2013 change in ownership of apartments may have negated tax-exempt status

FRANKLIN

The Franklin Redevelopment and Housing Authority may be on the hook for over $300,000 in delinquent real estate taxes owed to the City of Franklin.

City Treasurer Dinah Babb confirmed to The Tidewater News on Tuesday afternoon that back taxes, plus interest and penalties on the three FRHA-administered apartment complexes in Franklin totaled $313,869.68 as of Sept. 1, 2019.

This is in addition to the $111,000-plus the FRHA owes in unpaid bills for August and September, which the FRHA’s in-house accountant, Victor Mitchell, brought to the attention of the FRHA Board of Directors during a special called meeting on Sept. 12.

Ordinarily, housing authorities in Virginia operate as tax-exempt non-profit organizations, and in fact, are prohibited by state law from constructing or operating “any project for profit, or as a source of revenue to the city or the county.” In February 2013, however, the FRHA board voted to create two subsidiary entities — Berkley Court Apartments LP and Pretlow Old Town Apartments LP — and to deed ownership of its public housing apartment complexes to those entities. According to city and housing authority records, this was done so that each newly formed subsidiary could apply for low-income housing tax credits and thereby reduce the cost of planned renovations at each apartment complex.

State law allows housing authorities to create subsidiary entities only if the action is approved by the local governing body, which in this case is Franklin’s City Council. According to a Feb. 19, 2013, memorandum from former city attorney H. Taylor Williams IV to the City Council members, the FRHA’s request had been “to create a non-profit organization pursuant to Virginia Code Section 36-19(12).” Yet the resolution the FRHA board had passed on Feb. 11, 2013, pending the Council’s approval, makes no mention of the term “non-profit” and instead refers to the entities to be created as “limited liability companies, limited partnerships and other entities as may be desirable to facilitate the use of low-income housing tax credits … .”

The website for the U.S. Department of Housing and Urban Development refers to this type of ownership transfer as Rental Assistance Demonstration or RAD, which Congress authorized in 2012 to give public housing authorities the means to leverage public and private debt and equity to fund renovations and maintenance to public housing stock. In RAD, units move to a Section 8 platform with a long-term contract that, by law, must be renewed in perpetuity to ensure that units remain permanently affordable to low-income households.

According to Lisa A. Wolfe, regional public affairs officer for HUD, the advantage of RAD conversion is that it enables developers to apply for low-income tax credits to fund rehabilitations through the U.S. Department of the Treasury. However, that funding is not guaranteed.

Wolfe explained that the FRHA, in creating these subsidiaries, converted all three of their properties to Section 8 Project-Based Rental Assistance. Typically, Section 8 PBRA properties are owned by private owners who have entered into multi-year rental assistance agreements with HUD or a local public housing agency for contracts funded under the Section 8 Moderate Rehabilitation Program. Most owners of Section 8 PBRA properties are for-profit entities, but nonprofits and some public housing agencies own a significant share of Section 8 PBRA properties.

But as for who now owns the three public housing complexes in Franklin, Wolfe said she was uncertain if these properties were now privately owned for-profit entities or if the housing authority is still the sole non-profit owner, and deferred to the FRHA. When asked about the impact of RAD conversion on the non-profit status that these three apartment complexes had when owned directly by the FRHA, Wolfe deferred to the city’s taxing authority, explaining that each tax situation is governed by state and local law.

According to Babb, the position of the city treasurer’s office is that, by virtue of deeding the Pretlow Gardens, Berkley Court and Old Town Terrace apartment complexes from FRHA ownership to these two limited partnerships, the three apartment complexes in Franklin are no longer covered under the FRHA’s non-profit status, and should have been paying taxes to the city for the past several fiscal years. As such, her office sent tax bills to the FRHA last October for fiscal years 2015 through 2018, with a payment deadline of Dec. 5, 2018.

It appears that these bills went ignored for more than six months past the deadline, with the FRHA waiting until June to acknowledge and contest the bills. In a letter to Babb dated June 20, 2019, Philip H. Page Jr., who from 2011 through Aug. 28 of this year had served as executive director of the FRHA, claims that at the time the two subsidiaries were created, the City Council and former city manager R. Randy Martin had agreed to allow the subsidiaries to remain under the FRHA’s tax-exempt status. Page further claims that the FRHA has made payments in lieu of taxes annually for the years represented in the tax bills, per the terms of the FRHA’s tax-exemption agreement with the city.

