House of Cards
Is the State Housing Agency Stacking the Deck?
This year, the state's biggest affordable housing program was supposed to operate strictly by the book, or so legislators were told. The days of shoveling public subsidies into questionable developments were over, out the door with the housing agency's former director, Larry Paul Manley, who resigned last year with FBI and Department of Public Safety agents on his trail. With one, probably two, board members at the Texas Department of Housing and Community Affairs (TDHCA) under scrutiny by criminal investigators, all appearances of corruption were supposed to disappear into the past. Nevertheless, critics of the agency's Low Income Housing Tax Credit (LIHTC) program say that this year's allocations, announced July 30, show that TDHCA still disregards its own rules and plays favorites with developers. And Dallas state Rep. Harryette Ehrhardt, who last year alerted Gov. George Bush to possible corruption at TDHCA, presumably leading to Manley's resignation, is fed up with TDHCA's handling of the program. Her office initiated a legislative inquiry in August seeking to drag the secretive LIHTC allocation process out into the light.
The tax-credit program, understood by few and administered by a small handful of TDHCA staff and board members, annually doles out nearly a quarter of a billion dollars in direct subsidies to affordable-apartment builders in Texas. It is the state's most powerful tool for providing the working poor with decent homes -- spurring the construction of over 75,000 apartments since 1987 -- but it is also a cash bonanza that has, in the words of one industry official, "made more millionaires in real estate than any [housing] program ever." (See A Developer's Jackpot)
The final report from Ehrhardt's inquiry has not been publicly released, but according to an independent assessment of the 1999 allocation process acquired by the Chronicle, TDHCA is still making millionaires out of a select and arguably undeserving few. Developers whose 1998 deals were publicly questioned were winners again in this year's tax-credit crapshoot, carrying away huge awards from a fiercely competitive contest in which only one in five applicants are chosen. Program rules were waived on behalf of applications that received poor evaluations from department staff, while others with less serious problems were rejected. Upper-level TDHCA staff and board members disregarded agency underwriters' concerns about some projects and submitted them for approval anyway. "It was business as usual," says one developer, describing this year's allocation process, "and just try and stop us."
Causes for Concern An analysis of staff reports attached to applications for 1999 tax credits illustrate why critics say the program has yet to come clean:
If it's true that former TDHCA director Manley pressured staff to recommend awards for his friends' projects, as one former TDHCA official has alleged, it now appears that he may have been but one TDHCA official exerting personal influence in the program. (Manley has denied any wrongdoing and says the tax-credit program is fair and equitable.) Sources close to the FBI/DPS investigation of Manley and TDHCA board member Florita Bell Griffin say the case has expanded to include other TDHCA officials, including upper-level staff, a second board member, and a former board member.
But the nine-member TDHCA board, all of whom are Bush appointees, exhibit little interest in questioning the tax-credit allocation process. This year they rubber-stamped the projects put before them by staff and the tax-credit subcommittee, on which Griffin -- whom a developer says he bribed in a 1997 tax-credit scheme -- still serves. Only Lydia Saenz questioned the preferential treatment given some applicants. And TDHCA executive director Stiner recently told a gathering of nonprofit developers that the tax-credit program is "perfect" as it is.
In years past, TDHCA officials have justified choosing projects with low scores or deficiencies by claiming that the projects would create a better "geographic dispersion" of tax-credit properties. And it's this discretionary wiggle room that has so far allowed TDHCA staff to refute outside auditors who have questioned the fairness and objectivity of the tax-credit program. Every year, dozens of sites that score high according to LIHTC guidelines are passed by in favor of lower-scoring sites in order to better "follow the market." As critics have pointed out in the past, these justifications haven't always made much sense, especially to jilted developers. Every year, TDHCA board members are publicly upbraided by developers who sink upward of $50,000 into high-scoring applications that get pushed aside.
After the agency's underwriters score projects, one former TDHCA employee says, tax credit manager Cherno Njie and tax-credit committee members "wave magic dust" over the projects to determine the winners. "Some [of the decisions] have definitely surprised me, let me just put it that way," says the former employee.
