual tax credit allocation that was $188,472 below the amount requested by the Applicant; and
WHEREAS, the Applicant timely appealed this conclusion, contending that the Department should have underwritten assuming the hypothetical market value “As-Is Assuming Real Estate Tax Exemption” reflected in the Appraisal, which was denied by the Executive Director;
NOW, therefore, it is hereby
RESOLVED, that the appeal for Solano Apartments is hereby denied.
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BACKGROUND
Solano Apartments is an existing market rate property located at 535 W NASA Parkway, in Webster, Harris County. The 4% HTC application was submitted on February 26, 2024, and a Certificate of Reservation was subsequently issued for the development, with a bond closing deadline of August 24, 2024.
On June 21, 2024, the Department posted the underwriting report, recommending an annual tax credit allocation of $1,958,388, as determined by eligible basis. This amount is $188,472 below the annual amount requested by the Applicant of $2,173,860.
This transaction is considered an identity of interest. Kent Piotrkowski is the authorized signature for all three tenants-in-common noted as “Seller” and LSC Solano LIHTC, LP, noted as “Buyer,” in the Exclusive Option Agreement. Organizational charts included in the Application show that Mr. Piotrkowski will be the 100% Principal Member of the Special Limited Partner of the tax credit partnership, and is a 50% Principal Member of the Lone Star Capital Group, LLC, noted as the Developer and Guarantor in the Application and shown as a member of the three tenants-in-common noted as “Seller” in the site control.
According to the underwriting report, the Underwriter limited acquisition costs to the “as-is” value determined in the appraisal per §11.302(e)(1)(A)(ii):
“ii) For an identity of interest acquisition or when required by the Uniform
Relocation Assistance and Acquisition Act of 1970 the underwritten acquisition cost will be the lesser of the amount reflected in the Site Control documents for the property or the appraised value as determined by an appraisal that meets the
requirements of §11.304 of this chapter (relating to Appraisal Rules and Guidelines). An appraisal is not required if the land or building are donated to the proposed Development, and no costs of acquisition appear on the Development Cost Schedule.”
The Underwriter limited the eligible building acquisition cost to the appraised “as-is” value of the buildings per §11.302(e)(1)(A):
“(C) Eligible Basis on Acquisition of Buildings. Building acquisition cost included in Eligible Basis is limited to the appraised value of the buildings, exclusive of land value, as determined by an appraisal that meets the requirements of §11.304 of this chapter (relating to Appraisal Rules and Guidelines). If the acquisition cost in the Site Control documents is less than the appraised value, Underwriter will utilize the land value from the appraisal and adjust the building acquisition cost accordingly.”
Solano is currently a market rate property and therefore §11.304(c)(10)(D) applies:
“(D) For all other existing Developments, the appraisal must include the "as-is" value.”
The Novogradac appraisal dated March 4, 2024, states the following:
The Department underwrote $27,900,000 “as-is” value for the acquisition cost and $25,780,000 as the eligible building acquisition cost. This is based on the total “as-is” value of $27,900,000 minus the “as is” $2,120,000 land value stated in the submitted appraisal. The Application’s cost schedule assumed the $32,000,000 contract price as the acquisition cost and $29,880,000 as eligible building acquisition. This is based on the $32,000,000 contract price minus the $2,120,000 “as-is” land value. These different acquisition assumptions resulted in the reduced credit recommendation stated above.
The Applicant timely appealed the underwriting report, contending that the Department should have underwritten the $32,000,000 contract price and eligible building cost of $29,880,000 using the hypothetical market value “As Is Assuming Real Estate Tax Exemption” of $35,700,000 that supports the higher costs. The appeal response states that since the Application contemplates that the Harris County Housing Finance Corporation will control the property making it eligible for an ad valorem tax exemption, the higher hypothetical values should be used.
At the time of Application, the Exclusive Option Agreement executed on February 19, 2024 shows K&M NASA Webster LLC, HWPO51 LLC , and LSC Solano, LLC, collectively, as tenants-in-common, as “Seller.” None of these three entities qualifies for a property tax exemption at this time, as further confirmed in the appraisal, which states:
“It should be noted that the Subject currently operates as an unrestricted market rate property that is subject to a full real estate tax burden. At the direction of the client, we have included a hypothetical value that is based on the hypothetical condition that the Subject is fully exempt from real estate taxes.”
Since the property does not currently qualify for the tax exemption at the time of Application, the Application was correctly underwritten in accordance with the 2024 QAP which resulted in a reduction of recommended tax credits. Because of this, the appeal was denied by the Executive Director, and staff also recommends that it be denied by the Board. Despite the reduction in the recommended credit amount, the development is financially feasible.