Texas HFC Property Tax Loophole About to Close?

Texas landlords are rushing to take advantage of a legal loophole that allows them to secure big property tax breaks, potentially worth millions.

This caught the attention of state lawmakers, prompting them to introduce legislation to curb the practice, per GlobeSt. 

For And Against

At the heart of the issue are Housing Finance Corporations (HFCs)—government entities created by local governments to help finance affordable housing projects. These agencies have been used to grant tax exemptions to private developers, often far outside their jurisdictions, without the knowledge of local residents or officials.

Critics argue that these exemptions rarely lead to meaningful affordable housing outcomes and many developers simply use the tax breaks to boost their profits without offering affordable rents. 

Tax Break Bonanza

Developers in Texas, particularly in cities like Houston and Dallas, are leveraging HFCs to wipe out property tax bills on their apartment complexes. These tax breaks can amount to hundreds of thousands, if not millions, each year.

The strategy involves converting market-rate properties into affordable housing, enabling landlords to receive full property tax exemptions for up to 99 years. In return, developers often promise to set aside a portion of the units for lower-income tenants.

The rush to secure these tax breaks spurred a cottage industry of consultants, lawyers, and brokers seeking to capitalize on the lucrative loophole. 

Some of the key players include real estate investors from out of state, particularly high-cost areas like California, who see Texas as a goldmine for exemptions. With the help of local HFCs, they can erase property tax obligations, while local residents bear the burden of lost tax revenue.

Legal Loopholes

The loophole that allows HFCs to provide tax exemptions far beyond their local jurisdictions has attracted intense scrutiny. Although the HFCs were originally created to help build affordable housing, they have been increasingly used to grant tax breaks to developers on existing properties.

The rules are relatively lax, and there are no requirements to notify local governments when an HFC cuts such deals. This led to situations where tax revenue from major metros, like Houston and San Antonio, was redirected to benefit developers in distant parts of the state.

In response to growing backlash, state lawmakers, including Senator Paul Bettencourt and Representative Gary Gates, have introduced legislation restricting HFCs to their local jurisdictions unless invited by other areas.

The hope is that this will prevent developers from exploiting these tax breaks in areas far from their own businesses, and ensure that local residents aren’t unfairly burdened with lost tax revenue.

The Hidden Costs

Critics argue that these tax exemptions disproportionately benefit wealthy developers rather than addressing the housing needs of low-income Texans.

For example, while some of the complexes that receive these exemptions do set aside units for low-income tenants, the rents often remain close to market rates. A review of recent HFC deals shows that many properties benefiting from tax breaks are, in fact, older complexes that were already charging lower rents.

In such cases, the tax exemptions do not result in deeper discounts for tenants but serve as a boon for developers looking to cut costs without lowering rents. This raised concerns that the tax breaks are simply a way for developers to make more money rather than create affordable housing.

Looking Ahead

While the proposed legislation could close some of the loopholes, the scramble for tax breaks is likely to continue as long as the financial incentives remain in place. Landlords and developers will likely keep seeking ways to take advantage of these exemptions as the state’s housing crisis grows.

Meanwhile, local governments will have to balance the need for affordable housing with the growing financial strain caused by these tax breaks.

Without a solution that ensures the creation of affordable housing and the protection of local tax revenues, the scramble for property tax exemptions will likely remain a key issue in the Lone Star State.