Development consultant Don Hammond puts it another way: "Texas' tax-credit program is just the laughingstock of this country. -- Developers always say, "How in the world can you spend the kind of money you've got to spend in Texas, when it really doesn't make any difference how good your application is?'" Hammond was instrumental in documenting flaws in the 1998 tax-credit round, helping inform Ehrhardt's criticism of the agency and getting the attention of the governor's office. All of the developers he represents, says Hammond, have recently decided to stop competing for tax credits in Texas, focusing their efforts instead on programs in other states.
"Everybody in the tax-credit housing business knows that trying to get an allocation in Texas is a very political process. Your chance of winning doesn't correspond to the worthiness of your project," agrees Greg Dunfield, former project director for a Portland-based developer. Dunfield learned firsthand how treacherous the playing field can be when his company, which owned more than 6,000 affordable housing units nationwide, proposed a development in Round Rock in 1997.
A Case in Round Rock
Fast-growing Round Rock was ripe for an affordable housing project, Dunfield says, and inevitably attracted a competing project from Austin-based JNP Properties. Dunfield's team partnered with the area YMCA to build a gymnasium in the complex and run after-school activities. They proposed low-density fourplexes on the site, which borders a creek. The city of Round Rock wrote Dunfield's team a letter of support, something it refused JNP's property, which proposed stacked, identical townhomes and minimal amenities. "Any reasonable person could have looked at the two applications and seen that we were shooting for such a higher goal," says Dunfield. (JNP principal John Paul defends his project, saying the city forced him to make landscaping concessions he hadn't planned (see "How Austin Fared," p.28).)
Reasonable or not, the tax credit was given to JNP, a real estate company which had no previous experience in tax-credit housing.
But Dunfield hadn't seen the last of JNP and John Paul. The next year, 1998, Dunfield's company partnered with a local developer to propose a San Antonio project. Scouting an Eastside neighborhood, the developer located what he considered a prime site adjacent to a high school surrounded by homes and retail. The property was not listed for sale, but the developer made an offer which the landowner, Frank Stanush, accepted. That same afternoon, Stanush got a call from John Paul. "He said, "Go with me because I've got a better chance to get the credits,'" says Stanush. "He was very aggressive, and got angry when I didn't sell [to him], but I'd already given my word." Paul says he never talked to Stanush personally and that his brokers had been in touch with the landowner before Dunfield's team contracted for the land, though Stanush says he doesn't remember any previous offers from Paul's office.
Paul found another site about a half-mile away, this one not zoned as residential property and fronting a freeway access road. Dunfield says he blanched when he learned of Paul's project. "I said, "Oh, shit.' I knew we couldn't compete against him." Sure enough, Paul's project won, despite underwriting's concerns about Paul's credit history, the fact that he had not broken ground on his previous project, and concerns about locating family housing directly next to an interstate highway. "He's got some powerful magic," comments the local developer who teamed with Dunfield.
Hammond included this episode among the case studies he wrote up to demonstrate TDHCA's questionable tax-credit selections. The consequence for Hammond, and the developers he represents, was a total shutout in this year's allocation round. Hammond, a consultant who has competed in the program for five years, and Robert Bobinchuck, a developer who lent his name to Hammond's reports, did not receive a single tax credit this year despite submitting more than a dozen applications -- a failure rate highly unusual for them both.
Hammond says too much subjective authority is controlling the state's tax-credit awards, compelling developers to hire lobbyists when projects should be judged on merit alone. "That says to me that this state's not concerned with where housing's needed, which housing's the best, or which serves the greatest needy population. It's just politics, and that's why we quit," says Hammond.
Irregularities similar to those documented by Hammond in the 1998 tax-credit allocations had already been noted in a 1997 report from the U.S. General Accounting Office, which said that Texas' allocation program that year gave credits to 12 projects originally classified as unfeasible by the underwriting team. "At management's request, the underwriters subsequently granted "conditional approval' to the project applications, but the applications were never returned to the underwriters for verification. -- Moreover, the managers provided no documentation to show, as required, how their discretionary awards were consistent with state and federal requirements," the report stated.
"There's something wrong here, it's just way wrong, and it makes your stomach turn," says Dunfield. Bad projects "make the program look like shit, and make our job harder when we have to go and try to sell affordable housing to another city."
