Senator Eliot Shapleigh - El Paso, Texas

Fmr. Rep. Martha Wong, who was vice chairwoman of the committee that oversaw state housing issues

Paula Thompson pays more than $800 a month to rent a three-bedroom apartment in a decrepit Arlington housing complex that's part of a state affordable-housing program.

Boards holding up patios are rotting or busted. The driveway and parking lots, scenes of numerous fights, are riddled with potholes. Tenants complain of water-damaged apartments with mildewing carpets that make rooms uninhabitable, and of drug use in the complex near Lamar High School and Nichols Junior High.

Thompson's sliding-glass patio doors were installed incorrectly, making it easier to break in. The air conditioning broke, and she and her children, who have asthma, got sick. "It was out all summer, and we had no heat until December," she said.

Thompson, a school bus driver, has the misfortune to live in the Woodstock Apartments, one of scores of apartment buildings throughout Texas financed by bonds issued in the name of the Texas State Affordable Housing Corp.

All but two of 38 complexes are in a financial bind because their nonprofit developers have defaulted on the low-interest bonds, a Star-Telegram examination found. The bank foreclosed on three of the apartment complexes.

As a result of the financial problems, the state-backed program created to help residents obtain housing that is safe and affordable in many cases is providing neither. In addition, the apartment complexes created financial burdens for local governments and school districts because they were exempted from property taxes when nonprofit agencies bought them.

Not everyone suffered financially. A number of the complexes in the multifamily program were purchased at two to three times their appraised value, totaling tens of millions of additional dollars. In many of those cases, the seller was a company affiliated with Dallas' Hicks, Muse, Tate & Furst. That company also initially stayed on to manage many of the properties.

The Star-Telegram reviewed hundreds of pages of documents, including tax and property records, TSAHC inspection reports, municipal code-compliance records, police records and lawsuits. They show that conditions at some of the 10,000 TSAHC-backed apartments became so dire that residents' health and safety were at risk, something the agency's own inspectors have repeatedly acknowledged.

Some complexes have become breeding grounds for rats and roaches. Exposed electrical wires and faulty boilers have created serious safety threats. And crime has become rampant at some properties.

Arlington city inspector Kenny Mott wouldn't visit Woodstock late last summer without a police escort, for fear of being assaulted. The escort wasn't enough to scare off one attacker, though. When Mott tried to cite someone who was repairing a car in the complex's parking lot, another person inside the car punched the police officer in the face and ran away.

And the future looks bleak, said David Lynd, chief operating officer of a San Antonio-based property management company that maintains a complex in Arlington.

"If there's no cash put in, it will get worse -- that's a mathematical certainty," he said.

The program's failures have horrified national housing experts and insiders in the state's municipal bond markets. All told, more than $400 million in municipal bonds bearing the name Texas State Affordable Housing Corp. are in default. Some of the properties that ultimately went into foreclosure had been touted in the press by a high-profile real estate developer as solutions to the state's need for more quality affordable housing.

Two San Antonio properties are still afloat financially, but one has a number of vacancies and maintenance problems.

State regulators say they have been largely powerless to act. While the bonds were issued by the state, private investors -- not taxpayers -- are the ones who put up the money. So TSAHC officials say they don't have the power to intervene. The Texas program has fared worse than similar programs around the country, said Tabare Borbon, the bond analyst who reviewed the initial deals for Standard & Poor's.

"It's not something that happens too often," Borbon said of the massive defaults.

Borbon said that the numbers initially looked good but that market conditions doomed the deals.

TSAHC President David Long and corporation board Chairman Jerry Romero declined requests for interviews, but in a written statement, Long also blamed the financial problems on market conditions.

He and Katherine Closmann, TSAHC executive vice president, both believe that those conditions -- falling rents, increasing insurance costs and other expenses -- jeopardized what could have provided a vital service.

As a result, she acknowledged, the program has failed to meet its basic goals. "I would agree that's the case," Closmann said.

Former Republican state Rep. Martha Wong, who was vice chairwoman of the committee that oversaw state housing issues, said she was always skeptical but never expected such a widespread failure.

"I'm shocked and disappointed," Wong said.

Questions about deals

Not long after the program was created, there were troubling questions about whether the deals were financially sound and how well the program would serve the poor.

Nonprofit agencies that asked TSAHC to endorse bonds said the low-interest financing from government bonds and the property tax breaks would lower operating costs, making the deals a success even as they had to set aside some apartment units for very low-income residents.

But when the projects went before the Texas Bond Review Board for approval, advocates for affordable housing and at least one board representative pointed out what they believed were major flaws.

