Highlights
- Texas Gov. Greg Abbott signed House Bill 21 (HB 21) into law, marking a significant shift in how affordable housing projects in Texas can access property tax exemptions.
- The bill is the most sweeping state response yet to concerns surrounding Housing Finance Corporations that acquire properties and are issued tax-exempt bonds or claim tax exemptions outside their founding jurisdictions without local consent.
- This Holland & Knight alert details HB 21 and its potential effects on the Texas affordable housing market going forward.
Texas Gov. Greg Abbott on May 28, 2025, signed House Bill 21 (HB 21) into law, marking a significant shift in how affordable housing projects in Texas can access property tax exemptions through housing finance corporations (HFCs). The bill, which became effective immediately upon receiving the governor's signature, is the most sweeping state response yet to concerns surrounding "traveling HFCs" – entities that acquired properties and are issued tax-exempt bonds or claimed tax exemptions outside their founding jurisdictions without local consent. For lenders active in the affordable housing space, particularly those financing projects that rely on the property tax exemptions HFCs can provide, HB 21 creates both immediate and long-term uncertainty.
Effects on Property Tax Exemptions
HB 21 effectively reins in the geographic authority of HFCs (including traveling HFCs), limiting their ability to support or acquire affordable housing developments beyond their home jurisdictions without express approval from local governing bodies. This new limitation will impact both new and existing HFC property tax exemptions. This change introduces a new layer of risk for lenders, who must now account for the possibility that local governments may decline to approve deals – even those that have previously qualified, or new deals that would otherwise qualify, for tax exemptions under prior law. Notably, this bill applies to deals that are already in existence, requiring HFCs that already hold interests in out-of-jurisdiction properties to obtain local approval by Jan. 1, 2027, or risk losing the project's property tax exemption.
In addition to the jurisdictional restrictions, HB 21 tightens affordability requirements for projects to qualify (and continue to qualify, assuming, among other things, that local approval is obtained by Jan. 1, 2027) for exemptions. The new affordability requirements have been modified as follows:
- In order to qualify for a property tax exemption, a minimum of
50 percent of units must be reserved for occupancy by
income-restricted tenants. This requirement may be satisfied by
either of the following combinations:
- 10 percent of the units reserved for occupancy by 60 percent area median income (AMI) households, with 40 percent of the units reserved for 80 percent AMI households, or
- 10 percent of the units reserved for occupancy by 50 percent AMI households, with 40 percent of the units reserved for 100 percent AMI households
These formulas are significantly more stringent than in the past and must be verified through independent annual audits. This represents a direct underwriting consideration: Lenders must now ensure that borrowers not only meet these requirements for new deals at the outset, but that they also remain in compliance over the life of the loan for all deals, including existing deals for which local approval is obtained by Jan. 1, 2027. Noncompliance could trigger the loss of the tax exemption, affecting project cash flow, compliance with ongoing financial covenants and collateral value.
HB 21 also contains a "rent reduction test" that mandates that at least 50 percent of the tax savings generated from the exemption be passed through to tenants or returned to taxing authorities. This rent reduction test must be satisfied annually in order to continue to receive an ad valorem exemption.
Under the test, the rent reduction at the property in the preceding tax year must equal not less than 50 percent of the estimated ad valorem property taxes that would have been imposed on the property in the same preceding tax year if the property did not receive an exemption from those taxes. If the rent reduction is less than the 50 percent of estimated ad valorem tax savings, then the HFC user must make payments to each taxing unit in an amount equal to that taxing unit's pro rata share of the rent reduction shortfall. This rent reduction test is temporarily grandfathered for developments acquired prior to the bill's effective date. The HFC and HFC user must come into compliance with these requirements by the earlier of 10 years, conveyance of title to the property (for example, via a sale of the property), refinance or a change in the majority of the beneficial ownership interests of the HFC user.
Multiple lawsuits filed by local jurisdictions are currently pending and should also be closely monitored for future developments regarding the legality and future viability of the HFC financing model. There have been repeated requests made to Texas Attorney General Ken Paxton to determine HFCs' authority to conduct residential development under Chapter 394 of the Texas Local Government Code, but on June 3, 2025, Paxton denied issuing a formal opinion, citing the ongoing litigation involving this question.
Conclusion
Though HB 21 is aimed at increasing transparency, local accountability and tenant benefits in the use of public tax exemptions, it also introduces new and meaningful compliance risks, timeline delays and underwriting complexities for lenders and developers. Interested parties should move quickly to evaluate any outstanding loans or applications involving out-of-jurisdiction HFC participation or affordability compliance.
Going forward, careful diligence around local government approvals and the ongoing viability of the new affordability thresholds will be essential. Close coordination with counsel, borrowers and local officials will be critical to navigating the evolving landscape. HB 21 is a significant turning point in Texas affordable housing policy – and one that HFC users and lenders cannot afford to ignore.
Industry groups, consisting of interested parties including property owners and lenders, are currently in the process of being formed for the purposes of coordinating a response to some of the legal challenges that might be made or otherwise arise with respect to this new legislation.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
