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The Essential Role of Property Tax Exemptions: One of Only a Few Tools Available in Texas to Develop Affordable Housing
By Summer Greathouse and Levi Stoneking, Bracewell LLP
Texas stands at a pivotal juncture in its journey to address affordable housing. With rapid population growth, high construction costs and interest rates, stagnating or decreasing subsidy levels and evolving state and federal policies, stakeholders in the affordable housing industry face both unprecedented challenges and promising opportunity.
In this landscape, one policy tool has emerged as essential: the real estate tax exemption. Long viewed as a technical aspect of project finance, property tax exemptions have increasingly become the linchpin in making affordable housing transactions viable across the state.
As cities face mounting affordability pressures and housing providers seek new ways to make developments financially viable, understanding how real estate tax exemptions function—along with the benefits they provide, the people they serve, and the legislative framework behind them—is critical to the future of the industry.
Why Tax Exemptions Matter in Affordable Housing Finance
In most major Texas markets, property taxes account for anywhere from 25 percent to 50 percent of a multifamily property’s operating expenses. For affordable housing developers, who are already restricted on the revenue side due to rent caps, tax burdens of this magnitude can easily make a project unviable.
The ability to eliminate or significantly reduce property taxes through exemption allows for:
• Lower rents without sacrificing financial feasibility or product quality/finishes
• Greater leverage and investor interest in low-income housing tax credit( LIHTC) and Public Facility Corporation (PFC)-backed deals
• Deeper income targeting, making communities accessible to lower-income households
• Longer affordability periods, since reduced operating costs improve long-term sustainability
For local governments and housing authorities, this trade-off—relinquishing property tax revenue in exchange for long-term affordable homes and ownership of a quality housing development by the local government at the end of the long-term lease—often represents good public policy, especially when paired with transparency and accountability measures.
Who Benefits from Property Tax-Exempt Housing?
Tax-exempt affordable housing helps stabilize vulnerable populations while fostering inclusive growth. The residents served by tax-exempt affordable housing transactions span a diverse range of Texans, including:
• Working families earning 30% to 80% of AMI: grocery clerks, school staff, warehouse workers, and home health aides—often priced out of the very cities where they work
• Seniors on fixed incomes who cannot keep up with rising rents in gentrifying areas
• Unhoused populations and people with disabilities or chronic health issues who benefit from supportive housing models
• Veterans and those at risk of homelessness who need permanent, service-enriched housing
The Legal Basis for Property Tax Exemptions in Texas
Texas law provides for various property tax exemptions that support the development and preservation of affordable housing. Chief among them are Texas Local Government Code Chapter 303 (public facility corporations (PFCs)), Chapter 394 (housing finance corporations (HFCs) and Chapter 392 (housing authorities (PHAs)).
Impactful in recent years, these statutes enable various local government entities to enter into public-private partnerships with housing providers, leveraging private sector capital and experience with public policy requirements. If structured correctly, the ownership of the property by the PFC, HFC or PHA makes the asset tax-exempt, as it is considered publicly owned for governmental purposes. In exchange, developers agree to rent and income restrictions—often ranging from 50% to 80% AMI—and other public benefits like increased accessibility, infrastructure improvements, fees payable to the public partner and design requirements.
In most major Texas markets, property taxes account for anywhere from 25 percent to 50 percent of a multifamily property’s operating expenses. For affordable housing developers, who are already restricted on the revenue side due to rent caps, tax burdens of this magnitude can easily make a project unviable. — Summer Greathouse, Partner, Bracewell LLP
Together, these legal mechanisms have formed the basis for a large percentage of the development and preservation of affordable housing units—the vast majority of which simply would not be feasible without the property tax relief provided by exemption.
Recent Legislative and Policy Developments
The question of how tax exemptions are deployed—and who benefits from them—is deeply intertwined with broader issues of equity and public accountability. Critics have argued that some early PFC deals disproportionately benefitted developers without ensuring deep affordability or meaningful community input. Also, in recent years, there’s been special concern regarding so-called “traveling” HFCs and PFCs that have enabled exemptions for development far outside their sponsors’ jurisdictional boundaries. In response to these abuses, housing advocates and policymakers have pushed for more transparency, greater affordability and jurisdictional limitations, among other priorities, which has led to legislative and policy changes at both the state and local level.
While many Texas cities have developed their own frameworks for evaluating whether to approve transactions that would benefit from tax exemptions, the legislature has recently implemented statewide reforms that usurp local communities’ ability to determine an appropriate public benefit in exchange for the property tax exemption.
House Bill 2071 (2023)
Effective as of June 18, 2023, introduced significant reforms to non-LIHTC PFC developments, aimed at increasing affordability and ensuring greater accountability and transparency:
• Enhanced Affordability Requirements for New Construction – at least 10 percent of units now must be affordable to households earning 60% AMI or less, in addition to 40 percent of units reserved for those earning up to 80% AMI.
• Rehabilitation and Acquisition Standards – for existing multifamily developments acquired by PFCs, a minimum of 15 percent of the property’s total acquisition cost must be invested in rehabilitation, provided that this requirement may be waived if 25 percent of units are set aside for households at or below 60% AMI, instead of the standard 10% at or below 60% AMI.
