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Presentation, discussion, and possible action regarding the adoption of an Agreed Final Order concerning The Declan I (Bond MF007 / CMTS 2510) and The Declan II (Bond MF008 / CMTS 2509)
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RECOMMENDED ACTION
recommendation
WHEREAS, The Declan I (Bond MF007 / CMTS 2510) and The Declan II (Bond MF008 / CMTS 2509) both owned by Lurin Real Estate Holdings LIX, LLC (Owner) have uncorrected compliance findings relating to the applicable land use restriction agreements and the associated statutory and rule requirements;
WHEREAS, Owner is controlled by Jon Venetos;
WHEREAS, TDHCA identified findings of noncompliance at both property phases during its regularly scheduled 2023 file monitoring reviews and 2024 NSPIRE inspections, and referred the Owner for an administrative penalty when the noncompliance was not timely corrected;
WHEREAS, Owner reported a casualty loss to TDHCA in 2024 for CMTS 2509, but Owner failed to submit supporting documentation to substantiate the claim in order for the Department to set a two-year corrective action period;
WHEREAS, unresolved compliance findings for CMTS 2509 include: NSPIRE violations, casualty loss violations relating to four units that require supporting details, and file monitoring violations for pre-onsite documentation, household income, and annual recertifications;
WHEREAS, unresolved compliance findings for CMTS 2510 include: NSPIRE violations, and file monitoring violations for household income and annual recertifications;
WHEREAS, an Enforcement Committee informal conference was held on November 21, 2024, and Owner agreed, subject to Board approval, to enter into Agreed Final Orders for CMTS 2509 and CMTS 2510, assessing partially forgivable administrative penalties of $8,425.00 and $25,000.00, respectively; and
WHEREAS, staff has based its recommendations for an Agreed Final Order on the Department’s rules for administrative penalties and an assessment of each and all of the statutory factors to be considered in assessing such penalties, applied specifically to the facts and circumstances present in this case.
NOW, therefore, it is hereby
RESOLVED, that Agreed Final Orders assessing partially forgivable administrative penalties of $25,000.00 for noncompliance at The Declan I (Bond MF007 / CMTS 2510) and $8,425.00 for noncompliance at The Declan II (Bond MF008 / CMTS 2509), substantially in the form presented at this meeting, and authorizing any non-substantive technical corrections, are hereby adopted as the order of this Board.
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BACKGROUND
PROPERTY AND FINANCING INFORMATION: Lurin Real Estate Holdings LIX, LLC (Owner) purchased the following developments, located in Dallas, on June 22, 2022:
1. The Declan I (Bond MF007 / CMTS 2510), a 300-unit apartment complex; and
2. The Declan II (Bond MF008 / CMTS 2509), a 57-unit apartment complex.
The Owner is controlled by Jon Venetos, who is also the primary CMTS contact. Property management is conducted in-house by Lurin Management, Inc for CMTS 2509, and Lurin Property Management, LLC for CMTS 2510, both of which have Sarah Turner entered as the primary CMTS contact.
Each development is encumbered by a Bond LURA, with the bond funds used for acquisition and rehabilitation. The bonds are paid in full, and the state restrictive periods under each Bond LURA will terminate on November 30, 2033.
ENFORCEMENT HISTORY: There are three TDHCA-monitored developments in this ownership group. This owner has no prior enforcement history except for a prior administrative penalty referral for delinquent annual reporting, which was resolved informally.
NONCOMPLIANCE SUBJECT TO AN ADMINISTRATIVE PENALTY: The TDHCA Compliance Division (Compliance) identified the following findings of noncompliance and referred them for an administrative penalty. Noncompliance is listed below by Development, in the order that it was referred for an administrative penalty:
1. File Monitoring at CMTS 2509: A file monitoring review was conducted on February 16, 2023, and Compliance set a corrective action deadline of May 31, 2023. Unresolved noncompliance was referred to the Enforcement Committee (the Committee) for an administrative penalty on September 26, 2023.
After referral, the Enforcement Committee learned that this was a new owner who had purchased the development on June 22, 2022, and that multiple unresolved units were vacant due to a rehabilitation. Owner submitted partial corrective documentation and a corrective plan for Enforcement Committee consideration relating to the remaining noncompliant units. Status after this corrective documentation submission:
a. Findings that were resolved after referral:
i. Failure to provide a social services program plan.
ii. Failure to provide documentation that household incomes were within prescribed limits upon initial occupancy for units 212 and 425.
iii. Failure to provide annual recertifications that were due between October 2022 and February 2023, for units 211, 321, 416, and 426.
b. Findings that remain unresolved:
i. Failure to submit pre-onsite documentation, including the monitor review questionnaire.
ii. Failure to provide documentation that household incomes were within prescribed limits upon initial occupancy for unit 126.
iii. Failure to provide annual recertifications that were due between October 2022 and February 2023, for units 126 and 328.
