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Changes to Chapter 394 of the Texas Local Government Code will impact how HFCs own properties.

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The new law requires affordability, monitoring and transparency.

Some HFC properties could be at risk of losing property tax exemptions.

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On May 28, Gov. Greg Abbott signed House Bill 21 (HB 21), which becomes effective immediately. A brief summary of HB 21 can be found below. This summary reflects our current interpretation of HB 21. A more detailed analysis is forthcoming and should be distributed this week.

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Housing Finance Corporations (HFCs) are governed by Chapter 394 of the Texas Local Government Code. They are authorized to issue tax-exempt bonds and to own real property, among other things. HFCs can be created by a city, a county, or multiple cities and counties working in conjunction (the Local Sponsors). Property owned by an HFC is exempt from taxation. Therefore, HFCs frequently work in public/private partnerships with developers and investors to acquire, construct and operate an affordable housing development (a Property).

The impetus for HB 21 is that certain HFCs were acquiring Properties and seeking tax exemption outside the jurisdiction of their Local Sponsors. The Texas Legislature addressed a similar scenario in 2023 with public facility corporations (PFCs), resulting in House Bill 2071 (HB 2071) to reform the operation of PFCs. HB 21 includes many of the reforms of HB 2071, along with some new requirements, as described below.

Jurisdictional Issues. HB 21 prohibits an HFC from owning a Property for residential development outside the jurisdiction of its Local Sponsor unless it obtains the approval of the city or county, as applicable, as well as any local HFC.

Affordability Requirements.

Each Property must reserve at least (1) 10 percent of the units for households at 60 percent of the area median income (AMI) and 40 percent of the units for households at 80 percent of the AMI, or (2) 10 percent of the units for households at 50 percent of the AMI and 40 percent of the units for households at 100 percent of the AMI.

Household income is calculated in accordance with U.S. Department of Housing and Urban Development (HUD) rules.

Rent limits are published by HUD and include all recurring nonvoluntary fees.

Income-restricted units must have interior finishes that are comparable to those of market-rate units and must be proportionally dispersed throughout the different floor plan types.

To maintain the exemption, the Property must annually confirm that at least 50 percent of the value of the tax exemption has been applied to rent reduction at the Property. If such standard is not met, the owner must pay the difference to the applicable taxing authorities.

Tenant Protections. Tenant protections include a prohibition on discriminating against voucher holders, along with certain anti-retaliation and nonrenewal provisions.

Compliance, Audits and Monitoring. Owners must have annual audits for compliance and submit them to the Texas Department of Housing and Community Affairs.

Transparency. The Texas Open Meetings Act applies to HFCs.

Exemption. The exemption does not apply to conservation and reclamation districts that provide water, sewer or drainage services (generally known as Municipal Utility Districts (MUDs)) or emergency services districts (ESDs), unless the owner enters into a payment in lieu of taxes with those taxing units.

Exclusions for Housing Tax Credits. The revisions in HB 21 do not apply to Properties that have received low-income housing tax credits (LIHTCs). However, going forward, the jurisdictional restrictions will apply to all Properties, including those financed with LIHTCs.

Grandfathering. For HFCs to retain the tax exemption for a Property in tax year 2025 and beyond:

Properties currently owned by HFCs (both local and out-of-jurisdiction) must come into compliance with the compliance, audit and monitoring requirements immediately.

Properties currently owned by HFCs (both local and out-of-jurisdiction) must come into compliance with the tenant protections by Jan. 1, 2026.

Properties currently owned by out-of-jurisdiction HFCs must obtain local approval by Dec. 31, 2026, or they will lose the tax exemption on Jan. 1, 2027.

Properties currently owned by HFCs (both local and out-of-jurisdiction, assuming local approval is obtained) must come into compliance with the affordability restrictions by the earlier of (1) Dec. 31, 2035, or (2) the first sale or refinancing of the Property.

Properties currently owned by HFCs (both local and out-of-jurisdiction, assuming local approval is obtained) remain exempt from taxation by MUDs and ESDs.

This distribution is intended to summarize the provisions of HB 21 and is not comprehensive. It should not be relied upon as a legal opinion. Consult your counsel for advice on the impact of HB 21 on any particular Property.

Texas Legislative Update: HB 21 Changes Property Tax Exemption For Housing Finance Corporations

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