State Rep. Ehrhardt, however, says she's determined to make the state's housing programs respectable. "This program needs to work fairly and above board so we can keep providing affordable housing for families," she says. Ehrhardt, a Democrat who has served two terms in the House, passed legislation that forced TDHCA to adopt stronger LIHTC program guidelines and gave the agency's board the authority to fire the director. Apparently, it hasn't been enough, Ehrhardt says.
Ehrhardt's aide, Tim Thetford, has been buried in TDHCA documents for weeks researching the tax-credit program, trying to figure out what new rules could tighten accountability at TDHCA. "I don't know how to save this housing agency," he admits in a tired moment. TDHCA is up for Sunset review this year (the Sunset Advisory Commission reviews most state agencies every 12 years and assesses the agency's fate in recommendations to the Legislature) and for advocates of state-sponsored housing programs, having the agency's scope reduced is not a pleasant thought. "We need somehow to show people that housing and corruption are not innately inextricable," Thetford says.
Yet even after repeated audits and a criminal investigation, the perception of impropriety is, if anything, worse than it was last year, he says. Housing programs are so complex that while it's easy to get your finger in the pie, it's hard for others to prove you did anything illegal. "The allocation is so subjective that even a person with a good project knows he hasn't got much of a chance unless he knows somebody or hires the right lobbyist," says Thetford.
It's not easy to figure out where and by whom suspicious deals are made in the agency because the recipients don't form a cozy little group that can be linked to any one person. The applicants are a diverse and dissociated lot, each with their own connections.
How Do Some Win?
Some developers find success the old-fashioned way: They join a trade group and hire lobbyists. For example, a professional association consisting of about 70 housing industry members -- the Texas Affiliation of Affordable Housing Providers -- shows lots of tax-credit allocation winners every year. Of the trade group's 13 board members, six received awards this year, some more than one, and three hired lobbyists. But the group's president, Dick Kilday, who picked up an award this year, says his organization's members are successful because they're strong advocates for the housing tax-credit program, not because any of them wield influence inside TDHCA. The key is patience and enthusiasm for affordable housing, Kilday says. "Doesn't it make sense to you that people who are active in this process would be more successful than someone who just tries one project or two and gives up?" he offers. Hiring a lobbyist, Kilday says, is just one more way to "put your best foot forward in getting the word out about your project."
Being a former TDHCA official may also help your project get noticed. Former TDHCA board member Joe Kemp, for example, has won awards three years in a row despite the fact he had not completed previous developments, his 1998 application was rife with deficiencies, and his 1998 credit history showed nine delinquencies.
Or sometimes -- and this is a touchy area for the program's critics -- developers include partners on their team who qualify as Historically Underutilized Business (HUBs), companies headed by women or minorities. The IRS guidelines that govern Texas' tax-credit program do not stipulate that it must have a HUB program. But in Texas' tax credit scoring matrix, HUB developers get five extra points for their projects, giving them a scoring advantage that can make it all the easier to justify their approval. HUB participation may have fostered some much-needed equity in the program, but it may also serve as a front for some developers to push substandard projects. HUB participants with glaringly problematic projects have been surprisingly lucky in the tax-credit game.
John Paul, mentioned above, is a HUB player, as is Kemp. Another who has done well recently is Monday Esiere, who picked up two awards this year worth nearly $1.5 million, even though, according to his application, he hasn't finished previous projects, and underwriters noted that his problematic application showed the marks of extreme inexperience. Esiere's application was approved subject to the receipt of additional documents, including financial statements, a new site plan, and verifiable cost breakdown. But since the project was rushed to underwriting only one week before the board approved it, those documents couldn't arrive before tax credits were awarded.
Another HUB application from Richard and Phyllis Janson of Janar Inc. was missing so much information that it had to be resubmitted long past the deadline, a violation of program rules. That application also failed to properly disclose that Richard Janson stands to earn a commission on the purchase of the project's site. It was approved nonetheless, as was another HUB proposal to build a project in a flood plain on possibly unstable soil.
