Despite legislative reforms enacted two years ago to curb property tax exemptions for developers in exchange for affordable housing concessions, developers have continued to exploit a legal loophole that allows them to secure full property tax exemptions worth millions. State lawmakers are now working to close this gap, which they say has led to abuse of the program and a significant loss of tax revenue.
The Ongoing Tax Exemption Controversy
“What the industry did after we did the reforms last session is just jump over to another part of the code because it allows them to do the exact same thing with just a slightly different ownership structure,” said Rep. Gary Gates (R-Richmond), one of the leading lawmakers advocating for stricter regulations.
Gates highlighted the financial impact of this loophole, emphasizing that an estimated $277 million in annual tax revenue has been lost.
In 2023, Gates, along with former Rep. Jacey Jetton and Sen. Paul Bettencourt (R-Houston), led a legislative effort to impose new restrictions on the state’s Public Facility Corporation (PFC) program. This program allowed developers to obtain tax exemptions on multi-family properties for up to 99 years without notifying local entities such as counties, cities, or school districts. These local governments were then obligated to provide services without receiving corresponding tax revenue.
Under the PFC arrangement, developers were required to set aside some units at reduced rents for residents earning below the area median income (AMI). However, in some cases, only 10% of units were designated for actual low-income families, and some properties that converted to the PFC structure already had below-market rents, making little to no difference in housing affordability.
The 2023 reforms limited the duration of tax exemptions, increased the number of units required for reduced rents, and mandated annual audits. However, developers quickly pivoted to another state program, Housing Financing Corporations (HFCs), to continue obtaining full tax exemptions with minimal restrictions.
Cities Profiting from HFC Authorizations
Several Texas municipalities, including Pleasanton, Pecos, Cameron County, and Maverick County, have reportedly been working with out-of-state agents to authorize HFCs in major cities such as Houston, Dallas, and San Antonio. In exchange, these local governments collect millions in fees.
“This is really a despicable use of taxpayer dollars by four taxing entities in the state of Texas,” said Bettencourt. “They’ve decided to turn HFCs into slot machines for their local governments and it has to be stopped.”
Gates has uncovered communications from Avid Realty Partners regarding an HFC property authorized through Pleasanton. The documents claim that despite a $700,000 annual property tax exemption in 2025, there would be “no revenue impact.” Additionally, an internal chart indicates that the property owner could charge $275 more in monthly rent while remaining compliant with state requirements.
In exchange for obtaining HFC status, Avid proposed to collect an annual $33,000 “compliance fee.”
Impact on Local Tax Revenue
According to data compiled by Gates’ office, Texas House District 134, represented by Rep. Ann Johnson (D-Houston), has the highest value of properties removed from tax rolls—$1.06 billion—leading to an estimated tax revenue loss of $22.7 million per year. Rep. James Talarico’s (D-Austin) district ranks second, with $621.5 million in exempted property value and an estimated revenue loss of over $16 million.
Statewide, Gates has identified at least $12.7 billion in property values that have been exempted from taxes under these programs. He argues that these revenue losses ultimately affect all Texans.
“When you wipe out $277 million in revenue, you have to keep in mind that half of that is school taxes,” Gates explained. “Then the state makes it up. The state gets its money from the state sales or franchise tax. I tell my rural members that while they might not have any PFCs or HFCs in their district, their people will have to pay higher franchise taxes or state sales taxes to make up for what’s being wiped out locally.”
Legislative Solutions in the Works
To address these issues, Gates has introduced House Bill (HB) 21 and its companion, Senate Bill (SB) 867. The proposed legislation would:
Require developers to allocate a higher percentage of units for low- and moderate-income families.
Mandate local government approval before granting tax exemptions.
Ensure that the total rent reduction amounts to at least 60% of the estimated tax savings.
Provide additional renter protections within the program.
Require all HFCs to conduct compliance audits, which would be submitted to the Texas Department of Housing and Community Affairs and local appraisal districts.
The audit requirements would apply retroactively, requiring existing properties to come into compliance within three years.
Gates has also introduced HB 3532, which extends similar requirements to PFCs. Additionally, he plans to file legislation targeting other tax-exempt housing projects created through local housing authorities.
Legal Opinion Pending
Last year, Gates and Rep. J.M. Lozano (R-Kingsville) requested a legal opinion from Texas Attorney General Ken Paxton regarding whether HFCs have the authority to grant tax exemptions outside their own districts. However, because Lozano is no longer the chair of the House Committee on Urban Affairs, Paxton did not issue an opinion.
As the newly appointed chair of the Committee on Land & Resource Management, Gates intends to renew his request for an official legal interpretation from the attorney general.
With millions in tax revenue at stake and a growing number of developers leveraging this loophole, Texas lawmakers face increasing pressure to take decisive action and ensure that affordable housing programs genuinely benefit those in need, rather than serving as financial windfalls for developers and select municipalities.
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