Public Facility Corporations
Recently, the Houston Chronicle wrote a story about Public Facility Corporations (“PFCs”) a statutory organizational mechanism provided for in the Local Government Code which allows developers to purchase land in one local jurisdiction, remove it from that jurisdiction’s tax rolls through a statutory tax exemption, and partner with another local jurisdiction which then purchases that land. Proponents of PFCs claim that these PFCs are helping to address and alleviate the State’s affordable housing crisis.
Neither a political subdivision or other form of governmental entity, the Office of the Attorney General has defined a PFC as “a nonprofit corporation created by a sponsoring governmental entity — a city, county, school district, housing authority, or special district.”
A 2015 legislative addition to Chapter 303 of the Local Government Code, meant to exchange a property tax break for certain affordable housing concessions, provides tax exemptions for PFCs.
PFCs are then granted “the broadest possible powers to finance or to provide for the acquisition, construction, rehabilitation, renovation, repair, equipping, furnishing, and placement in service,” of “public facilities,” a term which includes any real, personal or mixed property – or an interest in such property – devoted or to be devoted to public use (a “Section 303.042(f) Project”).
In order to score these Section 303.042(f) Project tax exemptions, a bit of legal leapfrog must be played. Starting from the beginning, it’s best explained by first looking at the enabling statute itself – Section 303.042(f) of the Local Government Code.
Section 303.042(f) of the Local Government Code provides that a leasehold interest “shall be treated in the same manner” as a leasehold or other possessory interest in real property granted by an authority under Section 379B.011(b) of the Local Government Code. (This is where the tax exemptions begin to come into play.)
Section 379B.011(b), which applies to defense base development authorities but was previously referenced as applying to PFCs, provides that Section 25.07(a) of the Tax Code applies to a leasehold interest granted by a defense base development authority (and, therefore, a PFC) in the same manner as it applies to leasehold interests in real property constituting a project described by Section 505.161 of the Local Government Code.
Section 25.07(a) is the provision requiring leasehold interests of longer than a year to be taxed in the name of lessee versus the lessor. This makes the leasehold interest taxable if the lessee is not exempt. (This is why the property must be first transferred to the PFC and then leased back to the developer.)
Section 505.161 states that Section 25.07(a) does not apply to a leasehold or other possessory interest granted by a Type B Economic Development Corporation (and, therefore, a PFC) during the period the corporation (or, PFC) owns projects on behalf of the authorizing municipality. This allows those long-term leasebacks provided by PFCs to the original purchaser-developer to circumvent the application of local property and sales taxes.
For a more in-depth review and analysis of Section 303.042(f) Projects, be sure to check out the University of Texas School of Law’s Entrepreneurship and Community Development Clinic’s study, “Public Facility Corporations and the Section 303.042(f) Tax Break for Apartment Developments.”
Please do not rely on this article as legal advice. We can tell you what the law is, but until we know the facts of your given situation, we cannot provide legal guidance. This website is for informational purposes and not for the purposes of providing legal advice. Information about our commercial and business litigation practice can be found here.