Leslie Lemon, who represented then-Speaker of the House Pete Laney on the board, was troubled by what she believed was incomplete financial information and unanswered questions about how the deals were being put together.

"It was of grave concern to me," said Lemon, who was a nonvoting board member from the time the bonds first surfaced in April 2001 until the program was suspended.

"I never felt like we knew enough. ... I felt like we were churning properties and somebody was making a profit each time, but the people didn't benefit."

Robin Miller, a senior vice president at First Southwest, said many experts reviewed the bond transactions. But the bond's underwriters and others could not be reached for comment or declined to be interviewed.

Borbon, the Standard & Poor's analyst, blamed problems on the market. People began purchasing homes at lower interest rates, for example, reducing the pool of potential tenants. "A lot of the deals were done in 2001 or 2002 when the real estate market conditions at the time were very good in the state of Texas," he said.

But to Lemon, the devil was in the details.

One point in particular startled her: Some properties were purchased for much more than the value estimated by county appraisal districts. A draft document listing two dozen of the properties showed that a number of them received two times their appraisal or more. Fountaingate in Wichita Falls sold for $11.6 million but was appraised for about $3.4 million. Clover Hill in Arlington got almost double its value: $11.2 million for property appraised at $6.3 million. The Wharf in Corpus Christi got double its appraised value, as did Briarcrest and One Westfield Lake in Spring, and Woodedge and Northwoods in Houston.

Many of the properties that had the greatest gap between county appraisals and sale prices were sold by Olympus Real Estate Partners. Olympus was a real estate arm of Hicks, Muse, Tate & Furst, whose ownership included Texas Rangers and Dallas Stars owner Tom Hicks.

Olympus had acquired the complexes in February 2000 when it purchased Walden Residential Properties, which was an ailing Dallas-based apartment operator. That same month, TSAHC officials announced that they would issue bonds to nonprofits for multifamily projects, reviving a program that had been inactive for three years.

TSAHC officials later approached some nonprofits about buying some of the Walden complexes, said David Cole, president of South Texas Affordable Properties Corp. TSAHC officials also reviewed the fairness of the sale prices.

John Bartling, then-chief executive of Walden, said it is not uncommon for apartments to fetch two times their appraised value or more. He also said that the company sold other complexes, in addition to those that got TSAHC bonding.

Pete Haginas, the appraiser hired by bond underwriters to look at the Walden portfolio of properties, said the pricing seemed appropriate. "Apartments are income-producing properties," said Haginas, based in Austin. "As such, values are based on their ability to generate income."

But when an independent review looked at several of those appraisals, it concluded that some of the properties appeared to have been overvalued based on their potential to generate income.

Hicks Muse sold controlling interest in Olympus to one of its partners in April 2001 but remained a special limited partner in the company. No one at the company -- now called HM Capital Partners -- is familiar with the details of the deal, a spokesman said.

Others called into question the range between the sale prices and the county appraisals. At one point, Lemon said she called Wichita Falls to inquire about it and was told by the appraisal district manager that "if that apartment was worth that much money, then I've been losing a lot of money."

Tarrant County appraiser Willie Brand said the gap between the county appraisal and sale price seemed excessive.

"I can't see a reason why we should be three times lower than a sales price on apartments," Brand said, adding that the state comptroller audits the county's appraisals.

Lemon and John Henneberger, with Texas Low Income Housing Information Service, also wondered how the public would benefit from the deals.

They pointed out that some of the complexes seeking the government bonds already housed some low-income people.

And after the nonprofits took over, rents sometimes remained the same, the agencies conceded to the Bond Review Board. For example, one resident of the Woodstock apartments pays $644 for a two-bedroom -- close to market rate -- even though she is on government assistance. Paula Thompson says rent for her three-bedroom unit in the complex is $818, also close to market rate.

By February 2002, Bond Review Board officials told the TSAHC staff to recommend fewer applications for additional bond funding. Among their concerns was that the bonds were among the most expensive that the state was issuing, because of the size of fees for underwriters, attorneys and other advisers.

Still, TSAHC continued to endorse the projects, and the Bond Review Board approved the government bonds until late 2002, when the first signs of financial trouble surfaced.

Vacancies and crime

Just as the nonprofits took over the apartment complexes, it appeared the program was headed for trouble.

No more than 25 percent of residents could exceed income guidelines. All others had to meet income requirements to qualify for lower rents.

Many residents who did not meet the low-income requirements had to move. As they left, it became more and more difficult to fill those empty units with families who qualified. Other units remained vacant because there wasn't enough money to make needed repairs as owners scrambled to pay off their loans.

