HOT SPRINGS -- The public finance authority that issued tax credits for the $53.7 million renovation of the city's public housing stock said 70 of the 79 units inspected in May were out of compliance with Low Income Housing Tax Credit program regulations.
A letter grade of F on an A-to-F scale is assigned to property management when noncompliance is found in more than half of the inspected units, according to the Arkansas Development Finance Authority procedures manual for the tax credit program.
The Development Finance Authority said tax credits it issued project owner Mountain View Heights LP provided more than $19 million in equity for the project. According to the tax credit application the authority provided in response to a records request, a syndicate managed by Royal Bank of Canada agreed to pay $1.06 for every dollar of tax benefits the credits provide.
The Internal Revenue Service requires at least 20% of units in a Low Income Housing Tax Credit program property to be inspected and has the authority to rescind credits if noncompliance persists, according to the Development Finance Authority manual. The authority said it hasn't decided if the low compliance score will broaden the scope of future inspections or increase the number of units its contractor inspects. It charged Mountain View Heights $3,600 in noncompliance fees.
Louisiana-based Knight Development is the general partner of Mountain View Heights, the entity formed in 2017 to facilitate the conversion of all the city's 365 public housing units to the U.S. Department of Housing and Urban Development's Section 8 program through HUD's Rental Assistance Demonstration. The Hot Springs Housing Authority is a limited partner.
Knight Development hired Allied Orion to manage and maintain the units. The Houston company was selected for its tax credit program compliance expertise. Reporting forms the Development Finance Authority sent the IRS showed the noncompliant units were in violation of uniform physical condition standards, according to copies of the Forms 8823 the authority provided in response to a records request.
Level 3 violations, the most severe deficiencies on a scale of one to three, noted on inspection reports included exposed substrates on roofs, deterioration of exterior walls, rot and deteriorated subfloors and insect infestation.
"Unless life threatening, ADFA typically gives 90 days to address deficiencies," the Development Finance Authority said. "Life threatening findings are given 24 hours."
Similar issues were listed in HUD's report from its February site visit. The office of U.S. Rep. Bruce Westerman of Hot Springs asked HUD to visit after hearing from state lawmakers about the unsightliness of the grounds. The city of Hot Springs' inspection this winter revealed more than 300 violations of the city's property maintenance code.
Knight Development said Wednesday that, according to Allied Orion, all noncompliance issues from the May inspection have been addressed.
"Allied Orion has confirmed they are currently working through the appropriate documentation with ADFA with a goal of completion by the end of the week," Knight said.
The Development Finance Authority said Wednesday it had yet to confirm if the deficiencies had been corrected. It said no correction reporting forms had been sent to the IRS.
B.A.S. Construction Co. of Louisiana completed $17.5 million of rehabilitation and new construction in 2019. According to the tax credit application, construction costs included an additional $1.5 million in overhead and a $1.3 million contractor profit. Soft and interim costs of $2.7 million and $6 million in developer fees were also added.
Mountain View Heights' $17.8 million acquisition of the property from the Housing Authority was the second-largest expense. The owner-financed sale facilitated the issuance of tax credits and allowed the property's income to service debt issued for the renovation.
According to the tax credit application, the property has a more than $800,000 annual debt service obligation serviced by $2.5 million in net operating income. The $1.5 million in annual operating expenses leaves $957,000 in net operating income, or 118% of the annual debt obligation.
But the expected cash flow hasn't materialized. Income fell short of projections by a combined $950,000 from 2020 to 2022, according to variance reports the Housing Authority provided in response to a records request. A $1.8 million reserve for operating deficits was built into the budget, according to the tax credit application.
The Housing Authority said earlier this year that Allied Orion wasn't paying contractors and that regular pest control services had lapsed. It told its board of commissioners Allied Orion owed it more than $39,000 for expenses it incurred on the company's behalf since 2019.
"Various factors, which are well documented and not unique to this property, impacted revenue in market rate and affordable rental properties across the country during the COVID years of 2020, 2021, and 2022," Knight Development said Wednesday.
"For Mountain View Heights, these include, but are not limited to, the government work-from-home mandate and a moratorium on housing inspections and evictions, which led to lapses in referrals, routine maintenance, resident rent and subsidy."
Knight Development said rental income increased 40% from January to July. The company credited the turnaround to Housing Authority Executive Director Nadine Jarmon. The board of commissioners tasked her with sorting out the problems at Mountain View Heights when it hired her last year.
"Since the installment of Dr. Jarmon, we continue to look forward with renewed optimism as the Housing Authority and property management company collaborate to achieve more optimal operational efficiencies and cash flow for the betterment of the property and the residents," Knight Development said.
"The influence of Dr. Jarmon's leadership is evident in the boost of referrals from the Housing Authority to the property."
Jarmon told her board last month she would not have recommended converting all of the Housing Authority's 365 units to Rental Assistance Demonstration or ceding management to a third party.
"I don't know what happened in [the Mountain View Heights] deal, but in looking at it, it's not something I would've done," she said.