Owner indicated in their corrective plan that they intended to spend an average of $17,000 per unit, including new cabinets, fixtures, mechanical replacements, flooring, appliances, lighting, countertops, blinds, window seals. Owner was also planning to perform exterior renovations including roofing, gates, lighting, landscaping, foundation repairs, replacing damaged sidewalk sections, full exterior paint, HVAC replacements, and repairs to railings, stairs, electrical panels, fencing, and gates.
Since this was a new owner investing in repairs, the unresolved units were vacant, and it did not make sense to re-occupy the vacant units prior to rehabilitation, the Committee approved a corrective plan through March 31, 2024, to complete the rehabilitation. It later approved a plan extension through June 30, 2024, with authority for the Enforcement Committee Secretary to extend by a further 30 days for good cause. Owner instead: (1) submitted a casualty loss form on July 2, 2024, for a fire at unit 328, and (2) submitted another extension request for unit 126 on July 9, 2024, stating that it was still in the demolition phase, and estimating a September completion date.
2. NSPIRE Inspection at CMTS 2509: An NSPIRE inspection was conducted on July 8, 2024, and Compliance set a corrective action deadline of November 12, 2024. The inspection scored 90.84 out of 100. Despite receiving reminders, Owner did not submit any corrections, nor did they request an extension even though the Compliance Division can grant a 90-day extension for good cause. The NSPIRE inspection was referred for an administrative penalty on November 15, 2024.
3. Casualty Loss at CMTS 2509: Owner submitted a casualty loss form on July 2, 2024, claiming that a fire occurred in unit 328 on June 25, 2024. There is normally a two-year restoration period for casualty loss damage under IRS Memorandum CCA 200134006. After the Owner failed to respond to email requests for more information, the Compliance Division issued a notice of noncompliance, requesting further information on or before October 8, 2024, to substantiate the casualty loss claim. Owner provided a scope of work and disclosed that four units were damaged in the fire, but despite multiple TDHCA reminders, Owner failed to provide a copy of the City of Dallas fire report or photographs of the damaged areas to substantiate the casualty loss claim. The casualty loss was referred for an administrative penalty on November 18, 2024.
4. File Monitoring at CMTS 2510: A file monitoring review was conducted on February 16, 2023, and Compliance set a corrective action deadline of May 31, 2023. The following noncompliance was referred to the Committee for an administrative penalty on July 25, 2024, and Owner has not submitted any further corrections:
a. Failure to provide documentation that household incomes were within prescribed limits upon initial occupancy for units 132, 214, 423, 432, 723, 737, 821, 1117, 1118, and 1224.
b. Failure to provide annual recertifications that were due between January 2023 and February 2023, for units 924, 432, 634, and 1022.
During its July 30, 2024 meeting, the Committee discussed the file monitoring administrative penalty referrals and pending noncompliance that had not yet been referred. The Committee voted to set an informal conference. The conference was scheduled for October, and the scheduling notice reminded Owner of the following upcoming deadlines. The conference was then rescheduled to November, at Owner’s request, due to Hurricane Helene because the Owner owns properties in Florida that were affected by Hurricane Helene.
5. NSPIRE Inspection at CMTS 2510: An NSPIRE inspection was conducted on July 8, 2024, and Compliance set a corrective action deadline of October 20, 2024. The inspection scored 41.18 out of 100. Despite receiving reminders, Owner did not submit any corrections, nor did they request an extension even though the Compliance Division can grant a 90-day extension for good cause. The NSPIRE inspection was referred for an administrative penalty on October 22, 2024.
ADMINISTRATIVE PENALTY FACTORS: Owner participated in an informal conference with the Enforcement Committee on November 21, 2024. The Enforcement Committee analyzed the required statutory factors for determining an appropriate administrative penalty as follows:
1. The seriousness, extent, and gravity of the violations: Most of the violations for CMTS 2509 are not severe, however, the owner’s failure to cooperate with inquiries regarding the casualty loss is suspicious. The physical noncompliance at CMTS 2510 is extremely serious, with a score of 41.18 out of 100 on the 2024 NSPIRE inspection. Owner representatives stated that vagrants are going into vacant units and causing some of the cited damage on the inspection report. Security should be a higher priority, and this situation is likely compounding existing problems at the property since it will cause other tenants to move out, leading to more vacant units in a vicious cycle that is difficult to break. File monitoring noncompliance is also serious, with the owner failing to submit any substantive response for file monitoring noncompliance at CMTS 2510.