Developer Bobinchuck, who along with Hammond pointed out problems with applications from Paul and another HUB participant, Jay Oji -- whose project had to be completely reconfigured by TDHCA staff last year -- says that more established developers don't begrudge the housing agency giving inexperienced minority contractors a break. But, he says, "I don't think you ought to give them the whole farm. It shouldn't be that he hasn't even started one [project] before you go and give him the next one." Another developer adds, "You can't just give it all to the same five or 10 developers year after year. Politically, that can't happen."
Contradicting the tax credit program's critics, of course, is the array of worthwhile developments that tax credits have funded. Along East Riverside Drive in Austin, for example, tax-credit housing is virtually impossible to discern from adjoining market-rate complexes. Developers have to admit that whoever is doing the picking and choosing at TDHCA is doing a very deft job of balancing favors -- if indeed favors are being given -- with allocations for deserving projects. Some developers say that given the benefits of the tax-credit program and the nearly two million Texas residents who need housing assistance, it's irresponsible for developers to cry foul because they don't agree with how TDHCA awards credits. Even those, however, will admit that some shoddy housing is being built. Others say that it's not fair that TDHCA takes care of particular constituents first, leaving everyone else to vie for the remainder of the tax-credit pie.
No one can say for sure who's responsible for picking the projects that get special treatment. Sources familiar with the LIHTC office say tax credit manager Njie is known to express strong ideas about what he wants funded, and he has served as the point man for the department when auditors have demanded justifications for how tax credits have been awarded. And time and again, he has emerged unscathed. A secretive man who hired on at TDHCA as a lower-level staff member before Manley promoted him to manage the LIHTC division, Njie exasperates watchdogs like Ehrhardt by presuming possessive authority over the program. Njie is known to claim, however, that he's not the one calling the shots. (TDHCA did not allow the Chronicle an interview with Njie.) This year, seven projects not recommended by Njie's staff were added to the final list of applications submitted for the board's approval during the week the tax-credit committee was reviewing applications.
The chair of that committee, Margie Bingham, heads the Houston housing office and in that capacity has shown little shyness about steering contracts with a firm hand, City Council's approval be damned. But Bingham says she sure as shootin' didn't add any applications to the board's approval list. "We don't choose which ones we want -- that is an absolute no-no. And if anybody says otherwise, he or she is a damn liar," she says.
"I am not interested in whether Don Sowell or Joe Kemp got a deal," Bingham, added after this reporter mentioned Houston area housing magnate Sowell but not former TDHCA board member Kemp. Bingham, one of a tiny handful of THCA officials who understands the tax-credit program and wields powerful influence at the agency, says she trusts staff to pick the best projects, and isn't particularly interested in asking how they do it. One of her current staff members, TDHCA director Daisy Stiner, was once Bingham's employee at the Houston housing office. "I'd be doing a pretty good job if I knew why my staff does the things they do," says Bingham, "and frankly, I do not care. That's not my job."
Bingham and board chair Don Bethel both add that controversial board member Florita Bell Griffin, accused of using her position with TDHCA to approve awards for projects in which she had a personal interest, is welcome to keep her seat on the tax credit committee until she is proven guilty of wrongdoing. Sources knowledgeable about the criminal investigation surrounding Griffin suggest that she may be indicted before the end of the year. Griffin has denied doing anything illegal.
Over at the Capitol, Ehrhardt says the goal of her inquiry is not to point fingers or try to put anyone behind bars, but to force procedural changes in TDHCA this year that will restore confidence in the tax credit program. Thetford adds, "The department does not seem to understand that if it doesn't raise the bar to a high level, they can expect development to go low. If they think they can just open their coffers and expect developers to go do good projects, they're out of their minds." Members of the House Urban Affairs committee are currently reviewing Ehrhardt's report.
Officials at TDHCA declined to respond to any specific questions posed by the Chronicle regarding the tax-credit allocation process, including why the agency approved flawed applications, or why upper-level staff approved applications before they were underwritten. TDHCA's official response is that intense competition for tax credits makes some rejected developers feel cheated, but that the system is fair. The governor's office agrees, expressing confidence in new executive director Stiner and saying that there are no plans to replace any board members. "I feel like you're asking me when I stopped beating my wife," says Bush spokeswoman Linda Edwards in response to questions about Ehrhardt's inquiry into TDHCA. "You're telling me about all these problems we're not aware of."