S2 Capital took advantage of a criticized loophole known as a traveling housing financing corporation to get tax breaks on a Dallas asset it’s owned since 2022.
Deed records show S2 partnered with Pecos Housing Finance Corporation — an affordable housing organization in Pecos, a 13,000-person town more than 400 miles away from Dallas — to do a sale-leaseback of the Kendrick Apartments, at 7324 Skillman Street, effective this month.
S2 bought the property in 2022. In April, it sold the property to Pecos Housing Finance Corporation, which leased the ground back to S2, meaning S2 doesn’t have to pay property taxes on the Kendrick. Estimated property taxes on the Kendrick were $1.2 million last year. It has 403 units and was built in 1984.
Tax breaks for housing finance corporations, quasi-public entities, were created in 1979 to spur affordable housing development. The state later extended the tax exemptions to leasehold interests controlled by private entities.
The law doesn’t restrict activity to the area where the entities are located, which has opened the door for investors to partner up with firms in faraway towns to secure tax breaks for multifamily assets in large cities, often without making them affordable. The loophole has become a popular play with multifamily syndicators trying to cut expanses after rents dropped and the cost of debt soared, ten31 reported.
After getting wind of the loophole, Freddie Mac said in November it would stop quoting new deals that used it. Texas legislators led by state Sen. Paul Bettencourt closed this loophole for public finance corporations in 2023. Bettencourt’s SB 867, which is still pending, takes aim at the loophole as it relates to housing finance corporations.
S2 is required to reserve at least half of the units for people who make 80 percent of the area median income; 90 percent of units must be reserved for people who make 140 percent of the area median income. Point2Homes puts the Lake Highlands neighborhood’s median income at $63,000, putting the 80 percent cut-off at just over $50,000 a year.
The Kendrick’s website lists one-bedroom apartments starting at $960 a month; two-bedroom apartments at $1,370; and three-bedroom apartments at $2,160.
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