Questions are being raised about a $2 million public grant to a private contractor to build a 26-home affordable housing development in Texas City.

Under the terms of the contract, DSW Homes will receive just more than $2 million of the county’s share of Hurricane Ike recovery money for a promise to make the units available to people who qualify for public housing in the first 10 years after the development is built.

DSW Homes, a contracting company that set up offices in Galveston after Ike, will contribute its own money to the construction of the homes with about $454,550 in equity financing and a $2.1 million loan from the Texas First Bank, according to the terms of the contract.

The company will own the property, which was once owned by the city of Texas City and managed by its housing authority. The company will receive rent in full on the homes and be responsible for the management and upkeep of the properties.

After 10 years, DSW Homes is free to do whatever it wants with the property, including selling it or renting it on the free market, according to the contract. In the first 10 years, the 26 single-family homes will be available to people who qualify for public housing at area-based fair market rental rates set by the U.S. Department of Housing and Urban Development.

A concern for public housing advocates

The deal has alarmed some public-housing experts, including attorneys and advocates for state and national public housing groups, who worry the state granted a public subsidy without working out better terms to ensure affordable housing is available in the future.

The Texas General Land Office “needs to be a better steward and efficient user of taxpayers’ money and not enrich a private landlord above what is necessary in order to create high-quality housing,” said John Henneberger of Texas Low Income Housing Information Services.

Ten years is too short a period for a development to be reserved for public housing when taxpayers are footing the bill for about 40 percent of the construction, Henneberger said. Similar deals involving sizable, upfront payments to developers have required that the properties remain public housing for up to 30 years, he said.

The land office, which oversees the Community Development Block Grant disaster-recovery funds, didn’t respond to questions about Henneberger’s assessment of the deal.

Steve Mataro, a partner in DSW Homes, said the public-private partnership was the only way to make the project, involving more than two dozen three-bedroom homes, feasible for both the contractor and government.

“I don’t think you could find better money spent,” Mataro said. “You can bring life to a wonderful, game-changing process that will allow for the betterment of people.”

Mataro said he didn’t know what the company would do with the property once the 10 years passed.

“We have no plans at this point in time,” he said. “That 10 years or 15 years, whatever it is, isn’t on our mind.”

The project’s origins

The property at 7400 Blue Jay Drive in Texas City, formerly known as the Blue Jay Apartments, had been owned and managed by the Texas City Housing Authority for decades. But the 1960s-era duplexes were blighted and in need of repair, housing officials said.

DSW Homes submitted a proposal about two years ago to the county to buy the land, demolish the buildings and build a community of single-family homes using Community Development Block Grant money, said James Gentile, the county’s housing director.

Mataro said his company then worked with the county, the housing authority and Texas City to make the project a reality.

Working with the county housing department and the land office, the county legal department drafted the contract based on guidelines from the state, Gentile said. The county has the authority to add other requirements to the contract, which is eventually voted on by the commissioners’ court, he said.

“The guidelines come from the state and we have to follow at least the minimum,” he said.

GLO guidelines

The land office sets guidelines for such projects. The agency’s guidelines cannot run counter to the federal housing department’s requirements.

“This property has an affordable housing restriction, otherwise known as a land use restriction agreement, for a 10-year period,” agency spokeswoman Brittany Eck said.

“This means that for 10 years it must remain as affordable housing. At the end of that 10 years, there will be no further restrictions.”

‘Too lenient’

The 10-year period is an unsettling part of the agreement, Henneberger said. The upfront grant of $2 million is a lot of taxpayer money to spend to only have 10 years of restrictions on the developer, he said.

“I’m becoming very concerned about the direction the GLO is headed, which I consider to be much too financially generous with public funds when for-profit rental housing developers are involved,” he said.

Henneberger pointed to other projects the land office is involved with that have similarly short restriction periods. The land office last week published its funding notice for the first phase of its Rental Housing Replacement Program in Galveston, which called for 15-year affordability periods.

Moving forward

With approval from the commissioners’ court, Galveston County Judge Mark Henry executed the contract earlier this month and DSW Homes’ crews began demolishing the existing duplexes this week.

Mataro said the new development could be move-in ready as soon as this fall. The development would be similar in appearance to other new subdivisions and have lots of green space, he said. The company planned to hold job and educational training classes for residents to help residents’ use the place as a steppingstone out of public housing, he said.

“We want to improve the quality of life for the children,” he said. “Hopefully it’s a steppingstone to homeownership.”

A rent figure has not yet been set, Mataro said. Renters who qualify for assistance and live at the The Oaks at Blue Jay Drive will pay amounts equal to as much as 30 percent of their income toward rent to DSW Homes. The government will make up the difference between the fair market rental rate for the homes and the renter’s share.

‘Good housing stock’

The Texas City Housing Authority’s role after the purchase will be to decide on applications for project-based housing vouchers and do inspections of the units to ensure they meet housing standards, Texas City Housing Authority Director George Fuller said.

“The most important thing is to have some good housing stock,” Fuller said.

Ensuring affordable housing across the state is the primary goal, but such initiatives should come with long-term certainty, Henneberger said. The state isn’t protecting the taxpayers’ investment by allocating money without insisting the development stays affordable in the future, he said.

“To not retain it as affordable housing is just a bad investment,” Henneberger said.

Contact reporter Marissa Barnett at 409-683-5257 or marissa.barnett@galvnews.com.

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