Texas Closes One Developer Tax Loophole, But There’s Another

According to The Real Deal, Texas developers are increasingly turning to housing finance corporations (HFCs) to navigate a challenging real estate market, taking advantage of tax breaks intended for affordable housing projects. 

The rise in HFC use follows the closure of a similar loophole involving public facility corporations (PFCs), which was shut down last year after developers used the program to secure tax exemptions in high-demand markets like Austin and Houston without really contributing to affordable housing.

The Bigger Picture

Housing finance corporations were established to encourage affordable housing development by offering tax incentives to developers. Through HFCs, developers can receive substantial tax relief, including exemptions from property and sales taxes, which can be critical for projects facing rising costs due to high interest rates, stagnant rent growth, and increasing property taxes. 

These benefits are designed to make affordable housing projects financially viable, but developers have been using HFCs to rescue underperforming properties that might otherwise fail.

Unlike PFCs, which allow developers to waive property taxes by committing a portion of units to affordable housing, HFCs must be sponsored by a city or county. They are also required to join the general partner entity of the project.

In return, developers benefit from a package of tax breaks, which can be the deciding factor for a struggling project.

Concerns Over Misuse

The growing reliance on HFCs has raised concerns about the program’s effectiveness in delivering affordable housing. Two of the most active HFCs, based in Garland and Cameron County, have been involved in numerous projects across the state. 

However, critics argue that it’s unclear how much affordable housing these projects have actually created, especially in the local communities where these HFCs are based.

During a meeting this summer, Cameron County Judge Eddie Treviño expressed doubts about the benefits of HFC projects for local residents. He pointed out that the county’s HFC assets grew from $250K to $6M in just six years, questioning how much of this growth translated into affordable housing for Cameron County.

Change on The Horizon

State lawmakers are preparing to address these concerns when the Texas Legislature meets again in January. 

State Senator Paul Bettencourt, a Republican from Houston who was instrumental in closing the PFC loophole, is leading the charge to reform the HFC program. Bettencourt has highlighted the need for stricter oversight and clearer guidelines to ensure that tax breaks provided through HFCs are genuinely promoting affordable housing rather than being used to maximize profits.

“We need to make sure these programs serve their intended purpose,” Bettencourt said, signaling that legislative changes could be on the way. The reforms could include tightening eligibility criteria for tax exemptions, increasing accountability, and ensuring local communities benefit from HFC projects.

In Summary

With the PFC loophole closed, developers in Texas have shifted their focus to housing finance corporations as a means to secure tax breaks. 

However, the growing use of HFCs has led to questions about the actual benefits of these projects, prompting lawmakers to consider reforms. 

As the Texas Legislature prepares to reconvene in January, there is a growing push to ensure that HFCs are used appropriately, with an emphasis on transparency, oversight, and genuine contributions to affordable housing.