• Jurisdictional and Time Limitations – PFCs are now restricted to operating within the boundaries of their sponsoring entities and the length of the tax exemption is limited to 60 years on new construction and 30 years for acquisitions (each subject to extension).
• Transparency and Oversight – at least 30 days prior to approval, PFCs must notify local taxing authorities and post an underwriting assessment that evaluates the development’s affordability and financial feasibility. Additionally, if the PFC board is not comprised of a majority of elected officials, a development proposal must receive approval from the municipality or county where it’s located.
• Compliance Monitoring and Reporting – annual audits of PFC developments are now required to be submitted to the Texas Department of Housing and Community Affairs (TDHCA); failure to comply may result in a loss of property tax exemption.
• Taxes imposed by certain special districts such as municipal utility districts (MUDs) are no longer exempted for PFC multifamily projects.
The changes enacted by HB 2071 served to reform and increase public benefit to housing communities but does not completely halt the production of new
affordable housing, which has been viewed as a positive outcome in the industry by many.
House Bill 21 (2025)
Authored by Representative Gary Gates and signed into law by Governor Abbott on May 28, 2025, HB 21 took effect immediately and enacts significant changes to the operations of HFCs. Similar to HB 2071, it addresses jurisdictional limitations, audit requirements and heightened affordability standards. It also makes HFCs subject to open meetings and open records laws. By themselves, these changes would have curtailed the abuses of the HFC program that have been identified by the legislature and highlighted by the media.
Critics of the recently passed House Bill 21 warned legislators that HB21's lack of grandfathering could have a chilling effect on production of affordable housing in the state and may adversely affect our state’s ability to sustain continued economic development and investment.
Fannie Mae and Freddie Mac have already halted lendning activities on non-jurisdictional HFCs and paused lending on jurisdictional HFCs until more clarity emerges. — Tim Leonhard, Berkadia
However, HB 21 goes farther than HB 2071 by adding the requirement that developers of HFC-backed, non-LIHTC developments demonstrate rent reductions equal to at least 50 percent of tax savings, which is tested both prior to development approval and on an ongoing basis. The bill also requires payment of special district taxes (e.g., those correlating to MUDs and ESDs) in all future developments, including LIHTC. HB 21 also failed to fully grandfather existing HFC partnerships under the prior law, requiring existing developments to come into compliance with various provisions of the law, including deeper affordability and ongoing rent reduction tests to maintain the tax exemption. The specifics of these requirements are far more nuanced than can be explained here, but suffice it to say that HB 21 will drastically change the underwriting of many HFC developments and keep developers and their advisers busy with a bevy of new compliance concerns. Critics of the bill warned legislators prior to its approval that HB 21, especially its lack of grandfathering, could have a chilling effect on production of affordable housing in the state and may adversely affect our state’s ability to sustain continued economic development and investment. HB 21 poses significant challenges for investors and lenders in Texas’ affordable housing industry by creating uncertainty around the true value of the HFC tax exemption, according to Tim Leonhard, senior managing director of affordable housing at Berkadia. “Fannie Mae and Freddie Mac have already halted all lending activities on non-jurisdictional HFCs and paused lending on jurisdictional HFCs under 394 until more clarity emerges,” says Leonhard. “Other lenders are following Fannie and Freddie’s lead. And while lending on new housing tax credit developments with jurisdictional HFC sponsorships continues for now, these developments won’t be able to generate the same loan proceeds as they would have prior to HB21. This will cause even wider financing gaps for developers and will negatively impact the production and preservation of affordable housing in this state.” The full effects of this reform will become clearer as the industry attempts to navigate this and other myriad challenges of the post-pandemic economy.
The Future: Challenges and Opportunities
As the affordable housing sector in Texas continues to evolve, real estate tax exemptions will remain a core component of financing strategy—but they must be wielded responsibly.
Key priorities for the road ahead include:
Educating Stakeholders and the Public Developers, elected officials, and community members all benefit from clear, accessible explanations of how exemptions work and the tradeoffs involved. Transparent storytelling can help build the consensus needed to sustain and expand these programs. Unfortunately, the narrative thus far has only included voices that focus on the shortcomings and not the benefits the majority of developments have produced for communities across the state.
Maintaining Oversight Without Chilling Development Policymakers must continue to strive to strike a balance between accountability and efficiency. Overly burdensome compliance could deter much-needed private sector participation, while lax standards and lack of good judgment around policy goals has and will continue to erode public trust.
Property tax exemptions have become a foundational element of how affordable housing gets built in Texas. When applied with care and oversight, they unlock critical public benefits: safe, stable homes for working families, seniors, and vulnerable Texans across the income spectrum.
As the state confronts a growing affordability crisis, expanding and refining the use of tax exemptions may well determine whether Texas can meet the housing needs of its rapidly changing population.
A Balanced Approach is Needed
must find a balance between accountability and efficiency. Overly burdensome compliance could deter vital private sector participation, while lax standards risk eroding public trust."
Levi Stoneking, Associate Bracewell, LLP
