GALVESTON — How much should property existing primarily to house the poor be expected to contribute to governments such as the city and school district, which serve people living in those developments?
It’s a complex question being negotiated between Galveston Housing Authority staff members and officials of McCormack Baron Salazar, the master developer on a project to replace some of the public housing units demolished after being flooded during Hurricane Ike in 2008.
Many fundamental issues remain unresolved, and neither McCormack Baron Salazar officials nor housing authority staff members are willing to talk much about the negotiations.
McCormack Baron Salazar, however, already is estimating the taxable part of developments will pay about $1,000 per living unit a year, Mike Duffy, senior vice president of Finance, said during a public meeting Monday.
At that rate, the mixed-income developments would be paying more per unit than island apartment complexes advertising themselves as “luxury” or “resort” properties, based on a review of appraisal district and county tax office records.
Under a plan the city council reluctantly approved Sept. 28, McCormack Baron Salazar will develop 122 units at Cedar Terrace, which is mid-island, north of Broadway on land between 29th and 30th streets and Sealy Avenue and Church Street; and 160 units at Magnolia Homes, which is between downtown and the University of Texas Medical Branch campus on land between 16th and 18th streets and Mechanic and Strand.
Units at both sites would be divided into two categories — 51 percent would be public housing for low- and moderate-income people in which the rental costs are subsidized by the government, and 49 percent would be market-rate open only to those who could afford the full cost of rent.
The means by which those properties would contribute to the revenue of the city and county and the school, college, navigation and flood districts depends on how ownership is arranged, Duffy said.
The expectation is that a limited partnership called Galveston Initiative I would be formed, he said.
The housing authority and a McCormack Baron Salazar affiliate would be general partners, and private-sector investors would be limited partners. The housing authority would own the land and 0.1 percent of the improvements; McCormack Baron Salazar would hold a 1.9 percent ownership; investors, who are expected to put up about $14 million of the projects’ $69 million cost, would own 98 percent.
Another option would be to form a partnership without McCormack Baron Salazar. Excluding the developer would make both projects completely exempt from property taxes, however, Duffy said.
Any contribution to governmental revenues would then come through payment in lieu of taxes — known as PILOT in the jargon of public housing. The housing authority and other public entities such as the Port of Galveston traditionally have made such payments to the city and other taxing entities.
Payments the housing authority makes are calculated on a formula of revenue, less the cost of utilities, times 10 percent, housing authority officials said.
The number fluctuates considerably and has never been very much, officials said.
In 2007, for example, the authority paid $6,172. In 2008, it paid $37,850. It paid none in 2009, the year after Ike hit, but paid a little more than $26,000 in 2010 and almost $36,000 in 2011, according to the authority.
The money is paid to the city but divided among other taxing entities based on their tax rates, according to the authority.
If McCormack Baron Salazar was included in the partnership, the 49 percent of the properties operated as market-rate apartments would be assessed and taxed like any private commercial property, while the 51 percent would be tax exempt and make payments in lieu of taxes, he said.
The land would be tax exempt in either case, he said.
Ideally, the parties could agree on a predetermined amount derived from both taxes and payments in lieu of taxes, he said.
“Our goal is to ensure that these are taxable properties both on the fairest and most predictable levels,” he said.
An unknown variable in the equation is the taxable value of the taxable 49 percent. Making that determination falls to the Galveston Central Appraisal District. The question becomes complicated because appraisers can use a variety of methods to determine taxable value, some of which would result in a higher valuation, Duffy said.
If, for example, appraisers used the income approach, which bases taxable value on what a property earns for its owners, the taxable value could be far less than if appraisers used the cost method, which bases value on replacement cost of the property.
Galveston Central Appraisal District prefers to use the income approach on commercial residential properties, provided it has access to income information from the property owners, Chief Appraiser Ken Wright said.
The district sometimes sets the value of new property with the cost method until income information exists, he said.
McCormack Baron Salazar would like to remove the uncertainty from that equation, Duffy said.
“What we would love to have is a negotiated, predetermined PILOT payment of some sort on the public housing units and have a predetermined framework for how the balance of the development is going to be assessed,” Duffy said.
If Galveston Initiative I did pay close to the estimated $1,000 per unit a year on the mixed-income properties, it would be paying more per living unit than private-sector apartment complexes reviewed for this article.
The Daily News researched 2012 tax records of 10 apartment complexes advertising themselves as “luxury” or “resort” properties. The review also included Sand Piper Cove Apartments, 3916 Winnie St., which caters to low-income residents
The amount those private operators owed on the assessed value of improvements on their properties ranges from $175 a unit to $713 a unit, according to Central Appraisal District Records.
The land value was not included in that calculation because land under the mixed-income properties would be exempt from taxes.
At $1,000 per unit, however, Galveston Initiative I properties would be paying more per unit on its improvements alone, than all but one of the private operators owed on land and improvements, according to both appraisal district and Galveston County Tax Office records.
The tax office billed Houston-based Seaside Point Partners, owner of the 102-unit Ocean Front Lofts at 7820 Seawall Blvd., $102,538 in 2012, which is $1,005 per unit.
McCormack Baron Salazar proposes beginning the $1,000 per unit payments as soon as construction begins on the projects, Duffy said. The firm included $282,000 in payments in lieu of the taxes during a two-year building phase in a budget to be submitted to the Texas General Land Office. McCormack Baron Salazar officials said Friday that number might be higher.
Housing authority Chairman Irwin M. “Buddy” Herz said Monday it would be a good deal for the city because no improvements would exist on the property in the 2013 tax year, and only about 50 percent of the improvements would be in place by January 2014.
Construction of mixed-income developments could begin in July at the Cedar Terrace site and in September at the Magnolia Homes site, officials of the firm McCormack Baron Salazar have said.
The housing authority board is scheduled Monday to consider a budget for the redevelopment projects.