In its 89th Regular Session (2025), the Texas Legislature approved House Bill 21 (HB 21), substantially revising the way housing finance corporations own and operate multifamily rental affordable housing. Gov. Greg Abbott signed HB 21 into law effective May 28, 2025 (Effective Date). Some provisions in HB 21 may be subject to interpretation. The summary below reflects our analysis of HB 21 as of the date of this publication. Throughout this summary, we present questions about the portions of HB 21 that may require interpretation and suggestions for how that interpretation may be resolved. The Texas Department of Housing and Community Affairs (TDHCA) is charged with creating rules (HFC Rules) for monitoring compliance with the new provisions of HB 21. 1 The HFC Rules may establish procedures that differ from our recommendations and conclusions below. Generally, a Texas agency has certain discretion in rulemaking to implement a new law with rules that are reasonable, based on the plain language of the statute. Interested parties are encouraged to participate in the TDHCA rulemaking process in order to have a voice in the implementation of these new requirements.2
Housing Finance Corporations
A housing finance corporation (HFC) is a nonprofit corporation that can be created as an instrumentality of a municipality, county or collection of municipalities and counties (each a Sponsor) under Chapter 394 of the Texas Local Government Code (Code). The Code authorizes an HFC to issue revenue bonds3 and own property4 in order to provide persons of low and moderate income with access to decent, safe, sanitary and affordable housing. HFCs are empowered to facilitate residential development for households to rent or own. In the context of property for rent, "affordable" housing is understood to be a property that places limits on a portion of the residential units as to (i) the maximum income of the resident household, based on a percentage of the local area median income, adjusted for household size (AMI) (Income Restriction), and (ii) the rents that may be charged to those households (Rent Restriction). Units encumbered with an Income Restriction and a Rent Restriction will be referred to in this summary as Restricted Units. A multifamily housing rental property with Restricted Units will be referred to in this summary as an Affordable Housing Property. This summary does not address the implications of HB 21 for activities of an HFC related to home ownership.
Historical Tax Exemption for HFCs
Under the Texas Tax Code5 and the Code6 prior to HB 21, (i) an HFC, (ii) all property owned by an HFC, and (iii) all income derived from a property owned by an HFC were exempt from taxes imposed by the state or its local political subdivisions. Over the years, HFCs have utilized these exemptions to develop and own Affordable Housing Properties, with ad valorem tax exemption (Property Tax Exemption) providing critical financial support for the Affordable Housing Property and its Restricted Units.7
The Code functioned for decades without significant controversy, as HFCs fulfilled their public purpose to provide decent, safe and affordable housing for low- and moderateincome households. However, these factors made the statute vulnerable for misuse:
- Given the breadth of an HFC's activities, including both rental housing and home ownership, the Code was drafted flexibly regarding Restricted Units. Specifically, the Code did not require any Rent Restrictions for properties owned by HFCs. The Code established Income Restrictions for 90% of the units in a property owned by an HFC to be occupied by or intended for occupancy by households with "low or moderate" income.8 The Code did not define "low" or "moderate" income by AMI, giving the HFC discretion to create its own policies as to what should constitute low or moderate income in its market.
- While the connection between an HFC and its Sponsor was clear and the Code could be understood to limit an HFC's activities to the jurisdiction of its Sponsor, 9 some parties believed the Code did not definitively prohibit an HFC from operating outside the boundaries of its Sponsor.
A few HFCs proceeded to acquire or construct rental housing properties pursuing Property Tax Exemptions outside the jurisdictional boundaries of their Sponsors (colloquially referred to as Traveling HFCs). Some of the properties acquired by Traveling HFCs may be classified as "naturally occurring affordable housing," meaning that the age, location and physical condition of the property do not generate rents commensurate with a newer rental property. The below-market rents attract lower-income households, making the property affordable without the formality or necessity of Restricted Units. The removal of these properties from the tax rolls, without any significant improvements for the residents or the community, attracted local attention.