Sufficient lag time to convert the properties to low-income units hadn't been factored into the financial picture when the deals were approved.

Instead, bond advisers and underwriters painted a rosy picture of the deals, with little or no reserves built into the calculations, Lemon and others believe. In addition, market studies were conducted that affirmed the need for low-income housing in various regions of the state where the apartments were located.

But what the market studies did not account for was that some of those areas were becoming saturated with newer apartment complexes. In time, because so many units were available, those newer complexes became competitors, charging rents similar to what tenants were paying at places like the Woodstock and the Arborstone Apartments in Dallas. Those TSAHC-backed apartments were 20 to 30 years old and falling into disrepair, and they could not compete.

Many nonprofit developers used what renovation money they had for drainage and sidewalks. That left no money for other critical needs, like repair of parking lots, siding and paint, said Cole of South Texas Affordable Properties. He said that despite the lean budget, his properties are safe and clean, and agency documents indicate that most maintenance issues at his complexes are not as serious as those found at a number of others.

At Woodstock, the parking lot looks like it hasn't been repaved in years. The equipment in its laundry room is old and rusty, and its buildings are weather-beaten and screaming for paint.

A code inspector in August noted that a tenant at a Dallas Creekwood apartment unit reported that rats were getting inside. Lynd, whose company manages the Clover Hill Apartments in Arlington, said there is little money for anything but the basics now that the properties have defaulted on their loans.

"My company really has a very limited resource in the way of only getting planned budgeted expenses -- that's all we get from the trustee. So if I have a boiler go out or a roof leak ... that leaves me less money to pay monthly bills," Lynd said.

Over time, the situation gets increasingly dire, said Lynd, whose property is in better shape than many others in the program. "You are left with a few thousand dollars of discretionary spending to deal with issues like crime, vandalism."

It's generally not feasible to borrow millions to purchase aging buildings for affordable housing because there's typically no money left over for renovations, said Patrick Sheridan, senior vice president of real estate for Volunteers of America, a Virginia nonprofit not associated with the TSAHC properties.

TSAHC's staff has documented the deterioration of the apartments. It wrote letters to owners and property managers. It described in detail safety hazards and advised owners to clean up filthy swimming pools and apartment units. It caught owners violating income guidelines rules and ignoring requirements that they provide community services to residents.

Lemon said that the nonprofits promised to reduce rents below market rates when they took over the complexes. But that did not occur in a number of cases, Borbon said, because market forces did not enable them to do so.

But TSAHC ultimately has no control over what happens to residents or bondholders, even as it reports bad conditions to its board. Because state money is not ultimately at risk, agency officials say they have not been given the power necessary to demand improvements.

That's wrong, critics say. The agency should be held accountable, because it enabled the nonprofits to get the loans and qualify for the tax perks. "Yet when it came time to deal with the problems ... the crime, the defaults in payment ... they basically tell you they don't really have any authority or any power to do anything," said Steve Wakefield, head of a Dallas homeowners association that has urged city leaders and police to crack down on the drug activity and crime at the apartments. "That is extremely frustrating."

'It's a constant battle'

The half-dozen nonprofit developers who were approved under the program say they had high hopes for their operations. Most had owned at least a couple of low-income properties and believed that even though the financing for the TSAHC deals was different, the formula would work. Some were organized for the purpose of acquiring the properties in the program, state municipal reports show.

Today, they say they aren't to blame.

Cole, of South Texas Affordable Properties, thought the low-interest loans, along with property tax exemptions, for six properties in San Antonio, Corpus Christi and Houston would save enough money that he could repair the buildings. Cole also heads Common Wealth, another nonprofit that owns one of the properties, White Rock in San Antonio, that isn't in default.

He said he had a sense of security knowing that a state agency had a hand in the transaction, as well as top-notch organizations such as Standard & Poor's.

"These are high-powered companies, so I felt at the time pretty darn good that with that crowd, that whole group of people underwriting, we'd probably come up with pretty solid underwriting," he said.

More than four years later, Cole realizes he had been staring at a mirage. Today, he is working to obtain new financing that he said will allow him to rehabilitate the apartments. His properties are in better financial shape than some other TSAHC deals, he said."It's a constant battle between not letting the properties go downhill and living with rent restrictions," he said.

Another nonprofit, National Housing Trust in Washington, D.C., transferred control of its properties to Rainbow Housing Corp. in San Francisco."The debt was too high for the properties," said Michael Bodaken, president of the trust.

Housing Initiative Corp. in Austin lost its three properties, including one Dallas complex, in foreclosure.