2. Hazard posed to the health or safety of the public: The 2024 NSPIRE inspection for CMTS 2509 scored 90.84 out of 100, so the hazard posed is minor for CMTS 2509. The condition of CMTS 2510 is poor, however, scoring 41.18 out of 100 on the 2024 NSPIRE inspection. This poor physical condition seems to be fairly recent, with TDHCA’s 2018 and 2021 inspections scoring above average. The property was purchased in 2022, and the owner intended to renovate, but those plans appear to have stalled for CMTS 2510. Leaving units vacant for renovation could have unintentionally contributed to decline and the vagrancy issue noted above.
3. Hazard posed to the public’s economic welfare: Owner representatives stated that they think residents are income qualified, but admitted that they do not have good file documentation. If residents do qualify, then the economic impact of the file violations would be minor, but this cannot be confirmed until the owner submits the requested tenant files. There could be an economic impact if TDHCA determines that units are leased to non-qualified households. There is also an economic impact to having so many vacant units that are not available to rent at CMTS 2510.
4. Efforts made to correct the violations: The plan submitted for the initial file referral for CMTS 2509 included promise for a substantial rehabilitation, however, that plan was violated and owner cooperation since then has been limited, with multiple additional penalty referrals received. Renovation plans appear to have stagnated. Owner could have requested good cause extensions for the NSPIRE noncompliance, but did not submit any corrections or an extension request despite Committee reminders. Owner also failed to cooperate with requests for documentation to substantiate the fire casualty loss. Owner representatives do not appear to understand how serious the matter is, and did not present a coherent plan for resolution during the informal conference. The owner purchased the properties in 2022, however, the excuse that they are a new owner has long since expired. The properties had a lot of onsite staff and supervisory turn-over, and there is no discernible improvement to their monitoring procedures over time.
5. Any other matters that justice may require: This appears to be a purchase by an investor who did not realize how much work is involved with renovating a property of this age, or that owning multifamily affordable housing in Texas subject to a Department LURA is not a passive investment. The scope of work for the planned rehabilitation was compounded by security issues, which have led to high turn-over by staff at the property and a chaotic approach toward TDHCA noncompliance. There is a long road ahead and a large capital investment is needed to stabilize the property now that conditions have declined. Building confidence for tenants and staff will take time and investment.
6. Amount necessary to deter future violations: The person in control, Jon Venetos, has been silent for these enforcement matters (leaving reporting to the property management company), and is unlikely to take the matter seriously without a significant penalty assessment. However, while the penalty amount needs to be big enough to get his attention and incentivize resolution, the Department also needs the owner to fix the units in order to improve living conditions for tenants and address the vacancy issue, which will require significant investment as noted above. The penalty cannot be so large that it risks causing the property to fail, but it must be large enough to get the owner’s attention. TDHCA will physically inspect again during 2025 due to the poor NSPIRE score, and the owner will be referred for debarment if CMTS 2510 again scores below 50. Potential future debarment serves as additional incentive to make improvements to avoid further administrative penalty referrals. In light of the above factors, the Enforcement Committee recommends Agreed Final Orders for CMTS 2509 and CMTS 2510, assessing administrative penalties of $8,425.00 and $25,000.00, respectively, with 50% of each penalty amount to be forgiven if all noncompliance is addressed as outlined in the Agreed Final Orders on or before April 30, 2025 for the file monitoring and casualty loss noncompliance, and on or before June 30, 2025 for physical noncompliance.
AGREED FINAL ORDER RECOMMENDED: Owner has agreed to sign Agreed Final Orders for CMTS 2509 and CMTS 2510.
Consistent with direction from the Department’s Enforcement Committee, a probated and, upon successful completion of probation, partially forgivable administrative penalty in the amounts of $8,425.00 for CMTS 2509 and $25,000.00 for CMTS 2510, with 50% of each penalty amount to be forgiven if all noncompliance is addressed as required by the respective orders. This will be a reportable item of consideration under previous participation for any new award to the principals of the Owner.