The Texas Legislature addressed a similar circumstance in the 88th Regular Session (2023) regarding public facility corporations (PFCs) organized under Chapter 303 of the Code. At that time, a municipal management district with a limited jurisdiction created a PFC (Traveling PFC) that acquired and constructed rental housing properties in other areas of the state. Chapter 303 of the Code did not impose Rent Restrictions, Income Restrictions or any of the standard guardrails associated with the operation of affordable housing. Thus, properties owned by PFCs (including the Traveling PFC) were receiving Property Tax Exemption without creating the public benefits typically associated with Affordable Housing Properties. The Texas Legislature passed House Bill 2071 (HB 2071) to reform Chapter 303 of the Code. TDHCA implemented rules for the implementation of its responsibilities under HB 2071 (PFC Rules).10
Facing another scenario with a locally created governmental instrumentality utilizing Property Tax Exemptions in jurisdictions outside the boundaries of its local sponsor, the Legislature utilized HB 2071 as a starting point to create HB 21 and reform Chapter 394. Many of the provisions of HB 21 bear resemblance to HB 2071, but there are significant differences, as noted later in this summary.
Summary of New Requirements Under HB 21
Application of New Law
HB 21 applies only to HFCs and certain properties they own. HB 21 does not apply to PFCs governed by Chapter 303 of the Code, nor does it apply to public housing authorities governed by Chapter 392 of the Code. As discussed below, most, but not all, of the provisions of HB 21 do not apply to properties owned by HFCs that have received low-income housing tax credits (LIHTCs) under Chapter 2306 of the Texas Government Code (TDHCA Statute).
Section 394.031: Jurisdictional Restrictions
HB 21 revises Code Section 394.031 to clarify the jurisdiction within which an HFC may finance, own or operate an Affordable Housing Property, subject to certain exclusions. Key changes to Code Section 394.031 are set forth below. The new jurisdictional restrictions in Code Section 394.031 do apply to an Affordable Housing Property receiving LIHTCs. The new jurisdictional restrictions do not apply to property owned by an HFC for a purpose other than residential development.11
- An HFC's operations are restricted to occur within the boundaries of its Sponsor(s).12 For a county, that means the entire county, including any municipal boundaries therein.
- If an HFC wishes to operate outside the boundaries of its Sponsor(s), it must obtain a resolution of approval from (A)(i) the governing body of each municipality that contains any portion of the Affordable Housing Property; or (ii) if any portion of the Affordable Housing Property is located in the unincorporated area of a county, the governing body of such county; and (B) any HFC with jurisdiction including the areas described in (A)(i) or (ii).13
Section 394.9026: Conditions for a Property Tax Exemption
New Code Section 394.9026 establishes additional affordability and accountability requirements for an HFC or other "housing finance corporation user"14 to obtain and retain a Property Tax Exemption for an Affordable Housing Property. 15 A Housing Finance Corporation User is an HFC or "a public-private partnership entity or a developer or other person or entity that has an ownership interest or a leasehold or other possessory interest in multifamily residential development financed or supported by a housing finance corporation." While ownership by the HFC is critical to obtaining and retaining a Property
Tax Exemption, leases and public-private partnerships may be utilized to bring financing or development expertise to the property.
Many of the Conditions for a Property Tax Exemption derive from HB 2071 and will be recognized by those who followed that bill in the prior Legislative Session. The requirements set forth in Code Section 394.9026 do not apply to an Affordable Housing Property that is the recipient of LIHTCs allocated by TDHCA under the TDHCA Statute.
What does it mean to be the "recipient" of LIHTCs? HB 21 does not define this.
The TDHCA Statute and the rules promulgated thereunder present a welldefined process for a person to apply for LIHTCs for an Affordable Housing Property. When TDHCA determines to award LIHTCs, it enters into a commitment agreement with the owner, and upon completion of development, a land use restriction agreement is executed and filed in the Real Property Records. So long as such agreements are in effect, the owner is considered a "recipient" of the LIHTC funding. The TDHCA Statute supports this interpretation. Section 2306.185(c) states, "The department shall require that a recipient of funding maintains the affordability of the multifamily housing development for households of extremely low, very low, low, and moderate incomes for the greater of a 30-year period from the date the recipient takes legal possession of the housing or the remaining term of the existing federal government assistance." This indicates that an owner receiving funding from TDHCA is considered to be a "recipient" for so long as TDHCA maintains regulatory authority over the property. Consistently, when HB 2071 was passed and drafted to exclude LIHTC properties from certain requirements, it excluded properties that "receive" financial assistance under the TDHCA Statute.16
For purposes of HB 21, a "recipient" of LIHTCs should refer to an owner that is contractually subjected to regulation by TDHCA in conjunction with its participation in the LIHTC program, for so long as such agreements are in effect.
