(Seguin) — The complexities of a state law that’s being used to build a new large high-end apartment complex in Seguin is generating lots of questions from the public. Most of the questions raised, thus far, focus on how the Lily Springs apartment complex will be funded, how will it impact existing taxpayers, how it benefits the city, what benefits — if any — does it offer to the Navarro ISD, and does the city have the infrastructure in place to handle the project. Many of those questions were answered during a recent presentation on the proposed $58 million project, that would be built at the corner of State Highway 46 and Cordova Road.
The Seguin City Council last week approved a partnership between the city and private developer, Vaquero Multifamily LLC. The city is creating a Public Facilities Corporation (PFC), which will allow the city to become the owner of the project, but it will be fully funded by Vaquero. The partnership is considered workforce development housing and will create 288 units that will be marketed to middle class workers, like teachers, fire firefighters, police officers, government employees and a large portion of the existing Seguin workforce. City officials say this housing is desperately needed, and it will be a “Class A” project, which means that it will be one of the highest quality buildings in this market, it will feature top amenities and it will attract high quality tenants.
The city’s interest in this deal is being represented by attorney James Plummer, of the Bracewell firm. Plummer recently explained the state law that allows the PFC’s to be created, and how it benefits communities across the state. He explained that the city will own the project, but all of the financial components will be funded by Vaquero. Plummer says the city will get $500,000 at closing, but over the life of the deal, the city will continue to get paid.
“It will be a 75-year lease between the PFC and a Vaquero affiliate. The rent on the lease is going to consist of prepaid rent and the amount equal to the cost of the land. The land cost about $4 million and we’ve got to buy the land but you aren’t putting in any money in this so the way we do that is we enter into the lease and on day one, they pay you enough money so that you can buy the land and it’s paid all through the lease and it’s all their costs,” said Plummer.
If Vaquero is putting up all the funding, then the question becomes — what’s in it for them? Why is this a good deal for Vaquero?
Plummer addressed that in his presentation as well. He says Vaquero will get the project built and the apartments rented, and then, it will likely sell its interest in the building. The city would still own the project, but the value of the building is expected to grow significantly over the first few years.
“They are going to build this building. They are going to stabilize this building and they are going to sale this building. Their cost of the building is $58 million. They predict within five years, and it will between 3 and 5 years, they will sell this building for $78 million, and that increase is not an increase just because of the real estate increasing. It’s an increase because the construction risk is gone. The lease-up risk is gone. They will have an established net offering income and that is how much the building will be worth. We have actually seen these sales perform like this on a very very regular basis. The value of the building goes up $20 to $30 million as soon as it stabilizes because those risks are gone. So, when they sell this building, you are going to get 15 percent of the balance of the proceeds after they repay their loans, they pay back their equity partners and that is likely to occur in year three or four, depends on what the real estate market is like. At that time, they are currently predicting that you would receive $3,480,000 million as your 15 percent share,” said Plummer.
Plummer says the risks associated with the deal are limited, because the city’s PFC will continue to be paid rent as part of the lease, which will continue to provide a revenue stream for the city. Plummer says the project will not pay ad valorem taxes, because it’s owned by the city, but the law requires that the city be made whole for any taxes that it would lose over the life of the deal. The rent payments from the developer will make that happen.
“Net cash flow rent is beginning in the fourth year, and we choose the fourth year because it takes two years to construct, one year to get the project stabilized — that’s 90 percent occupied. Then they will start paying you rent at the greater of 25 percent of the annual tax savings, which is what the tax bill would have been if this project was taxable; or 25 percent of their net operating income. The reason we choose 25 percent is because if you look at the tax stack of school, county, city — the city is usually about 25 percent of that stack. I believe in your case; it might be 23 percent. That’s an annual payment and it is designed to assure you that you will as a city collect the same taxes that you would have collected if this building was taxable. So, annual rent will pay the equivalent taxes,” said Plummer.
The apartment complex is inside the Seguin city limits, but it’s also within the boundaries of the Navarro ISD. Several Navarro ISD families took to social media this week to raise some concerns about what impact the project would have on its district. The building will not pay property taxes, but the law does require the complex to pay the Navarro ISD a flat fee for each student that resides in the complex each year. City Manager Steve Parker says the project not only brings some much-needed housing, but it also helps to put Seguin in a better place to attract new businesses, especially retail opportunities to the community. He says that benefits everyone, including the people in the Navarro ISD.
“They do get $7,000 per student that resides in that (complex) from the state. That’s the state’s way of incentivizing workforce housing in the community. I also personally think it helps those first through third year teachers and it’s going to create more density and we know that we have had a lot of developers looking out in the 46 corridor, Rudeloff, Cordova Road and the more dense that area is, the more shopping that is going to come there which will definitely benefit the Navarro School District so I know there may be some pushback from the school district related to that,” said Parker.
The law that allows for PFC’s tries to offer protections to the public entities that create them, because those public entities represent the taxpayers in those communities. Plummer says that’s why the city’s interest will be protected even, if or, when the building is sold.
“And then because this is a 75-year deal, every time, they sell in the future, you will get paid a two percent of gross commission. So, the first sale is at $78 – if the second sale is at $100 million, you will be paid $2 million on that sale as a commission for continuing to be involved in the project,” said Plummer.
That money would all go to the PFC but could be used by the city for any public service or need. The city of Cibolo has one of these apartments, that’s also located in the Schertz-Cibolo-Universal City ISD. Plummer says that project has worked well., He says Cibolo used some of the money it received to build a fire station. He says that’s just an example of how the funds could be spent by the city.
Plummer also addressed another big question — what happens if the project goes under?
He says it’s a real estate deal and if it’s foreclosed on, the city and the Navarro ISD would still benefit, because the property would then go onto to the tax rolls and would be subject to paying property taxes going forward.
The city and Guadalupe County already have plans in place to make major improvements along Cordova Road, between highways 46 and 123, so that infrastructure question is already being addressed. City officials say that they also plan to use the $500,000 that it receives at the close of the deal to fund a portion of the improvements needed along Link Road near the Navarro ISD schools.
The city council, last week, unanimously approved the deal, which means that Vaquero can now go forward with its plans to secure financing for its joint venture with the city of Seguin.