"We felt we'd given it our best shot and it wasn't going to get better," said Kelly Elizondo, a representative for the corporation. He blamed high turnover and problems created by tenants who skipped out on rent and damaged apartments.

One nonprofit blames the city of Dallas for the demise of its complexes.

In a fair-housing lawsuit, American Housing Foundation of Amarillo alleges that police, politicians, a neighborhood association and inspectors harassed and intimidated residents and drove them out of the two Dallas properties, Bent Creek and Creekwood Village.

"If it hadn't been for these two properties in Dallas, we'd be fine," said Steve Sterquell, American Housing president. His nonprofit has 13 properties in the program.

Residents of adjacent neighborhoods, however, said that once the foundation took over, crime at the complexes soared. Police stepped up patrols after several homicides at the complexes, and the city cracked down on code-compliance violations.

Sterquell declined to comment further.

American Opportunity for Housing President David Starr did not return repeated phone calls. The nonprofit, with properties in Arlington and Grand Prairie, was cited by TSAHC in documents for not complying with low-income requirements or providing special services such as free child care to residents at its five complexes.

The governor's office says it's glad taxpayers aren't on the hook for the financial failures but wants to work with legislators this spring to ensure that such state programs are "accomplishing their mission," said Ted Royer, Rick Perry's deputy press secretary. The governor appoints the boards of TSAHC and the agency that approves bond issues.

TSAHC is also expected to get close scrutiny in two years by the Sunset Review Commission, Royer said.

Some legislators are saying enough is enough.

"Anybody that has approved the financing of affordable housing should have some responsibility on whether or not these are good deals," said state Rep. Robert Talton, R-Pasadena, who for several years led the urban affairs committee.

The bottom line, Talton said, is that overall the deals have too many losers: municipal governments, school districts, taxpayers, bondholders.

And those are hardly the only ones.

"The people that live there," he said, "got a sorry deal."

By the numbers

$489 million Value of multifamily bonds issued through Texas State Affordable Housing Corp.

10,000 Apartments in TSAHC complexes

93 percent Units in default or foreclosure

$4.9 million Property taxes lost to abatements in the state's four largest counties, 2001-02

$0 Amount rents were expected to be lowered at the Woodstock in Arlington after a nonprofit took over

4 Murders at Bent Creek Apartments in Dallas in two years

12 years Time since Wichita Falls apartments had been painted

SOURCES: Texas State Affordable Housing Corp., Dallas Police Department, Sunset Advisory Commission

Bond fees

In 2002, the financial advisers, rating agencies and experts who put together the bond packages for the state housing program racked up the highest fees for municipal bonds issued in the state that year.

The state average was $9 per $1,000 of bonds issued; Texas State Affordable Housing Corp. bonds, on average, were $35.54 per $1,000 of bonds issued.

SOURCE: Texas Bond Review Board 2002 report

Controversial tax breaks

Nonprofit developers seeking tax breaks for their low-income properties are getting less sympathy from local governments and politicians in recent years.

Legislators have reduced the amount of taxes that can be exempted on the low-income properties, and public school districts, such as Arlington, have opposed efforts to develop such properties within their boundaries.

The tax-exempt properties tend to "overwhelm" local schools with students who have greater educational needs, said Arlington Associate Superintendent Steve Brown. At the same time, the cut in property taxes means the school district has less money to educate those students.

Two of the Texas State Affordable Housing properties are in the Arlington school district.

Crime and safety

The state inspects properties in the program and compiles an annual report, but has no power to force the complexes to fix the problems. Here are some excerpts from recent state documents:

Galveston

A lot of criminal activity, including gunfire. Graffiti on sidewalks and the playground.

Arlington

Some units have been vacant for more than a year, and several dozen units in one complex don't have working smoke detectors. Tennis court covered in broken glass. Not setting aside enough units for low-income residents.

Houston

Gangs in the apartment communities and reports of sexual assaults on children at one of the complexes. One unit at one of the complexes has been vacant for 100 days and has mold. Another complex was flooded, and residents in three of the buildings had to walk through standing water and mud to get to their apartments.

Conroe

Vendors at two complexes called the state to demand payment of services. One complex showed it owed vendors $53,857 for services; another complex owed more than $223,000. One complex has a crime problem.

Spring

One complex has a broken playground slide, graffiti on the playground and a unit that has been empty for three years. One complex did not provide police reports to the state.

SOURCES: Texas State Affordable Housing Corp. Asset Oversight Portfolio 2006 annual report, November 2006 board minutes and a 2005 inspection report.