As proof of the first claim, Page attached to his response two letters he had received from Martin — one concerning Pretlow Old Town Apartments LP and the other concerning Berkley Court Apartments LP — each of which is dated May 5, 2014. In each letter, Martin writes, “This correspondence confirms the City’s intention that the referenced apartments, consisting of 75 units to be rehabilitated, will be exempt from all real and personal property taxes and special assessments levied by the City of Franklin … .”

Babb, when asked if Martin had made her aware in 2013 that the FRHA properties had been transferred to limited partnerships, said the former city manager had not informed her of the change in ownership, nor had he ever indicated to her his belief that these properties were still tax exempt, despite the change in ownership. City Manager Amanda Jarratt said that when city staff received Page’s response to the tax bills, they indicated to her that they had never before seen the attached letters from Martin granting the new partnerships exemption from city taxes.

“I am also not aware that a City Manager has the authority to grant tax exempt status to any business or entity,” Jarratt said.

Babb added that she didn’t learn of the alleged change in taxability until October 2018 when she was told by the city’s commissioner of revenue, Brenda Rickman. Rickman said she only learned of the change in taxability after a citizen inquired last year about the FRHA properties and her office looked into the matter.

As for Page’s claim that the FRHA has made annual payments in lieu of taxes, Babb confirmed that the FRHA had indeed made payments to the city in lieu of taxes for fiscal years 2016, 2017 and 2018. These payments, however, are significantly lower than the $300,000-plus allegedly owed. For 2016, the FRHA paid the city $4,896.70. For 2017, that amount was $6,195.44. For 2018, the payment increased substantially to $23,501.50.

If the three apartment complexes are indeed taxable now, the question remains, who pays?

A limited partnership, according to state law, is defined as one or more general partners, who are responsible for the day-to-day management of the company and are liable for the partnership’s financial obligations, and one or more limited partners, who do not participate in the control of the business but in return, are not responsible for the financial obligations of the partnership.

According to the certificate of limited partnership filed with Virginia’s State Corporation Commission for Berkley Court Apartments LP, the name of the sole general partner is Berkley Court Apartments GP LLC. The post office address of the general partner is listed as 601 Campbell Ave., Franklin, which was the address of the FRHA’s administrative office until the housing authority relocated to its current headquarters at the corner of Main Street and Fourth Avenue in mid 2014. The articles of incorporation on file with the SCC for Berkley Court Apartments GP LLC likewise list 601 Campbell Ave., Franklin, as the address of the limited liability company’s principal office.

For Pretlow Old Town Apartments LP, the certificate of limited partnership filed with the SCC lists the name of the sole general partner as Pretlow Old Town Apartments GP LLC. Yet the same address of 601 Campbell Ave., Franklin, is listed as the location of Pretlow Old Town Apartments GP LLC’s principal office.

The initial registered agent listed in the articles of incorporation for both LLCs is Delphine G. Carnes, a an attorney formerly with the Norfolk-based law firm Crenshaw, Ware & Martin PLC who now has her own private practice, Delphine Carnes Law Group PLC, also in Norfolk. The initial registered office for both LLCs is listed as 150 W. Main St., Suite 1500, Norfolk, which is the address for Crenshaw, Ware & Martin. Page’s letter to Babb identifies Carnes as the FRHA’s counsel, and further refers to the two limited partnerships as “subsidiaries of the Franklin Redevelopment and Housing Authority.”

According to Renee Diaz, recording clerk for the Southampton County Courthouse, deeds of trust on file at the courthouse for both partnerships list the FRHA as one of five “grantees or trustees,” the other four being Michael W. Clarke, Patricia J. Fuller, Carnes and W. Ryan Snow. Both deeds of trust are dated Aug. 5, 2014.

Michael W. Clarke appears to have served as president and CEO of Access National Bank in Reston, Virginia, at the time, which announced a merger with Union Bankshares Corporation in October 2018, and is now called Atlantic Union Bank. He now serves on the board of directors for Atlantic Union. The fact that he is named a trustee in both partnerships suggests that Access National may have been the bank that provided the debt financing for the renovation of the three apartment complexes around the time the limited partnerships were created. The Tidewater News was unable to locate information on Patricia J. Fuller’s involvement with the partnerships, but did confirm that W. Ryan Snow is managing partner of Crenshaw Ware & Martin.

By press time on Friday, it was unclear what, if any, current involvement or liability any of these trustees, to include the FRHA, have for the allegedly owed taxes.

The Tidewater News made repeated attempts to contact FRHA Interim Executive Director Loretta Batten throughout the week, but all were unsuccessful.