What happens when an owner's LIHTC agreements expire? Can an Affordable Housing Property retain its Property Tax Exemption?
Yes, but it would need to comply with all of the requirements of Code Chapter 394 to qualify for the Property Tax Exemption.
a. Income Restrictions. The following Income Restrictions apply to the Restricted Units in an Affordable Housing Property in order to obtain and retain the Property Tax Exemption:
- The Affordable Housing Property must have Restricted Units in
one of the two following categories: 17
- (i) 10% of the residential units are reserved for households earning not more than 60% of AMI (a "lower income housing unit"), and (ii) 40% of the residential units are reserved for households earning not more than 80% of AMI (a "moderate income housing unit"); or
- (i) 10% of the residential units are reserved for households earning not more than 50% of AMI (a "very low income housing unit"), and (ii) 40% of the residential units are reserved for households earning not more than 100% of AMI (a "middle income housing unit").
Note, these Income Restrictions are different from those set forth in Code Section 394.004, which requires 90% of the residential units to be occupied by or intended for occupancy by households with "low or moderate income," a phrase that is undefined. The Income Restrictions in Code Section 394.004 apply to all of Chapter 394, while the Income Restrictions in Code Section 394.9026(c)(1) apply only to an Affordable Housing Property seeking a Property Tax Exemption to which Code Section 394.9026 applies.
Is an Affordable Housing Property required to comply with both Code Section 394.004 and Code Section 394.9026(c)(1)?
Rules of statutory construction require provisions to be harmonized to avoid inconsistency. If harmonized, it is possible for an Affordable Housing Property owned by an HFC or a Housing Finance Corporation User to meet both requirements. It could select one of the two Income Restrictions in Code Section 394.9026(c)(1) for 50% of the units and then restrict another 40% of the units for use by households at "low and moderate" income, as described in Code Section 394.004.
Income Restrictions in Code Section 394.004 apply to all of Chapter 394, while the Income Restrictions in Code Section 394.9026(c)(1) apply only to an Affordable Housing Property seeking a Property Tax Exemption to which Code Section 394.9026 applies.
Is an Affordable Housing Property required to comply with both Code Section 394.004 and Code Section 394.9026(c)(1)?
Rules of statutory construction require provisions to be harmonized to avoid inconsistency. If harmonized, it is possible for an Affordable Housing Property owned by an HFC or a Housing Finance Corporation User to meet both requirements. It could select one of the two Income Restrictions in Code Section 394.9026(c)(1) for 50% of the units and then restrict another 40% of the units for use by households at "low and moderate" income, as described in Code Section 394.004.
An Affordable Housing Property that is occupied when acquired by an HFC is given a grace period and is entitled to the Property Tax Exemption for the two tax years after the date of acquisition, so long as the Income Requirements are met by the end of the second tax year after the date of acquisition.18
Tax years are based on calendar years. If an Affordable Housing Property is acquired in the middle of a tax year, is the following calendar year the "second" tax year for purposes of this provision? Or is it intended to mean the second full tax year so that the calendar year following the year of acquisition would be the first tax year and the second tax year would be one year after that?
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Footnotes
1. Code Section 394.9027.
2. Code Sections 394.9027(i) and (j). The rules may include the ability of TDHCA to charge a fee for its services and must include an appeal mechanism for findings of noncompliance. HB 21 also suggests an HFC should be able to appeal the loss of a Property Tax Exemption because of noncompliance. The appeal of a loss of a Property Tax Exemption is not within the legal purview of TDHCA and must be conducted in accordance with the Texas Tax Code. The only appeal TDHCA can administer is for the findings of noncompliance.
3. Code Section 394.051.
4. Code Section 394.039.
5. Texas Tax Code Section 11.11.
6. Code Section 394.905.
7. A Property Tax Exemption for an HFC is effective as of the date the HFC acquires the property.
8. Code Section 394.004.
9. Code Section 394.903(a). “A residential development covered by this chapter must be located within the local government.”
10. See Texas Administrative Code, Title 10, Chapter 10, Subchapter I.
11. Code Section 394.031(e).
12. Code Section 394.031(c).
13. Code Section 394.031(d).
14. Code Section 394.9026(a)(2).
15. Code Section 394.9026(a)(7).
16. Texas Local Government Code Sections 303.0421(a)(4) and 392.005(c-1)(2)(D).
17. Code Section 394.9026(c)(1).
18. Code Section 394.9026(g).
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.
