Gov. Greg Abbott just signed legislation to close a loophole that’s allowed multifamily investors to remove billions of dollars worth of property from tax rolls in Texas’ biggest cities.
But, the loophole’s biggest critics say the law goes too far.
Over the past year, media outlets across the state have detailed the abuses of “traveling” housing finance corporations, chronicling how multifamily investors misused the program by partnering with affordable housing entities in far-flung counties to secure property tax exemptions in big cities.
The program intended to spur affordable housing development instead provided a lifeline to struggling investors, like Tides Equities, all while wiping millions of dollars worth of property off the tax rolls.
Three proposals filed this session — HB 21, SB 867 and HB 1585 — moved to ban the heavily criticized misuse of the program. Richmond Republican Rep. Gary Gates’ HB 21 rose to the top.
But large swaths of the program’s stakeholders have a problem with it, arguing it’s an overcorrection.
HB 21 doesn’t just close the loophole; it also requires all properties owned by a housing finance corporation (even the deals done properly) to come into compliance with stricter affordability guidelines.
To receive the tax exemption, 10 percent of units must be reserved for people making up to 60 percent of the area median income, and 40 percent of units must be reserved for people making up to 80 percent of the area median income.
The proposal gives another option for the affordability split: 10 percent of units reserved for people making up to 50 percent of the area median income, and 40 percent for people making up to 100 percent of the area median income.
In Dallas, the median income for a one-person household is $77,210.
HB 21 also stipulates that rent reductions must add up to at least 50 percent of property tax savings. Technically, deals made using the loophole can maintain tax exempt status if they get approval from their local housing finance corporations. Under the new legislation, the deals will be audited annually.
Todd Kercheval, a lobbyist for the Texas Association of Local Housing Finance Agencies, called the reforms “unnecessary”
Chapter 394 created housing finance corporations in 1979, he said, and until the issue with traveling HFCs, “they’ve never had a foul flag thrown on them,” leading him to ask: “What problem were they fixing?”
Since compliance with HB 21 would be based on a changeable, market-based metric (rents), Kercheval is worried lenders would be wary of lending for these kinds of projects.
“What they call accountability in that bill is more likely a deal-killer,” he said.
Rep. Gates, who championed the bill, dismissed the critique about lenders, calling it a “red herring.”
Waterford Property Company’s John Drachman said the bill flies in the face of the concept of local control, calling it “anti-Texas.”
“The city of Dallas did nothing wrong in all this,” he said. “All they’re trying to create is workforce housing. They have a very strong process in place that’s very public, very prescriptive and meets all the obligations. The state is just being heavy handed, in my opinion.”
He fears the new legislation will cause developers like his California-based firm to rethink developing in Texas.
Waterford has multiple deals with the Dallas Housing Finance Corporation. It partnered with Vistria Group to buy Axis at Kessler Park and turn it into workforce housing. It did the same with Domain at Midtown Park, for which the partnership also included Northern Liberties.
Multiple sources expect lawsuits will challenge the new legislation immediately, arguing that applying new regulations to prior contracts violates federal and state law.
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