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MOU August 7, 2024

Fort Bend Precinct: 4 | Far West Houston/North Richmond

The August 7, 2024, Hanover Lakemont MOU outlines a $67.4 million partnership between The Hanover Company and the Rosenberg Housing Authority PFC (RHAPFC). The post-HB 2071 Chapter 303 deal supports 360 units at 7102 S Mason the west Houston suburb of Richmond, in unincorporated Fort Bend County.

The upfront capital structure requires fixed payments to the Housing Authority: a $447,630 acquisition fee and $150,000 in RHA legal fees at closing. The ground lease payment equals the land acquisition price, currently estimated near $3.2 million. These non-scalable costs total approximately $3.8 million before standard development expenses.

The MOU includes a post-disposition revenue structure referred to as the Annual Value Tax (AVT) payment. Following any leasehold sale, the replacement tenant must pay an annual sum equal to 10% of the property taxes that would have been payable without the exemption. This payment is due on Fort Bend County's standard tax due dates and effectively monetizes 10% of the exemption's value.

The AVT creates an ongoing revenue stream for the PFC that scales with property value appreciation, essentially converting a portion of the theoretical tax burden into actual cash flow.

Cash flow distributions prioritize developer returns through a two-tier waterfall. Operating cash flow first pays a 10% preferred return to the Developer, with remaining funds split 85% Developer/15% RHA. Capital events require achieving an 18% IRR hurdle to the Developer before RHA participation. On sales, the RHA receives the greater of 1% gross price or 15% of remaining proceeds. Refinancing triggers 15% RHA participation in remaining proceeds after the IRR hurdle.

Post-disposition economics maintain tax exemption value while defining RHA participation. Leasehold sales trigger a 1% Transfer Fee.

RHA will collect an Asset Management Fee being the greater of two terms: $25,000 floor with 3% annual escalation or 0.50% of gross revenues. Hanover is the initial property manager, with a fee of 3% of monthly gross revenues.

The 100% property tax exemption provides ongoing operational benefit, while the sales tax exemption on construction materials creates immediate value. The RHA affiliate receives 25% of these savings, split between closing (50%) and completion (50%). If construction materials represent 45-50% of total development costs, the potential sales tax savings on a $67.4 million project approaches $2.5 million. RHA retains 25% of this benefit, approximately $560K, with payment timing split 50-50 between closing and completion.

The MOU states construction financing is capped at 55% loan-to-cost ratio. The permanent loan will refinance construction debt post-stabilization. Developer affiliates will provide necessary guarantees, with no guarantee requirements from RHA or affiliates.

Exit flexibility includes both fee and leasehold sale options after year 10, with RHA ROFO rights bound by specific timelines. The 60-day ROFO exercise period and ability to close with third parties at 97% of the ROFO price creates defined parameters for disposition planning. The 60-year initial ground lease term includes extension rights under HB 2071's recent modifications to Chapter 303 of Texas Local Government Code.

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